ISA said lower-income workers, ie those earning less than $37,000, would be left tens of thousands of dollars worse off in retirement if they were to opt out of Australia’s superannuation system.
ISA chair Peter Collins said super builds a substantial nest egg for a majority of Australians through compound interest over decades of saving.
“This proposal would cost younger workers very dearly in the long run. The younger you start putting money into super, the more you retire with,” said Mr Collins.
Senior cabinet ministers said Treasurer Scott Morrison should consider the idea, which was first floated in pre-budget submissions from unnamed industry groups, the Daily Telegraph reported on the weekend.
ISA said the benefits of compulsory super become apparent by middle age, with a 45-year-old cleaner expected to boost their total retirement income by up to 30 per cent a year if all of their super lump sum was converted into an income stream.
“For a middle-income earner, the super system will deliver them a retirement income 46 per cent above the full age pension,” said ISA.
“A single female earning $17,000 per annum and retiring in 2055 would enjoy a retirement income 27 per cent higher than the full age pension, if she stayed in the existing superannuation system.”
Mr Collins said with more people opting out of super, the higher cost of funding the age pension would become a burden that would fall ever more heavily on taxpayers.
“There are a number of sensible ways to make the super system deliver a fairer outcome for lower and middle-income earners, primarily by rebalancing tax concessions which mostly flow to Australia’s highest-income earners,” said Mr Collins.
“The government could also boost women’s super by restoring the low-income super contribution and lifting the freeze on the Super Guarantee from 9.5 per cent to 12 per cent.”
SMSFA chief executive Andrea Slattery also believes the policy proposal will have long-term negative consequences.
Ms Slattery said the notion that small amounts of income have a negligible impact on a person’s long-term retirement savings outcome simply reveals a lack of understanding about how compounding works.
Where a contribution has been forgone for just the first year and the person has taxable income of $37,000 in that year, this means a lost contribution of $3,515 in that year (9.5 per cent of $37,000), which would have resulted in an accumulated amount of $23,549 over 40 years after tax, SMSFA explained.
“The other downside of being outside the superannuation system is not having access to insurance. In the event of the untimely death of a young person or a serious work injury, these payments can be critical,” said Ms Slattery.
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I am in favour of being able to opt out of super, but why stop at low income earners? I would be way better off if I could put the money I have to put in super into paying off my mortgage instead.
If super is such a great investment people would use it regardless of whether or not it is compulsory. The fact that so many people spend money to self manage in order to get away from managed investments suggests to me that it isn’t that great. I’d like access to my money right now, it’s of more use to me now than when I am 65 (I might be dead by then).