RDP 2004-01: The Impact of Superannuation on Household Saving 2. The Superannuation System in Australia

Superannuation has been used in Australia as a policy instrument to increase retirement incomes and reduce reliance on the age pension (which is provided by the government). Tax concessions have existed for superannuation since 1914.^[1] Until the 1980s, interest and capital gains on superannuation funds were not taxed. However, the extent of tax concessions has since been reduced. In 1986 compulsory superannuation was introduced in Australia. The system initially applied to employees on Federal awards, with 3 per cent of their earnings saved in superannuation funds in lieu of wage rises.^[2] The system was extended to apply to most employees in 1992 under the Superannuation Guarantee Charge (SGC), with the contribution rate gradually raised to its current level of 9 per cent of earnings and coverage increased to 90 per cent of employees.

Perhaps not surprisingly, households' superannuation assets as a proportion of GDP almost quadrupled in Australia over the last 20 years (Figure 1), and are now the second largest component of household wealth after non-financial assets, which comprise mostly housing.^[3] However, the growth in superannuation funds (or their equivalent) was an experience shared by the US and the UK, which do not have compulsory superannuation schemes in place.

Valuation effects were an important factor behind the unprecedented growth in superannuation assets over the 1980s and 1990s, explaining around 70 per cent of the rise in current price terms in the UK and over 60 per cent in the US between 1988 and 2000. The importance of market movements is also evident in the reduction of the value of holdings of these assets since 2000 and the more volatile experience of the UK, where equities represented a much larger proportion of assets over the 1990s. However, valuation effects explain only one-third of the rise in Australian superannuation assets since 1988, with most of the growth due to increasing flows into these assets.

To abstract from valuation effects and overall growth in the economy, Table 1 shows households' flows into superannuation as a share of GDP. Due to data availability our analysis examines the period since 1989, broken into two equal samples.

Australian households' flows into superannuation have grown from an average of 2.8 per cent over 1989–95, to 4.6 per cent over 1996–2002. In contrast, over this period, US households' flows into superannuation fell, while in the UK, households' flows remained broadly flat.^[4] This suggests that a factor that is specific to Australia, such as compulsory superannuation, may have contributed to the rise in flows into superannuation.

Superannuation has grown in importance as an investment vehicle for households and, over the last 10 years, appears to have driven an increase in household financial flows. Superannuation policies almost certainly have contributed to these developments. However, it is difficult to estimate the effect of superannuation policy on saving or wealth accumulation using net flows over such a short horizon. Moreover, net flows into financial assets measure only one aspect of households' saving behaviour. In the remainder of this paper, we take a broader perspective and analyse the effect of superannuation contributions on household saving.

Footnotes

See Bateman, Kingston and Piggott (2001, p 210). There is also a detailed description of the history of the Australian retirement income system in Commonwealth Treasury of Australia (2001). [1]

These are employees whose base wages and conditions were covered by national level arbitration. [2]

The term ‘superannuation assets’ used here includes both superannuation assets and life insurance. Assets in life insurance, part of which is not governed by the superannuation scheme, are reported as part of voluntary superannuation assets. See also Appendix A. For simplicity, we use in this paper the term ‘superannuation’ also for the pension schemes in the US (reserves in pension funds and life insurance) and the UK (life assurance and pension fund reserves). [3]

Part of the fall in flows into US superannuation may be due to the fact that Individual Retirement Accounts (IRAs) are not included. However, household flows into financial assets, which include IRAs, also fell over the period. [4]