Introduction
Developing an understanding of superannuation can play a key role in building long-term financial security. While retirement may seem far off during university, it may be valuable to recognize how superannuation contributes to future financial planning. Research shows a significant knowledge gap among young Australians when it comes to super. An ASIC Moneysmart survey found that nearly half (48%) of millennials admit they don’t fully understand how to maximise their super. Furthermore, a Findex survey revealed that only 22% of Millennials and 13% of Gen Z view superannuation as a key wealth-building tool, with most preferring traditional savings accounts instead. This mindset is influenced by present bias, where immediate needs and short-term financial goals take precedence over long-term benefits. This often results in young Australians missing out on the growth opportunities that super can offer.
Less than one in ten Australians under 40 make personal contributions to their super, with many blaming the rising cost of living for not prioritising it. However, as the cost of living continues to increase—requiring $52,085 annually (an increase of 3.7% from last year) for a comfortable retirement for a single person, according to the Association of Superannuation Funds of Australia (ASFA)—it is more important than ever to begin contributing early. By starting young, workers can benefit from compound growth over time, greatly improving their financial situation at retirement. Actively managing super from the start of their careers allows young people to lay a strong foundation for a secure future.
The Life Cycle Hypothesis (LCH) suggests that individuals aim to smooth consumption over their lifetime by adjusting their savings and spending at different stages. Starting contributions young aligns with this hypothesis, as it allows workers to benefit from compound growth over time and gradually build a strong financial base. Actively managing super from the start of their careers enables young people to lay a solid foundation for a secure future.
Source: WallStreetMojo
Super Fund and Investment Strategies
Although both young and middle-aged workers typically prioritize low fees and strong long-term performance when selecting a superannuation fund, the difference in time before retirement often leads to varying investment strategies. Younger workers, with a longer investment horizon, may benefit from higher returns using a growth or balanced strategy, while those closer to retirement might prioritize more conservative options to protect their accumulated savings. Additionally, it's worth considering whether opting out of insurance is suitable to reduce costs, depending on individual circumstances. Industry funds generally have lower fees, while retail funds may offer more investment options but can come with higher costs. Comparison tools such as Canstar, SuperRatings, and MoneySmart can help assess fees, performance, and available investment choices.
University students tend to have a greater allocation in high growth assets as their long investment horizon until retirement allows for more risk-taking. Over 5.2 million young Australians may be missing out on significantly higher returns by leaving their super in default low-risk MySuper accounts. According to Innova Asset Management's review of Australian Prudential Regulation Authority (APRA) data, many young people would benefit from higher-growth strategies, which prioritise equities over more conservative assets like cash. Over time, failing to invest in higher-return options could result in missed growth opportunities worth hundreds of thousands of dollars.
APRA data shows that an all-equities portfolio, split between Australian and unhedged international shares, outperformed typical MySuper balanced funds by 13.6 percentage points over the decade ending September 2023, and by 16.8 percentage points since 1995. Although MySuper only started in 2012, Innova simulated results from 1995 to assess longer-term outcomes, highlighting the wealth-building potential of higher-growth super funds. Younger Australians, who have more time to recover from market downturns, can afford to take on greater risk with equities compared to conservative MySuper options.
Graph 1: Super fund performance (results to 31 July 2024)
Source: Chant West. Performance is shown net of investment fees and tax, before administration fees and adviser commissions.
Maximising Super Savings
Making Contributions
Young Australians earning less than $60,400 in the 2024-25 financial year may be eligible for the government’s superannuation co-contribution scheme which assists in increasing their retirement savings. By contributing to their super from after-tax income, eligible individuals can receive a government co-contribution of up to $500. Making a $1,000 personal contribution entitles an individual to the full $500 co-contribution.
To benefit from this, they simply need to make personal super contributions, and the government will automatically calculate and deposit the co-contribution, helping to boost retirement savings for those on lower and middle incomes. The scheme is intended to encourage voluntary superannuation contributions by offering extra government support. In doing so, it helps young Australians grow their retirement savings sooner while also working to enhance wealth equity and increase national savings. By encouraging more individuals to contribute to their superannuation, the government promotes greater financial security for its citizens and contributes to the broader health of the economy.
Table 1: Government co-contribution to super
Source: Hesta
Concessional contributions, capped at $30,000 annually, lower taxable income and benefit from the lower tax rate within the fund, leading to significant compounding returns over time. Non-concessional contributions, capped at $120,000, made with after-tax money, increase the super balance and benefit from tax-free growth. Contributing early to superannuation leverages the power of compounding, which can play a critical role in building a robust financial foundation over time. This strategy reflects a long-term approach to financial planning, offering the potential for greater retirement security through gradual asset growth.
Consolidating Super
Many Australians have multiple super funds, leading to unnecessary fees that erode their savings. Superannuation funds offer options for members to consolidate their super into a single account, which members may opt for to receive cost savings and simpler management.
Checking Super Payments
Anyone aged 18 or over is entitled to superannuation, yet data from 2021-2022 shows that 25% of employees are missing out, with up to $5.4 billion in unpaid super each year. This can cost the average worker around $1,800 annually, or over $30,000 by the time they retire.
Monitoring superannuation contributions via ATO services, employer communication, or fund statements provides a mechanism for individuals to verify the accuracy of their contributions and assess their fund's performance. From July 1, 2026, employers will be required to pay superannuation at the same time as wages to address this issue.
The Future of Superannuation
A major upcoming change is the gradual increase of the Superannuation Guarantee (SG), which will reach 12% by 2025. This is aimed at boosting long-term retirement savings for workers, particularly those just entering the workforce. With the cost of living rising and people living longer, this increase is designed to help Australians accumulate more savings for a comfortable retirement. Future reforms are also likely to focus on equity, addressing gaps in contributions and improving access for lower-income earners and women, who are often disadvantaged in retirement savings.
Additionally, proposed reforms to the taxation of large super balances could see higher tax rates for individuals with larger accounts. This is part of an effort to make the superannuation system more equitable by reducing tax benefits for wealthier Australians, ensuring the system provides adequate support for all income levels. These changes reflect a shift towards a more sustainable and fair retirement system that better meets the needs of future generations.
Bibliography
ABC News. (2024, August 28). Australian workers missing super payments. https://www.abc.net.au/news/2024-08-28/australian-workers-missing-super-payments/104271996
ABC News. (2024, August 28). How to check your employer is paying your superannuation. https://www.abc.net.au/news/2024-08-28/how-to-check-your-employer-is-paying-your-superannuation/104278912
Money Magazine. (2024). Cost of living stops Aussies topping up super – Money Survey. https://www.moneymag.com.au/cost-of-living-stops-aussies-topping-up-super-money-survey
Sidney Morning Herald. (2024, March 19). Young workers missing higher super returns by taking the default option. https://www.smh.com.au/money/super-and-retirement/young-workers-missing-higher-super-returns-by-taking-the-default-option-20240319-p5fdm6.html
SuperGuide. (2024). Investment performance – Latest super returns. https://www.superguide.com.au/comparing-super-funds/investment-performance-latest-super-returns
Sydney University. (2024, January 30). 5 things I wish I knew about superannuation. https://www.sydney.edu.au/news-opinion/news/2024/01/30/5-things-i-wish-i-knew-about-superannuation.html
The New Daily. (2024, June 3). What you need to do with superannuation as June 30 approaches. https://www.thenewdaily.com.au/finance/superannuation/2024/06/03/what-you-need-to-do-with-superannuation-as-june-30-approaches
Yahoo Finance. (2024). Major $1,800 superannuation problem costing millions of workers poorer when they retire. https://au.finance.yahoo.com/news/major-1800-superannuation-problem-costing-millions-of-workers-poorer-when-they-retire-235053319
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