Superannuation May Be Boring, But It's Important

A very sophisticated piece by Anna Fenech in the Australian looks at the two parties’ superannuation policies. Most of the debate in this campaign seems to be revolving around matched contributions for low earners, and the compulsory contribution rate, but she also quotes an industry lobbyist as pointing out the lack of policies that “demonstrate vision for Australia’s long-term future”.

One disadvantage of a higher compulsory contribution rate is that it raises employment costs, and therefore risks reducing employment. An alternative – so far unmentioned by anyone in the current campaign – is to change not the compulsory rate, but the default rate. Here’s our alternative, from Imagining Australia:

One of the key insights of behavioural economics is that impatience often leads us to make decisions that make us happy now, but that we later regret. As a result, we tend to under-save for the future. Noting the gap between what people say they would like to be saving, and what they actually save, researchers have experimented with raising the default superannuation contribution rate, but allowing employees to opt out. The researchers found that this approach significantly boosted retirement savings, reducing the deficit between what people wanted to save, and what they actually saved. Even though employees could lower their rate with a simple phone call, very few chose to do so. The strategy—dubbed by some as ‘libertarian paternalism’—helped people get closer to their savings goals, without restricting their freedom of choice. But unlike a compulsory increase in the default rate, this proposal is unlikely to increase unemployment, since workers on the margin can simply opt out of the superannuation contribution and take the money as wages. Libertarian paternalism thus provides a way to increase savings, which is essential to improving the opportunities of future retirees.

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