Imagine a $2.1 trillion pile of private savings that is the result of government policies and receives hefty tax breaks, but has no clear objective enshrined in law.
Yes, that's our superannuation system.
Of course we all have a general idea of what super is there for. But its precise purpose is not written in any law, and this is blamed as one reason for inconsistent and dysfunctional policies.
The generosity of super tax concessions can change with the federal budget's fortunes. Some wealthier Australians have squirrelled so much cash into super it is more of a taxpayer-supported inheritance scheme.
So in a move that seems eminently sensible, the government is well on its way to settling on a formal objective for super.
It is proposing legislation to say super exists is "to provide income in retirement to substitute or supplement the age pension", a recommendation of the 2014 Financial System Inquiry.
Sounds simple enough, but this is not a hit with the super sector. All corners of the industry – from the bank-owned retail funds to their not-for-profit industry funds rivals – are in furious agreement that this is wrong.
They are worried this definition could to leave the door open to future cuts to accessing the age pension, and they are pleading for a definition with adjectives – whether it's to provide a retirement that's "comfortable", "adequate" or to help people retire "with dignity".
Well, they would say that wouldn't they. Inserting any one of those adjectives would probably strengthen the case for future policies ensuring more money is put into super. This is something Labor and the Coalition also support through a higher superannuation guarantee, though the government doesn't plan to introduce this until next decade.
So on one level, this fight is typical of self-interested debate we often see in super. But in reading through submissions to a Senate inquiry on this legislation, I was struck that for all the flaws in super – and for all the political argy-bargy – one fact often gets overlooked: the current system appears to be doing a pretty good job of helping people "smooth" consumption over their lives.
A submission from the Grattan Institute's John Daley and Brendan Coates, which I'm drawing on for this column, makes that overarching point, while highlighting a few under-appreciated facts about the superannuation system. It supports the government's proposed objective for super, but more importantly, it calls out some myths and misconceptions we often hear from this very well resourced industry.
One key fact is that despite all those descriptions of super in news stories as "retirement savings" (something I've been guilty of), super is only one part of how we save and pay for retirement. The other "pillars" in the system are the age pension, housing assets and other savings. At the moment, these all play a bigger role than super.
Even excluding the family home, Grattan's analysis shows the average Australian has as much in savings outside super as they do inside it.
Will that change as younger households, who've had super their whole working lives, dominate the system? Maybe, but don't count on it. Even people aged between 25 and 44 have about the same in assets (excluding their home) outside super as they do within.
And that leads us to the second misconception.
It's easy to get the impression from parts of the super industry that the vast majority of us should be putting more into super if we want to avoid spending our twilight years in poverty.
Yet if super is only one part of the retirement saving system, that should be taken into account when assessing how well super is working.
And on Grattan's numbers, super is working fairly well for many of us, when you also include the other bits of the system.
It forecasts today's pension arrangements, combined with super contributions of 9.5 per cent of pay, will give the average income earner who works for 40 years 79 per cent of their working-life income in retirement. Two thirds of income earners will get 70 per cent of their working incomes, a key benchmark for what's acceptable, it forecasts.
Retirees today are also mostly hitting this benchmark, spending about 70 per cent of the amount spent by people in the same income bracket who are in the workforce, it says.
Of course plenty of people may have perfectly valid reasons to put more than the minimum into super – that is entirely up to them. But these figures paint a picture of a system that for the bulk of workers, is doing reasonably well.
A third fact that often gets overlooked is that if you lift how much people must save through super, that comes at a cost to their take-home pay. When wages are only growing at about 2 per cent, that cost is more noticeable.
"In a world that we're now in, with very low real income growth, when you put in place these kind of super changes, what we are going to see is some people whose real incomes as a result are either flat or go backwards," Daley says.
These points are worth remembering the next time you see some industry-funded modelling painting a picture of a super system that desperately needs higher contributions. Hopefully the government also keeps these facts in mind as it faces off with the industry over how to define the system's very purpose.
Source: The Sydney Morning Herald