By Marian Baird and Susan Thorp
The superannuation system is stacked against women because it fails to pay any attention to their working lives.
The royal commission into banking, superannuation and financial services shone a spotlight on the management fees of superannuation funds. But it did nothing to address how the scheme could work better for women.
Australian women have a distinctive work pattern over the course of their lives, one that is quite different to men’s.
Whether by choice or constraint, women in Australia manage their care responsibilities with part-time work. In fact, levels of full-time work for women have not increased at all over the past 40 years, despite the surge of women entering the labour market.
Nearly half (46 per cent) of women work part-time compared to 17 per cent of men. Two-thirds of women move to part-time work after the birth of their first child and one third are likely to move to jobs requiring different skill levels. This inevitably leads to less pay, and therefore less superannuation. As a result, on average, women retire with about 40 per cent less superannuation than men.
There are four things wrong with the superannuation scheme.
- The default settings do not favour people who move jobs and default into new superannuation accounts. Multiple accounts cut into retirement balances by multiplying administrative charges. The Productivity Commission has estimated that one extra superannuation account may lead to a 6 per cent lower retirement balance. Default settings should allow one superannuation account to follow a worker from employer to employer. This would help part-time and gig-economy workers avoid the costs of multiple accounts.
- Default life and temporary and permanent disability insurance is set up for full-time workers. Premiums are set by age not income, and people who work part-time pay premiums as if they worked full-time. Furthermore, premiums are deducted for a period of time after members stop contributing. Women who take time out of the workforce continue to pay premiums. The Productivity Commission estimates that a retirement balance could be eroded by 14 per cent by inappropriate insurance premiums. Insurance in superannuation needs a complete overhaul. Better communication with members about insurance, and easier processes to adjust policies, are critical starting points.
- In a defined contribution scheme like Australia’s, lower earnings at younger ages means less funds to benefit from compounding of investment returns. For every dollar that women do not contribute in their 30s, their child-bearing years, they need to contribute $3 in their 50s to achieve the same balance. Improvements to the performance and efficiency of superannuation funds will make the early dollars contributed by women count more. However, the system should facilitate women contributing to their superannuation in their 20s or early 30s, before they have children.
- The annual and lifetime limitations on concessional contributions mean that women who reach their peak earnings in their 40s or 50s cannot get the advantages of tax concessions in the same way as if they had smoothed work hours over their lives. Concessional contribution caps should accommodate the uneven workforce participation that many women experience. The current catch-up windows around parental leave, for example, are too short. The regulations should allow people to catch up in their 50s and 60s when they have more money to save, without imposing higher tax rates.
It’s time to make a good superannuation scheme even better.