How Superannuation Works

How Superannuation Works

Have you ever heard someone say “I have worked all my life, now I am entitled to the pension”, as if working and paying tax was a quasi superannuation scheme?

With an ageing population this was a bit of a pyramid scheme relying upon an increasing population of healthy young taxpayers to fund all government services along with the retired population.

The problem in the 1980s and 1990s was that the population increase was not occurring fast enough and migration was relatively low.

Australians did not need to be very good at saving for their own retirement, partly because we had a relatively generous social security system that provided a pension. 

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In the early 1990s the government sought to reduce the cost of the ageing population by forcing people to pay for their own retirement. A carrot and stick approach was used by the Hawke-Keating Government to force people to ‘sacrifice’ some of their wage rises to be diverted into superannuation, that they could not access until they retired (or met a ‘condition of release”).

Whilst wage rises were forfeited by being diverted into the superannuation system (the stick), the benefit was a tax-effective long term investment was created that was intended to fund your retirement. Politically, the tax incentives were a critical part of the bargain (the carrot), otherwise the electorate would never have accepted it.

At the time this was wonderful economic policy that helped solve two problems. Firstly, the future expansion of the cost of the Age Pension was reduced. Secondly, the inflation problem at the time was helped with the real wage rises falling behind the rate of inflation, with so much spending money ‘lost’ into the superannuation system.

As a student of economics at the time, I said current taxpayers are paying for 2 retirements. Their own, via superannuation and their parents and grandparents, via the taxes they were paying to fund existing pension ‘entitlements’. Remember, they had earned those pensions, right?

Why Do I Love Superannuation?

Why Do I Love Superannuation?

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