Grattan proposes ‘cash out’ option for super contributions

The Grattan Institute believes Aussies should be given the opportunity to “cash out” a portion of their compulsory superannuation contributions each year. 

In a submission to the Senate economics committee on improving consumer experiences, choice, and outcomes in Australia’s retirement system, the Grattan Institute argued against the further increase in compulsory super from 11 to 12 per cent of wages by 2025 and said Australians should be able to “cash out” a portion of their super each year. 

According to the institute, the legislated increase in compulsory super would compel “most people” to save for a higher living standard in retirement than in working life, while costing the budget over $1 billion in super tax breaks, and widening the gender pay gap in retirement incomes. 

On the “cash out” suggestion, Grattan said it would give Australians greater flexibility in managing their finances during their working life, particularly in securing a home of their own. 

“It would save the budget, since any super contributions cashed out would be taxed as wages and salary income on individuals’ personal income tax returns,” the institute said. 

“And it would not compromise the adequacy of Australians’ retirement incomes, since most are already saving more than they will need for retirement.” 

Grattan also raised five key concerns it has with the retirement system within its submission, including the amount of super fees Aussies pay, the lack of guidance and support offered to retirees in the drawdown phase, the threat unaffordable housing presents to a comfortable retirement, the impact super tax breaks have on the system, and the role of default insurance in super that it believes should be reviewed.

Regarding guidance in retirement, the institute stressed that “stronger intervention” is necessary to ensure the products that Australians access in retirement offer value for money. It, however, judged that the government’s proposal to allow superannuation funds to provide financial advice to their members is “unlikely to lead to good outcomes”. 

“It will leave funds more able to advice people in their own products, and leave those products more lightly regulated than those available in the accumulation phase,” Grattan said. 

Last month, the new shadow assistant minister for home ownership Andrew Bragg said he believes superannuation should be more flexible and mirror the Singapore model that allows individuals to use certain funds for housing, investment, and education under certain conditions. 

“I wouldn’t abolish the whole scheme [superannuation], but I’m not sure it’s a one-size-fits-all solution,” he said. 

“I think there is a strong case to make that you could make it voluntary for some people, or you might be able to unpack some more flexibility particularly around housing, or maybe around aged care or other component parts of it.”

While Bragg believes in incentivised savings underpinned by tax concessions from Canberra, he doesn’t believe the current model is “absolutely right”. 

“I am flexible with my thinking. If someone could come up with a more flexible model, or an opt-out model, that might be a reasonable starting point,” Bragg said. 

The Senate referred an inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system to the Senate economics references committee in November, for inquiry and report by 30 June 2024.