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Why is Superannuation compulsory in Australia?

Superannuation is a government policy designed to encourage people to accumulate savings for their financial freedom during retirement and rely less on the age pension. The government regulates contributions, taxation, and the management of superannuation savings.

The Super Guarantee (SG) requires employers to contribute a minimum percentage of an eligible employee’s earnings to a super fund, which acts as a retirement savings account that can’t be accessed until you reach your ‘preservation’ or retirement age.

On top of the SG contributions, employees can make voluntary personal contributions. There are tax benefits and also limits on these contributions.

Why is superannuation compulsory?

Statistics show that, as at 2016, life expectancy in Australia was 80.4 and 84.6 years for males and females, respectively, making us one of the leading countries in terms of ageing populations worldwide.

The government predicted this trend and became concerned that age pension payments would be overwhelming to the country’s economy in the future if nothing was done.

In 1992, the government made superannuation compulsory to ensure that every working Australian saved for their retirement. The policy aimed to address the challenge of retirement income in three ways:

  • mandatory employer contributions to super funds
  • more contributions to super funds and other investments
  • a means-tested, government-sponsored age pension.

With all these measures in place, the government hoped that every Australian would have a financially secure life in retirement.

The growth of superannuation: today and into the future

The superannuation system has evolved significantly since its introduction. Employees can usually choose the super fund they prefer to manage their super savings, or they can set-up a self-managed super fund (SMSF). Most super funds currently also have a default level of life insurance included.

SG contributions climbed from 9.00 to 9.25 per cent of the employee’s ordinary time earnings in July 2013, and a year later, rose further to 9.50 per cent, which is the current rate.

The Australian Taxation Office details the timeframes for the super guarantee percentage rate to gradually increase to 12 per cent by 2025.

Wrap up

With superannuation, Australians receive tax incentives to build an income stream to support them financially in their retirement years.

You can supplement your employer’s compulsory SG contributions with personal contributions to boost your super savings, or you can choose to create an SMSF if it suits your needs and you’re interested in that level of control.

Contact us today for more insights on superannuation and to find the right solution for your needs.