12% SG by 2025 - how small increases lead to big benefits

Although it has yet to fully mature Australia’s superannuation system is already among the best in the world in terms of providing Australians with their best possible retirement.1

The superannuation guarantee (SG) is the percentage of your wages that your employer pays into your super fund on your behalf. It’s an important part of the superannuation system. The SG rate was 3% when it was introduced on 1 July 1992 and rose to 9% in the following 10 years. In the last 18 years it has only risen by 0.5% to its current rate of 9.5%. However, in 2021 that’s set to change. Find out more below.

READ MORE: THE SUPER GUARANTEE – WHAT YOU NEED TO KNOW

 

12% by 2025

In 2013 the government legislated that a gradual increase in the SG rate will begin from 1 July 2021. From this date, the rate will increase slowly by half a percent each year until it reaches 12% SG in 2025. While such a small increase may not sound like much – over time, it could have a big impact on your retirement savings.

The impact of the COVID-19 pandemic on the economy and many individuals continues to be significant. Estimates of when we will return to ‘normal’ vary. In the face of this short- term uncertainty the enduring nature of super, its long-term perspective and increasing importance to individuals and the economy is reassuring.

‘The superannuation sector plays 2 major roles. It supports millions of Australians in their retirement and also helps secures our nation’s future prosperity by investing those retirement savings in almost every corner of the economy, creating jobs.’ Ian Silk Chief Executive.

 

An increase in SG means people won’t have to work as long

Slowly increasing the SG to 12% by 2025 means people won’t have to work as long to save the same amount for their retirement.

Even small increases to the SG will make a big difference in the long run.

Let’s look at some examples to see how it benefits members and helps re-build super balances for those who have withdrawn the maximum $20,000 of their super under the COVID-19 Temporary Early Access arrangements.

Using the examples below, you can see that a rise to 12% can have a significant effect on your working life and retirement outcome. 

Marco

Marco is 30 years old and earning the median Australian wage ($71,500) with a super account balance of $60,000. 
With an SG of 9.5% (the current legislated rate) Marco will need to work an extra 2 years to achieve the same retirement outcome he would if the rate was increased to 12% as legislated.
If Marco withdraws $20,000 of his super early, due to COIVD-19 temporary early access scheme, he’ll need to work and extra 3 years^.

Mary

Mary is 39 years old, earning $82,000 with a super account balance of $51,000.
With an SG of 9.5% (the current legislated rate) Mary will need to work an extra year and a half to achieve the same retirement outcome she would if the rate was increased to 12% as legislated.
If Mary withdraws $20,000 of her super early, due to COIVD-19 temporary early access scheme, she’ll need to work and extra 2.5 years^.

^ Assumptions:

Investment return is 6.5%pa net of fees and tax, salaries increase at 3.5%pa, SG increasing to 12% in line with legislated increases, Retirement at age 67. All results expressed in ‘today’s dollars’ by discounting at assumed wage inflation of 3.5%pa.

 

Small increases have a big impact

A gradual increase to 12% may not seem like a lot, but over the long term it has a big impact.

Here are Marco and Mary again.

The difference an increase in SG could make
  Age Account balance Wage Extra super in retirement with SG increase
Marco 30 $60,000 $71,500 $82,000
Mary 39 $51,000 $82,000 $60,000

 

^ Assumptions: Investment return is 6.5%pa net of fees and tax, salaries increase at 3.5%pa, SG increasing to 12% in line with legislated increases, Retirement at age 67. All results expressed in “today’s dollars” by discounting at assumed wage inflation of 3.5%pa.

 

Taking a long-term view helps this generation and the next

Australians are living longer and not having as many children. So, the ratio of Australians working to those in retirement will almost halve over the next 40 years.3

Chart showing the number of people aged 15-65 relative to aged 65, comparing the years 1975, 2015 and 2055. 1975, there are 7.3 people aged 15-65 for every 1 person over 65. In 2015 the ratio was 4.5:1. 2055 is predicted to be a ratio of 2.7:1. This shows the ratio of Australians working to those in retirement will almost halve over the next 40 years

Chart showing the number of people aged 15-65 relative to aged 65, comparing the years 1975, 2015 and 2055. 1975, there are 7.3 people aged 15-65 for every 1 person over 65. In 2015 the ratio was 4.5:1. 2055 is predicted to be a ratio of 2.7:1. This shows the ratio of Australians working to those in retirement will almost halve over the next 40 years

This means there’ll be fewer working people paying taxes to support things like the Government Age Pension, and a lot more people likely to rely on part or all of the age pension in retirement.

For Australia to afford it, working people may have to pay more tax or retired people may receive less pension. Raising the SG to 12% will increase the savings of members in retirement, helping to take some of the pressure off the broader government budget and the overall economy.

Having more super will help the current generation and the next (and the next).

AustralianSuper supports the increase of the SG to 12% by 2025 as legislated by the government. The Fund believes it’s needed, affordable and necessary. It will positively impact the retirement outcomes of millions of Australians, particularly women and lower income workers leading to a more comfortable and dignified lifestyle – key indicators of a good retirement outcome.

 

READ MORE: A TOP-PERFORMING FUND

 

Sources:

  1. Source: Mercer, Melbourne Mercer Global Pension Index Report 2019 p6
  2. Source: 2015 Intergenerational Report, Australian Treasury. ABS cat. No. 3105.0.65.001, 3101.0 and Treasury projections.
  3. Source: 2015 Intergenerational Report, Australian Treasury. ABS cat. No. 3105.0.65.001, 3101.0 and Treasury projections.      

This may be general financial advice which doesn’t consider your personal objectives, situation or needs. Before deciding on AustralianSuper read the Product Disclosure Statement available at australiansuper.com/pds. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788,

Trustee of AustralianSuper ABN 65 714 394 898.

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