Ah, life used to be so simple. Get a steady job. Buy a home. Pay it off. Retire. Live a modest life on the age pension. Die.
Ok, it was a bit more complicated than that.
For instance, there were always people who managed to save a little extra for retirement, or who had employers who chipped in a bit extra on their behalf to a retirement account to supplement their income from the age pension. But not everyone.
Paying rent, paying super, and saving for a home deposit all at the same time is tough.Credit:Peter Rae
In the early 1990s, the Labor government decided – after a long union campaign – that this was unfair, and that all workers should be entitled to a more comfortable life in retirement.
Compulsory super for all workers was introduced in 1992, and employers were forced to set aside a relatively modest 4 per cent of all employee wages into superannuation accounts. This rose progressively to 9 per cent by the early 2000s. It’s now currently sitting at 10 per cent and legislated, with bipartisan support, to rise to 12 per cent.
Get that? While the Coalition now suddenly seems to think younger Australians would be better off with a bit less super and a bit more homeownership, it is also committed to taking an increasing slice out of their pay packets in coming years to funnel into super. Huh?
People often get confused believing super is “free money” from employers. In reality, it’s a portion of your salary that gets forcibly removed and would otherwise be paid to you upfront as wages. Because of this enforced nature, governments have seen fit to grant a tax concession on money going into super.
Fewer home buyers are making plans to enter the market.Credit:Peter Rae
For some reason, it was decided all super contributions should be taxed at a flat rate of 15 cents, meaning that workers who would otherwise pay much higher rates of tax get the biggest benefits. Double huh.
So, is this the right way to organise society? What is the correct balance between money invested in property ownership versus super? How much should Australians be forced to sacrifice today to fund their future selves in retirement? 9 per cent? 12 per cent?
Perhaps a little bit of encouragement to sacrifice present consumption to fund future consumption is no bad thing, particularly if it just means fewer holidays or meals out.
But it’s less fine when younger Australians are increasingly short the funds to purchase one of the most basic consumption needs of all: a home to live in.
Homeownership is the unacknowledged fourth pillar of our retirement savings system, alongside the age pension, compulsory super and voluntary savings.
But as a pillar, it is crumbling.
One of the best protections for retirement is to make sure you own a home, and are not still paying rent.
The assumption that most workers will achieve this, having bought and paid off a principal place of residence by retirement, is a key embedded assumption of our system. The age pension is only adequate if you’re not also trying to pay rent.
But by far the biggest financial benefit for most Australians in achieving a home purchase is that it brings access to the wonders of “leverage”. That is, the bank lends you a massive whack of money to immediately own – and be entitled to the full gains upon – a large whack of asset.
There is no other asset class on which banks will lend as much, or to as wide a range of people. There is also no other asset class on which you will pay zero tax on any capital appreciation.
I think young people should be engaging in a conversation about whether they want as much of their money going off to fund their retirement versus keeping more in their pockets to buy property.
By far the easiest way to achieve this would be to simply stop the compulsory super guarantee rising to 12 per cent.
Instead, the Coalition’s policy approach in its totality is a complicated game of hokey pokey. You’re forced to put more money into super, then you draw some super money out, then you put some super money back upon sale of the home. Presumably a policy to help home buyers “shake it all about” is pending.
As others have observed, this new Coalition policy, by giving easy access to large lump sums, is only likely to boost property prices in the short term.
The Labor Party, it should be noted, has a particular blind spot when it comes to super. Keating is revered in the party for inventing super and seemingly no bid to increase compulsory contribution rates is ever too much.
In truth, young people need to aspire to both save a deposit for a home and to contribute towards a comfortable retirement.
By far the best thing politicians could do to really help them would be to stop forcing an increasing amount of their pay packets into super, while also addressing the underlying forces driving required deposits higher, by both boosting the supply of new homes and reducing investor demand for them.
But I’ve been advocating that for nearly two decades now.
Ah, the hokey pokey.
Jessica Irvine is author of the new book Money with Jess: Your Ultimate Guide to Household Budgeting. You can follow more of Jess’ money adventures on Instagram @moneywithjess and sign up to receive her weekly email newsletter.
A previous version of this story stated that the Howard government introduced the 15 per cent flat tax on super contributions. This was an error – the tax applied from introduction in 1992.
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