Introduction
The issue observed in the area of the Australian superannuation has a comprehensive economic and social importance for the whole country and especially for the life of senior citizens in it: “In Australia, superannuation funds are a major source of capital for the development of the economy with assets of around AUD 1 trillion and growing rapidly” (Evans, 2008). Thus, being one of the main economic development factors, superannuation demands great attention and care from the authorities and the society as a whole.
The recent superannuation trends are, however, far from positive and optimistic as according to the Australian Prudential Regulation Authority (2007; 2008; 2009), the total superannuation assets have been on the steady decrease beginning from 2007, when the superannuation assets reported 15.4% increase for the last time.
Thus, by December 2008 the superannuation assets decreased by 7.6% to amount to $1.05 trillion, while the next twelve months saw the total decrease of the assets by 14.8%. Further on, 2009 brought another decrease wave that reached 10.8% level and cut the superannuation assets to $1.03 trillion as estimated for the second quarter of 2009 (APRA, 2009). All these factors provoke an enquiry about the causes of such assets decrease, and the explanations to this might be found in the history, structure, and recent developments of the Australian superannuation system.
Australian Superannuation System
History
The very beginning of the history of superannuation in Australia dates back to 1980s when the country experienced the generations’ shift similar to the one that is now taking place in Australia according to Deloitte (2009). The same issues were observed in the number of other countries but Asutralia adopted the experience of the United Kingdom, where the pension scheme issues were solved by the superannuation in the late 1980s: “In the 1980s Australia faced the same dilemma as Britain – an ageing population, too few people saving and a state pension withering on the vine. Less than half the population, especially women and minorities, were part of a company pension scheme” (Collinson, 2004).
The essence of the system of superannuation lies in the accumulation of incomes during one’s working life so that after retirement of this person could have acceptable finance for living: “Superannuation (otherwise known as super) is a way of saving money to provide benefits for when you retire, if you become an invalid, or your beneficiaries upon your death” (Australian Taxation Office, 2009). After introduction of the system, the bulk of Australians started paying their contributions to their superannuation accounts together with their employers who were obliged to provide the major part of those contributions for their employees.
As a result, according to Collinson (2004), already in 1992 the superannuation system was implemented all over the country making every business company pay 3% of its each employee’s salary to the superannuation fund it cooperated with. Having started at the level of 3%, the monthly contributions to superannuation were gradually increased up to 9% and the system still operates according to this rate.
Structure
The structure of the superannuation system in Australia is determined by its main purposes and the very definition of the system. According to Australian Government (2009), “superannuation is an investment designed to provide money for your retirement. Most people start superannuation when they start work because their employer has to pay contributions. You can choose to top up the funds out of your own pocket”. Employed people contribute to the system together with their employers, while self-employed people might or might not have superannuation at all based on their preference (Australian Government, 2009).
The participation of the employer in superannuation of the employee is required if the employee is 18 – 70 years old and receives a monthly salary of $450 and more before paying all taxes. People younger than 18 years must work over 30 hours per week to be eligible for employer superannuation payments, also known as “super guarantee payments” (Australian Taxation Office, 2009).
Australian Government (2009) singles out two major types of superannuation funds operating in Australia. They are accumulation and defined benefits funds. The former define the retirement benefits of their clients by “how much you accumulate over your working life, which will be the money paid in plus investment earnings less expenses” (Australian Government, 2009). Thus, the more a person earns and contributed while working, the more he/she receives as retirement payments after resigning from work. Defined benefit funds calculate the retirement benefits from one’s salary levels, contribution rates, service length, and age of retirement.
People can use their retirement benefits before retirement age if he/she is permanently ineligible for work, has health complications that do not allow him/her to work, or lives through a serious financial hardships period (Australian Government, 2009).
Discussion
Assets Decrease
The initial years after the introduction of the superannuation system in Australia saw the drastic increase in superannuation assets. As Collins (2004) argues, in 2004 about 95% of Australian workers were involved in superannuation. The data presented by APRA (2006) evidence that by the end of 2005 the assets of superannuation funds across the country grew by 4.1% to the level of $844.6 billion. AustralianSuper (2009) is one of the superannuation funds that deal with ensuring proper retirement benefits for Australians. As Collins (2004) argues, in 2004 the Australian Government envisioned the further development of the superannuation system that would allow every citizen of the country to have retirement benefit of “about 40% of their pre-retirement salary” (Collins, 2004). These forecasts were accompanied by the actual 2004 and 2005 5.9% to 15.4% growth data on superannuation funds’ assets reported by APRA (2006).
However, the year 2007 and the following two years brought sudden changes to all the forecasts as superannuation assets started declining from quarter to quarter. Already for the 12 months of 2008, the operational assets of superannuation funds in Australia dropped by 14.8% (APRA, 2008). Moreover, according to the most updated APRA data issued in March, 2009, “total estimated superannuation assets decreased by 1.4 per cent in the March 2009 quarter to $1.03 trillion. Over the 12 months to March 2009, this represents a 10.8 per cent decrease” (APRA, 2009). In more detail, the overall figure of the decreasing assets of the superannuation funds is composed by the decreasing assets of the particular kinds of the superannuation funds that include self-managed, retail, industry, corporate, etc. funds:
During the March 2009 quarter, self-managed superannuation funds’ assets increased by 1.8 per cent. Industry funds’ assets decreased by 1.4 per cent. Retail funds’ assets decreased by 2.6 per cent, corporate funds’ assets decreased by 2.9 per cent and public sector funds’ assets decreased by 3.2 per cent (APRA, 2009).
Thus, the equally negative picture of development of every kind of the superannuation funds (for more detailed information see Appendices section) allows speaking of certain outside, more global factors, than inherent issues observed in funds’ operation or changed people’s attitudes towards the superannuation and funds dealing with it.
Causes
Accordingly, the above presented data and other scholarly pieces of evidence presented by Australian Taxation Office (2009), AXA (2009), Deloitte (2009), Evans (2008), and Vanguard (2009) allow speaking about the three major groups of factors that caused and are still affecting the decline of the assets of superannuation funds in Australia. These issues include the overall global economic crisis, the generational change that has been taking place in the Australian society over the last two years, and the governmental policies concerning the state budgets for 2007 and on, that made it rather dangerous and insecure, by cutting planned superannuation expenses (Australian Government, 2007), for Australians to allocate the whole sum of 9% of their earnings to superannuation funds.
As a result of these factors’ influence, Deloitte (2009) argues about the average 24% decrease of the assets of superannuation funds in Australia observed in 2008. The continuation of this decline in 2009 is mainly connected, as Deloitte (2009) argues, with the global economic issues:
This decline has continued into 2009 as markets have continued to be weak and volatile. The rate of growth of superannuation assets in the short term will depend on whether the market continues to be adversely affected by the global financial downturn and whether that downturn continues for an extended period, rebounds quickly or gradually returns to more normal levels (Deloitte, 2009).
Therefore, global economic problems are viewed by Deloitte (2009) as the major cause of decrease of superannuation funds’ assets, and the recovery of these funds is dependant to the great extent upon the further development of global economics and might take some 20 or more years (Deloitte, 2009).
At the same time, scholars like Deloitte (2009), Evans (2008), and Vanguard (2009) address the issue of generation interchange currently observed in the Australian society as another main reason for the issue discussed in this paper. The demographic change of the population composition not only reduces the assets of the superannuation funds but might, as Evans (2008) argues, shift the very idea of superannuation as generations that implemented it and enjoyed its benefits leave to be replaced by new generations:
In 2008, some 47% of all super assets were held by the Baby Boomer generation. Together with 12% of the assets held by those born before 1942, this amounted to more than 59% of all assets. In 2028 these groups will only represent 13% of all assets (Deloitte, 2009).
Thus, all these reasons including the governmental policies, economic crisis of the global scale, and the demographic changes in Australian population cause, according to the data by Australian Government (2009), Australian Taxation Office (2009), AXA (2009), Deloitte (2009), Evans (2008), and Vanguard (2009), the currently observed decrease in assets of Australian superannuation funds, and overcoming these factors might, according to scholars like Deloitte (2009), take up to 20 years.
Summary and Conclusions
Summing this report up, it is obvious that the superannuation system of Australia is currently experiencing the period of recession connected with the decrease of superannuation funds’ assets and conditioned by the global economic and domestic Australian political and demographic issues. The reported overall 24% decrease in superannuation funds’ assets over the two years from 2007 to 2009 is caused by the global economic crisis and its effects on the Australian economy and on lives of ordinary people.
As well, the controversial policies of the state government that reduced potential expenses for funding superannuation needs in the state budget for 2006 and on affected people’s attitudes towards allocating money to superannuation funds. Finally, the currently observed change of generations in Australia provides for less working force whose task is to contribute to superannuation funds and for the growing number of aging people who demand to have these funds’ assets at their disposal in the form of retirement benefits.
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