The lifetime challenge for super contributions

Superannuation and short-term decisions are not comfortable bedfellows.

Your super balance at the time of retirement is the result of a lifetime of saving and work. It then has to last through the retirement years - typically around 25-30 years.

So super really requires a lifetime perspective for both savings and spending phases.

One of the key challenges of our super system is getting enough money into the system during the working years to replace the salary.

The actuarial and consulting firm Deloitte^* this week released a discussion paper on the adequacy of the Australian superannuation system addressing a range of issues facing Australia's super system.

You can expect more of these type of research and discussion documents in the coming months as the Financial System Inquiry headed by David Murray is due to release its interim report mid-July with superannuation a core focus.

The Deloitte report finds our super system lacking on a number of levels - member engagement, the lack of competition among funds and the need for more focus on delivering member benefits both before and during retirement.

An underlying argument is that over the past 20 years the super system has passed on the impact of most key risks to individuals yet done little to help fund members manage those risks.

And one of the key risks is that as you get close to retirement your account balance is inadequate to fund the retirement years.

Deloitte raises the caps on concessional contributions as a major problem. While acknowledging the need to place some caps on the amount of contributions eligible for a tax deduction Deloitte argues that the current system does not make sense.

Deloitte says the fault with the current system is that the concessional caps are assessed on a year-by-year basis and there is no scope for claw back to compensate for periods out of the workforce or for different lifecycles.

“There is limited and inadequate scope to top up super in the years approaching retirement to finance a comfortable lifestyle,” the report says.

This approach particularly impacts women who typically may have some years out of the workforce for family reasons and therefore lose the ability to make concessional contributions over that time.

A potential solution, according to Deloitte, is to introduce lifetime contribution caps. Leaving aside for the moment any administrative complexity to manage it, the concept of individuals having a lifetime contribution cap appeals both on an equity level but also the flexibility it would give people who may have an interrupted working life for whatever reason.

It would better reflect the reality for most Australians where there is typically a period of years of high cost - mortgage, child-raising etc - and then periods of higher disposable income when mortgages are paid off or much reduced and dependent children have moved into the adult (and hopefully self-funding) world.

With a lifetime contribution cap Australians who are approaching retirement would have the ability to top up their super balance when it is most practical to do so.