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A recent study from the University of New South Wales warned we have to save young people from saving! Well in fact, the argument was against excessive superannuation, with the Gillard Government promising to push up the compulsory superannuation paid by bosses from nine per cent to 12 per cent per annum.

This will be phased in annually until 2020 with the jumps being 0.25 per cent annually from 2013 until 2015 and then there will be 0.5 per cent increases. That’s when small business employers will be screaming – not employees as they will be receiving it, not paying it.

Two arguments

So why is this UNSW academic, Dr Bruce Bradbury, a senior research fellow at the Social Policy Research Centre, squealing about this super imposition on the young?

First he argues many younger Aussies are under financial stress right now. That could be true but maybe the stress has come from poor money management, the Federal Government’s efforts to encourage young Australians into home loans via the First Home Owner Grant during the GFC and the ridiculous interest rate policy of the Reserve Bank.

There’s nothing wrong with younger people getting a wake up call into reality about debt. I copped it in the 1980s when home loan interest rates went to 18 per cent!

His second argument looks at the lifecycle challenge.

“The point of superannuation is to help us move resources to the retirement years when our income is low,” he says. “But the policy doesn't take into account the other stages in life when people also have high needs, typically when they're buying a house and having children.” 

Lateral thinking

Now Bradbury has a point and maybe some lateral thinking could help here. The best bit of thinking isn’t to give young people a ‘super holiday’ because they need money in their 30s when they might be paying off a house and bringing up kids, but it’s to actually make them pay more when they’re in their 20s!

Possibly you could pay 15 per cent of your income until you’re married or until you hit 30 and after that you could drop back to nine per cent. Now I know this is a wild and wacky idea few governments could actually make work, but there’s a strong wealth-building idea behind it.

Super growth

A few years back I wrote the Aussie version of a book called The Complete Idiot’s Guide to Getting Rich. The US author provided a table that showed if someone saved $2000 a year between the ages of 21 and 30 and then stopped, if the dough was in super getting nine per cent on average over the next 35 years of work, the super amount would roll over and over until it was in excess of $500,000!

If this responsible young person kept saving $2000 a year until retirement, it would snowball into an amount over a $1 million! Now I don’t want to be taken to task on returns for super recently or the tax implications, but I do want to underline how money grows and grows when it’s saved as well as invested over a long period of time. 

The idea explained

Under my weird idea of making the young sock 15 per cent into super before their 30s or marriage, they could afford a ten-year period when they could cut back on their super contributions. However, as the money would have been growing for at least 10 years, there would be a pretty good balance that could start the snowball process.

Dr Bradbury says young people are more likely to be behind on their bill paying but the mid-40s and the 65-and-older groups were much better at managing money. And that’s why he wants to save them from excessive super saving.

His Saving the Young from Superannuation paper showed people in their 30s and 40s save only two per cent or less on average from their income. Meanwhile people in their 50s and early 60s save in excess of 10 per cent. 

How much do we want?

But how much of this difference in saving is about excess income and how much is it about being serious about saving?

Pauline Vamos, the chief executive of the Association of Superannuation Funds of Australia (ASFA), told the Sydney Morning Herald that “most people did not earn enough to be able to make contributions big enough from the age of 50 to provide a modest to comfortable retirement”.

The super CEO says you have to start young to make sure super gives enough money in retirement, especially as we’re all living a lot longer.

ASFA once surveyed Aussies to find out how much we wanted in retirement. The figure was 66 per cent of our final wage or salary and so if you finish on $100,000, you will want $66,000 a year when you clock off work for the final time. However, to achieve this, ASFA said you would have to sock away 15 per cent of your income into super for 40 years!

Given this, we should be thinking of smart ways to get young people to save more when they’re very young, not give them ways out, which will perpetuate the problem of too many Aussies with too little super.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, January 16, 2012

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