Policy Forum: Long-Term Issues in Superannuation Why Is Superannuation Compulsory? M. E. Drew and J. D. Stanford School of Economics and Finance, Queensland University of Technology; and School of Economics, The University of Queensland, respectively
Nearly all employees in Australia are now covered by superannuation and superannuation accounts for a significant proportion of household wealth. The expansion of superannuation has come as a result of decisions to make superannuation contributions compulsory. The major policy decision for compulsory superannuation was the introduction of the Superannuation Guarantee (SG) in 1992. It provided a pecuniary penalty, the Superannuation Guarantee Charge (SGC), for employers who failed to make prescribed payments on behalf of employees to a superannuation fund. The SG system reached maturity in 2002 when the prescribed percentage reached 9 per cent. Earlier decisions in the 1980s, initiated by trade union pressure and the Labor Government Accord, saw the introduction of award superannuation under which an amount equivalent to 3 per cent of wages and salaries was paid to a superannuation fund as specified in the relevant industrial award. The SG and award superannuation were an overlay to existing occupational superannuation schemes, many of which required employees to contribute to superannuation as a condition of employment, usually with a copayment by employers. Within the superannuation system there are other elements of compulsion, including contributions by, and on behalf of, employees are placed in a fund selected by employers, and accumulated balances in superannuation funds cannot be transferred by employees. These strands of compulsion add up to a substantial constraint on the ability of employees
to allocate their income between consumption and saving and to allocate their wealth between different types of assets. They stand in stark contrast to the presumption in a liberal democratic market-oriented capitalist society that consumers are the best judges of their own welfare. The level of compulsion in superannuation is inconsistent with the measures taken to deregulate the financial sector and the labour market. The existence of such compulsion implies a welfare loss as individual economic agents are constrained in their choices. We explain the nature of the welfare losses from compulsion in superannuation and then examine whether the government should require compulsory superannuation, whether employers should be allowed to override individual decisions on superannuation, and whether compulsory superannuation should be part of industrial awards to determine if these compulsions are justified. Finally, we suggest certain policy recommendations for superannuation. We begin by explaining the current superannuation system. 2. The Current Superannuation System
The current superannuation system consists of the following five elements: (i) Award superannuation requires that 3 per cent of wages and salaries are paid to a superannuation fund specified in the award. These funds are run by boards of trustees with equal representation by employers and trade union officials. They are referred to as industry funds.
2004 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd
Drew and Stanford: Why Is Superannuation Compulsory? (ii) The SG requires employers to pay, from July 2002, 9 per cent of wages and salaries to a fund of the employer’s choice. SG contributions are required for all employees, not just those working under an award. Some employees, notably those under 18 and those whose wage is below a specified minimum, are excluded from the provisions of the SG arrangement. Contributions are not required from employees above a maximum wage level. (iii) Occupational superannuation schemes are those...