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Australia’s Superannuation System Enshrines Inequality

Australia’s compulsory superannuation system has made us all shareholders in a vast financial investment industry worth almost $3 trillion. These collective funds are enormously powerful, yet when it comes to retirement, lower-income earners are left with all too little in their hands.

A general view is seen of the Grand Concourse at Central station on May 19, 2020 in Sydney, Australia. Mark Kolbe / Getty

As a measure to alleviate financial hardship in the context of sudden recession brought on by COVID-19, Australia’s Liberal government recently announced an easing of restrictions on its superannuation rules. On March 22, the government announced plans to allow two one-off withdrawals of up to $10,000 (one this year and one again next) from individual superannuation (or “super”) accounts. The uptake was rapid — nearly one million people registered their interest to withdraw funds.

By April 23, close to half a million applications to withdraw on average $8,000 had been approved. Half of applications have come from younger workers and superannuation funds covering hospitality, media, education, and retail workers have had a higher percentage of their members apply, not only because they are among the hardest hit by the crisis, but likely also due to the prevalence of precarious and casual work in those industries.

By providing short-term funds for those in need, the rule change was promoted as an act of benevolence on the government’s part. But rather than the welfare state footing the bill for pandemic-related cash shortages, it displaces the cost onto workers, asking them to dip into their own funds — and at a time when stock-market losses have already lowered their value. In classic Liberal Party–style, it’s a maneuver that seeks to shift the burden of responsibility onto individuals and, in so doing, absolves the state and employers of their responsibility.

The Labor Party’s (ALP) position has not been much better. Though it opposed the government’s measure to allow withdrawals, arguing it will harm the viability of the superannuation system, it has not made the case for extending welfare payments necessary to tie people over. Without offering any real alternative, the ALP’s position amounts to simply the inverse of Morrison’s: instead of losing money in the future, workers should endure financial hardship now. 

Pathological Compromise

The story of superannuation dates back to the official arrival of neoliberalism to Australian shores in 1983 in the form of the Prices and Incomes Accord. In return for restraining industrial action, ACTU-led unions were promised a schedule of wage rises, economic stability, and a collection of “social wage” policies, including Medicare (the restoration of Whitlam’s Medibank, but with private health insurance alongside) and superannuation.

The ALP’s Paul Keating made super mandatory in 1992. Since then, super has grown into a financial behemoth. Today, or before the pandemic, the pool of financial assets tied up in superannuation was valued at nearly $3 trillion — enough to purchase the entirety of every company on the Australian Securities Exchange. While workers may transfer savings between super funds or choose broad investment strategies, this immense accumulation of capital is functionally operated and managed largely by executives drawn from the financial sector. 

The scheme requires employers to contribute a percentage of each employee’s salary to an investment account, on top of their normal wage. This contribution began at 3 percent of any wage and has steadily increased over time. Currently it sits at 9.5 percent and is legislated to reach 12 percent by 2025. Individuals also have the right to make voluntary contributions incentivized by tax deductions.

The ostensible purpose of super is to fund retirements. But as living standards have stagnated and union strength has declined, the ALP and parts of the labor movement have come to see super as the only way to win wage increases, in so far as mandatory employer contributions can be considered as “deferred wages.” Paul Keating himself conceded this bluntly (and approvingly) in a 2019 column. Opposing moves to undo the legislated 2.5 percent increase in mandatory super contributions from 2021, he stated that “working people will either get the 2.5 percent extra super or they get nothing.”

It is this perspective that traps today’s union bureaucracy in a conservative logic. Defending super entails trusting lawmakers and whatever contribution rate increases they’ve scheduled in the legislation, further delinking union strategy from rank-and-file organizing.

The unions’ commitment to super also creates vulnerability. Morrison has already indicated that the Liberal Party has its eyes on the billions of dollars of retirement money tied up in industry (union-managed) super funds, suggesting the funds be used to underwrite Virgin Australia’s debt. 

There is also a political risk. As super has risen in scale and power, it has gradually outgrown its origin in the union movement. Today, unions maintain financial and political links to super via industry funds, not-for-profit funds whose boards are legally mandated to comprise just 50 percent union representatives. The other half of these boards represents employer interests, which means little practical worker control. Though industry super funds do grant unions some financial power and revenue, there’s no guarantee it will last.

This again ties the labor movement to a neoliberal logic. Unions and the ALP are forced to guard against moves to decrease union control over industry funds or to divert super funds for purposes contrary to worker’s interests. And yet, this commits the labor movement to the neoliberal, market logic of superannuation.

Market Solutions Create Market Problems

Like other market-based schemes, superannuation has reinforced and accelerated existing inequalities. Because super is primarily funded by employer contributions, it is self-evidently terrible for the unemployed or those out of paid work due to disability, sickness, or caregiving. They earn a 9.5 percent contribution on zero — namely, zero. By contrast, professionals, managers and other high-income employees earn 9.5 percent super on six-figure salaries — earning increased interest.

Lower-income groups are also at a disadvantage. The gender pay gap currently sits at 13.9 percent, and when superannuation was introduced in the 1980s, it was much higher still, with lower participation of women in the labor force . As a result, in 2015–6, the median super account balance at retirement for women was around just $36,000; about 45 percent of women aged sixty-five to sixty-nine had nil balances. A third of all single women above sixty in Australia live in poverty: it is the most poverty-afflicted demographic in Australia.

Super’s inflexibility can also compound poverty associated with typical life events like raising children because poverty is most severe for households who must support non-earners. For many cash-strapped households, a 9.5 percent boost to income throughout working life would be more useful than additional savings at retirement age. Although some provisions exist to withdraw super in cases of financial hardship (apart from the special COVID-19 measures), they are onerous and have high barriers to access.

While super can be accessed between fifty-five and sixty, depending on date of birth, the age pension can only be accessed at sixty-seven, a change introduced by the ALP under Kevin Rudd. This leaves older unemployed workers with low or nonexistent superannuation with only the JobSeeker allowance for support.

Perhaps the most pathological problem with super is the most neoliberal: An enormous, extractive financial sub-industry has been built around it. Currently Australia pays over $30 billion dollars a year in super fees. Much of this is skimmed from low-balance accounts belonging to the worst off. It’s nearly the size of the military budget (roughly $40 billion) and twice what the whole country spends on electricity.

There are tens of different super funds, but all perform roughly the same role. This multiplication of effort means Australia’s superannuation system is absurdly wasteful. Super fees add up to more than $1,000 for every person in Australia, every year. By comparison, Norway’s nationalized pension fund has over twenty times lower fees per invested dollar. 

For a Universal Age Pension

Unions ignore many of these problems, or at best, treat them as narrow gender issues isolated from any wider inequality or class concerns. It’s commonly asserted that a higher contribution percentage will simply fix things, but super contributions cannot fix income inequality because super balances are themselves nothing more than income, determined by the labor market, forcibly saved.

There is a straightforward short-term solution to this ideological corner: a state-provided, universal age pension, generous enough for a decent retirement. This is already standard in many countries. New Zealand’s pension, for example, isn’t means-tested, which means simpler administration, wider public support, and no disincentives for saving. This should be matched with an end to retirement age rises and an adequately funded public sector running aged care and disability services. Pre-retirement, we need welfare expansive enough to go beyond the role of safety net and stabilize the lifetime incomes of everyday people. 

Until then, super funds should be merged into one, cutting fees and bringing for-profit funds under public control, replacing financial-sector management with democratic oversight and expanded union representation. Earnings on investments could power an expanded welfare state. This wouldn’t and shouldn’t mean cutting employer obligations — these changes could be funded through similar payroll mechanisms.

The first step towards any of this is to acknowledge that the existing system is broken. The Award’s “social wage” was inadequate at best and at worst, a neoliberal compromise that contributed, long term, to a vast upward wealth transfer.

Failure to admit this may be fatal. After all, unions have become dependent on super, both for funding and in lieu of wage increases for their members. But superannuation does not need the unions. Should the Liberals strike at the heart of super or drive a wedge between it and the unions, the labor movement risks being left with nothing but nostalgia while workers’ retirement funds are left at the mercy of markets and financiers.