Australians are paying up to three times more than they should for superannuation, according to a new Grattan Institute report.
Excessively high fees are seriously damaging individual retirement balances and hurting taxpayers, who pay more for pensions when superannuation runs short.
Super sting: how to stop Australians paying too much for superannuation finds that reducing fees by at least half could save account holders $10 billion a year.
‘It’s the largest single opportunity for micro-economic reform in the Australian economy and it is long overdue,’ said Grattan Institute productivity growth program director Jim Minifie.
The report finds that Australians on average pay fees of 1.2 per cent on their superannuation account balances, more than three times the median OECD rate.
On conservative assumptions that means a 50-year old Australian today will have his or her super balance reduced by almost $80,000 in fees (in today’s dollars) at retirement.
A 30-year old will lose more than $250,000, or about a quarter of his or her total balance. Under a fairer and more transparent fee structure, at least half that money could be saved.
These high fees are not justified by high returns – Australian funds that charge the highest fees consistently deliver lower returns than other funds once their fees are taken out.
Dr Minifie says costs are too high because the system wrongly assumes that choice in the market will drive enough account holders to choose low-price funds, thereby forcing others to lower their fees.
‘But this approach has not worked in Australia or anywhere in the world,’ he says.
‘Superannuation is inherently opaque and most people do not make an informed choice, instead paying into a default fund chosen by their employer.’
The report recommends two reforms to reduce the cost of superannuation: creating a new low-price default fund for new job starters, and using the tax return process to allow taxpayers to match their fund against the new fund – and to be able to switch on the spot.
‘These reforms might reduce the revenues of super funds, but more importantly, they will take the nasty sting out of super for most Australians,’ Dr Minifie says.