I was recently asked by a kiwi friend about the major differences between the Australian economy and its counterpart across the Tasman. The two that immediately sprang to mind were Australia’s mining sector and its superannuation system.
My friend acknowledged the first difference but suggested that, in KiwiSaver, NZ now has something similar to Australia’s super system. That reflects a failure to appreciate the scale and significance of the Australian system.
Last month, the Australian Prudential Regulation Authority released the superannuation statistics for the September 2024 quarter. They revealed total Australian superannuation assets now exceeding A$4 trillion (NZ$4.4 trillion). That compares to just NZ$110 billion in KiwiSaver at 31 March 2024.
In the September year Australians contributed more than A$190 bln to super while in the March year kiwis contributed just over NZ$11 bln to KiwiSaver.
The scale of contributions in Australia is driven primarily by three factors – the compulsory nature of the super system, the inability to withdraw super funds before 60, and the generous tax concessions provided for both contributions and superannuation earnings.
Employers are required to make a minimum contribution equal to 11.5% of an employee’s earnings. That will rise to 12% next year. This ‘superannuation guarantee’ creates a constant stream of money pouring into the super system.
Australia now has the fifth largest pension or savings market in the world after the US, Japan, the UK, and Canada. Superannuation assets are equal to around 150% of Australia’s GDP, a ratio that puts Australia fourth behind the Netherlands, Switzerland and Canada.
A $4 tln superannuation pool has enormous consequences for the Australian economy. Obviously, it generates wealth and financial security for many Australians and takes pressure of the means-tested state age pension. However, it also stimulates the growth of financial markets and provides capital for investment throughout the economy, including in vital infrastructure.
Unsurprisingly, the growth of Australia’s super system has led to some huge superannuation funds and the emergence of a substantial funds management industry.
The two largest super funds, based on a not-for-profit mutual fund structure, are AustralianSuper which manages more than A$340 bln and Australian Retirement Trust with around A$310 bln. The next six biggest funds each manage more than A$80 bln.
These funds have the advantages of scale, including access to sophisticated investment opportunities worldwide, diversification by asset class and jurisdiction, the capacity to invest directly in high-value assets, and the ability to charge lower fees than smaller funds.
International diversification is a key feature of the Australian super system. Given the numbers involved, it’s necessary both to maximise returns and to avoid excess exposure to the domestic Australian economy. The system enables individuals with small super amounts to invest indirectly in a wide range of jurisdictions that would otherwise not be available to them.
AustralianSuper illustrates this international diversification. With over 3.4 million members, it now has around half its funds, or A$150 bln, invested offshore and has offices in London, New York, and Beijing.
Diversification of asset class is another key feature of the super system. Again, the goal is to spread risk. Data from the Thinking Ahead Institute shows the asset allocation in the world’s seven largest pension markets.
2023 asset allocation in top seven pension markets
Source: Thinking Ahead Institute
Australia has the highest allocation to equities and the lowest to bonds. This constitutes a higher risk profile than the other pension markets. That leaves the Australian super system much more exposed than those markets to a stock market crash of the type seen in 1987, 2000, and 2007.
In recent years at least, the Australian system has produced healthy returns. Chant West tracks the performance of Australian super funds based on their investment approach – from the lowest risk ‘conservative’ to the highest risk ‘all growth.
Diversified fund performance (results to 30 June 2024)
Source: Chant West
These are impressive numbers and they help to explain how the super pool has grown to more than A$4 tln. That growth also confirms the wisdom of Warren Buffet’s faith in the power of compounding.
In the 32 years to June 2024, the growth category experienced only five negative annual returns. Still, as most funds management advertising constantly repeats, ‘past performance is no guarantee of future performance’.
In recent months, some potential risks with Australia’s super system have been in the news. The IMF’s Global Financial Stability Report in October highlighted a liquidity risk. While there are comprehensive restrictions on the ability of super fund members to access their funds, members can switch between different investment options in a matter of days, eg. from ‘high growth’ to ‘conservative’. That could create liquidity problems for a fund with significant illiquid exposures such as private equity and hedge fund investments.
In the Reserve Bank of Australia’s Financial Stability Review in September, the RBA identified super funds as ‘an increasingly important part of the Australian financial system’. For example, super funds ‘directly hold nearly one-third of bank short-term debt securities and over one-quarter of equity issued by domestic banks’.
According to the RBA, this connectedness carries some risk including ‘the ability to amplify shocks’. To ameliorate the risk, the RBA states that super funds need to ‘strengthen their liquidity risk management practices’.
The other major risk of the Australian super system is a fiscal risk. The tax concessions built into the super system, including zero tax on earnings once a person retires, have contributed to its success. However, those concessions are becoming increasingly expensive as the amounts invested in super rapidly rise.
The current version of Australia’s compulsory super system began in 1992. Many kiwis don’t realise that a NZ Labour government introduced a compulsory superannuation scheme nearly two decades earlier. However, it was soon cancelled by the next National government under PM Robert Muldoon.
It’s an interesting counterfactual to consider how different the kiwi economy would be today if that scheme had survived.
*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.
37 Comments
What a complete 'drop-kick' Muldoon was. How can National stalwarts ever rest easy knowing that their party was exclusively responsible for the most lasting damage ever done to the NZ economy. Muldoon was an absolute prick and there should be statutes of Muldoon upside down with his head in a bucket of you know what. And we're seeing it again with Luxon and co...the three wise monkeys and their futile tax cuts.
Muldoon openly campaigned on the issue and his intent, it was no secret to the voters. Even commissioned a Hanna-Barbera cartoon with dancing Cossacks to illustrate the "communist" nature of compulsory super.
And then you have those very voters today suggesting they paid for the super they receive now, trotting out phrases like "social contract" and unsubstantiated claims they funded their own super from taxes paid.
Blame sits squarely with every single National voter in 1975.
compare the immediate actual deaths resulting from the more recent Labour policies with the long term effects of rich people able to work not getting a larger cut of a pension benefit pie (something all parties had a hand in both in action and inaction over decades) and we can look at how well the historical actions stack up to affect the most vulnerable in the country.
In case you were wondering it does not matter what a politician says or publicly advertises and you should never ever trust a single one. Also start saving now yourself for private care, you will need at least 50k a year for medical and living support (and that is a very low number and does not include housing or household services).
Chris Hipkins & Ardern who stripped disability and medical care for the most vulnerable disabled people including the disabled elderly and denied minimum wage pay to support workers but they made good tv smiles and promises while directly implementing ways to defraud even those covered by support now and drain hundreds of millions for private consultant boys club fly by night companies. Hence the further illness and injuries and premature deaths. Not exactly rocket science they were stealing from disabled peter to pay the rich pauls and secure their own future benefits for themselves. Arden spent more time on self advertising then she did on actual policy and improvements to the nation and sadly it is clear in her roles after she is equally unqualified but over marketed for the significant self serving benefits. No one politician ever has to live the life of the plebs or face the same fate if ever they were stuck down by similar bad luck. They literally get a golden handshake for life. Is it worth lying to the NZ public then for them, you bet. Unethical but then much of the NZ public is aok with unethical behaviour so long as their team does well in the sport.
Blaming it all on one man who has long since died is a cope.
His rhetoric that this money was yours to spend and not the governments to save was extremely popular with voters, they knew they were kicking the can down the road but that's exactly what they wanted.
Voters overwhelmingly supported getting rid of tax advantages for private superannuation savings in 1989.
Voters overwhelmingly rejected an Australian style compulsory savings scheme at referendum in 1997.
Voters supported scrapping the surcharges that saw people with zero material need for welfare, start to collect the superannuation in 1998.
It's a cope to just wash your hands and blame "muldoon"
No, because a politician can be both wrong on some things, right on others, ignorant and self serving and supported by a crowd of equally self serving members of the public looking to future governments to bail them out and give them lots of free money at the drop of a hat. Regardless of whether the money is available or not because in most the public eyes govt money is endless and magically appears. Opportunity cost, cynicism, common sense, logic and forward thinking not being strong suits for most the NZ public. Especially since we had such bombshells to NZ education and mob rule/public voting is often stupid & nonsensical (with a high degree of ignorant us vs them political side taking in the mix as evidenced by many of the comments).
Likewise it was Chris Hipkins & Ardern who stripped disability and medical care for the most vulnerable disabled people including the disabled elderly and denied minimum wage pay to support workers but they made good tv smiles and promises while directly implementing ways to defraud even those covered by support now and drain hundreds of millions for private consultant boys club fly by night companies. Hilariously they made national carry the can when they found out less then a month after forming a govt what had been done in past budgets, policies, legal minefields designed to deny employees minimum rights & pay equity, dept costs, and corporate wastes of space draining the health system (while Labour cutting the actual medical living needs support budgets in deep significant ways that did lead to deaths).
So in many respects compare the immediate actual deaths resulting from the more recent Labour policies with the long term effects of rich people able to work not getting a larger cut of a pension benefit pie to fritter on luxuries they don't need (something all parties had a hand in both in action and inaction, not just Muldoon, over decades) and we can look at how well the historical actions stack up to affect the most vulnerable in the country.
In case you were wondering it does not matter what a politician says or publicly advertises and you should never ever trust a single one. Also start saving now yourself for private care, you will need at least 50k a year for medical and living support (and that is a very low number and does not include housing or household services or transport).
Note: I have never, ever supported National once in my life or voted for them but I can read, use logic and remember politicians actions, not the fake advertising put out that conveniently excludes the actions taken by politicians where it matters. I am not swayed by the halo effect and find picking sides or a team to attack another is self destructive in politics when as a country we all need to be able to move forward together or we fail together. Pushing Us vs Them politics is just a way to distract and mollify the public mobs so they do not think or look behind the curtain. In most years it is a predominantly two party system designed to keep the public stupid and distracted from what actually happens in depts.
Hence how NZ education could be stripped by the DoE to exclude most reading and science and we have crippled a generation of youth & kids which has especially harmed the lower socioeconomic classes more then those who can afford private tutors.
Hence how the climate commission racially and discriminatory targeted the disabled and poor for massive fines and stripped them of both medical, housing and work access they had, spiked the price of essential services to make them unaffordable causing much harm, and causing much greater harm to the wider public when they also gave carte blanche oks for actions that caused billions in destruction to the natural environment through poor planning and lack of basic forethought. It is not rocket science but it takes a special dept to be that hateful of the poorest in the nation and seek to remove them from society en masse while also failing in its own mandate in very very large ways. But they were allowed to do this because the NZ public is distracted and often could not really care for those they purport to be voting for in the first place (which included the wellbeing of their own family).
Lesson: don't look at the politicians as much, look at the depts and what their legal teams are focused on, then remember the politicians actions around the depts including what they signed off on which can have long tail effects a year or two, (or even more) down the line.
Stop picking a side because you like the colour or have friends who cannot be arsed reading 40+ page reports picking based on marketing ploys & popularity. Actually stop, look, listen... or as the NZ education system now is: understand, know and do.
"zero tax on earnings once a person retires"
This is how I see the superannuation I will receive. Effectively I will be getting back the tax I pay on other investments. My superannuation wont cost the country anything. Why not have a system where you stop paying tax when you reach 65? This would make investing for retirement more attractive and negate the need to pay out a "benefit".
What happens if your investments get wiped out? Not suggesting they would because I imagine you're probably an incredibly savvy investor, but let's say hypothetically at the age of 62 your investments get wiped out? At least you won't have to worry about paying tax on what little you receive when you hit 65.
But next problem: If over 65s have a significant stake in a significant portion of the economic activity in this country? Do companies start channeling tax free profits to their over retiree directors? Wage earners carrying more of the tax burden while they wait for over 65's to drop dead so they can advance their careers, because why retire if that 6 figure salary is tax free?
I guess that's the beauty of the current system, it's a UBI for the retired and available to everyone. With superannuation payments being minimal it does put a cap on the amount of tax that is returned. Keep things as they are or have a limit on the tax free earnings.
I've written it before and write it again, it's not the well off that people need to worry about with superannuation, it's those that retire with no investments. At least well off superannuants continue to earn and pay tax.
Compounding doesn't have any benefit if inflation exceeds the rate of compounding interest.
True. And if capital appreciation + dividends is simply the result of monetary expansion, it arguably doesn't have any benefit.
For ex, if you look at the SPX Total Return in USD terms v. in gold terms, from January 1999 to now:
USD: +695%
Gold: -17%
System 1 thinking would suggest SPX Total Return is beating inflation and 'growing wealth'. But when benchmarked against gold, what you're being told is not all it seems.
. True and if the rate of compounding on an amount is smaller then the cost of rental housing, power, water and network communcation increases it is damn near useless. Sadly for many in kiwisaver (the superannuation "replacement" that is a sad joke) their savings are not compounding because Kiwisaver is not a savings account it is a risk investment that has every likelihood of decreasing and with higher rates of black swans have been crashing. The obfuscation confusing people on what their contribution into the scheme is and what is true returns just means many would have been better off with emergency savings in a savings account or a better risk management profile with more insurance to cover significant life events. Of which if they become disabled they can be out of work, without income and without a home so for the amount put into kiwisaver they would have been better off with life, medical & work income insurance.
Australia now has the fifth largest pension or savings market in the world after the US, Japan, the UK, and Canada.
The Japan Government Pension Investment Fund (GPIF), the world's largest pension fund, has a significant portion of its assets invested offshore. As of the latest reports, GPIF's asset allocation includes approximately 24.86% in foreign equities and 23.86% in foreign bonds, totaling around 48.72% of its assets allocated to international investments (https://www.asianinvestor.net/article/japans-gpif-reaps-record-annual-g…)
Japan has a two-tiered pension system that has been used to for infrastructure development by reallocating funds towards public projects. This is a key reason why they have an infrastructure surplus compared to the Anglosphere nations.
I wouldn’t trust Waka Kotahi with a single cent of my super even if they went to market and selected a Japanese company as Prime for a national highway system projected to increase national productivity by 1000%. They would somehow screw it up, double the project length and budget and need more KiwiSaver funds to save them.
It's possible to solve the super problem, if I've got the maths roughly right. At birth, govt makes a one-off Kiwisaver kickstart of $20K for every child born. That's about $1B p.a. (55K births @ $20K.) By 2028 there are projected to be about 1M over 65s, so that's about $20B p.a. So $1B isn't that much comparatively. And the kickstart is off set by roughly 40K deaths p.a. of over 65s. By the time those babies turn 65 they will have accumulated about $1.2M. without any other Kiwisaver contributions. Which is enough for $40K p.a., about twice what super currently provides. At that point, govt expenditure on super has another 20 years or so to fully reduce to its annual cost of $1B. That's an annual saving of $19B in today's money. Seems like a practical solution?
Don't forget it wasn't just Muldoon.
In 1997, New Zealand voters rejected a proposed Compulsory Retirement Savings Scheme (CRSS) in a postal ballot:
- Question: "Do you support the proposed compulsory retirement savings scheme?"
- Results: 91.8% of voters were against the scheme, while 8.2% were in favor
- Turnout: 80%
The referendum was held on September 26, 1997, and was the result of the coalition agreement between the National Party and New Zealand First after the 1996 general elections. The main issue was how the public sector could provide for increased health and pension costs without creating an excessive tax burden on the future workforce. The CRSS would have shifted some of the cost of future pensions onto current earners.
A great article
I don't think the average person in NZ realises how incredible the Aus super scheme is, if you worked a normal job you'd end up with over $500k in super
nor do we fully understand how that 1.0m are kiwisaver members but don't contribute
nor do we fully understand the sleeping timebomb our super situation is and the flow on affects
Time for a revamp from a brave govt
"The rate of poverty in retirement in Australia is 22.6% – more than one in five. In Sweden it is 11.1% and in Norway it is 3.8%. This is a stark contrast. The poverty rate is measured from country to country as a percentage of the median equivalised household income – to live in poverty means to earn less than 50% of this amount. The report states:
the maximum amount that a single pensioner can get from the Age Pension is $1,144.40 per fortnight ($572.20 per week), which is below the poverty line of $612.47 per week for a single person.
Authors of the report believe that our high pension poverty is due to our relatively low spending on pensions as a percentage of GDP. Among all OECD nations, Australia spends just 5.29% on the Age Pension, compared to an OECD average of 7.43%, and above 9% in both Sweden and Norway.
The authors emphasise two other factors. Firstly, that the Australian government supports retirement income by forgoing revenue through generous superannuation tax concessions (worth $36.77 billion in 2019-2020), but that this support goes to wealthier Australians – those with the ability to top up super – as opposed to those on low or no incomes.
They also note that guaranteed Swedish and Norwegian pension systems allow recipients to work as much as they wish, unlike the Australian system which has low income allowances before pension entitlements are reduced."
https://retirementessentials.com.au/news/planning-for-retirement/22-of-….
Panacea?
The two largest super funds, based on a not-for-profit mutual fund structure, are AustralianSuper which manages more than A$340 bln and Australian Retirement Trust with around A$310 bln. The next six biggest funds each manage more than A$80 bln.
Isn't it telling that there are no comments of this feature?
How many of NZ's Kiwisaver providers are of a 'not-for-profit mutual fund structure'?
Dumb kiwis - fleeced at every turn. (And so are all taxpayers as they've contributed to Kiwisaver whether they in a scheme or not!)
Again a failure for commentators and presenters to take into account the $80B in the New Zealand Superannuation fund that has a ROI of 10%.
When will the $8B per anum be returned to the boomers, those boomers who contributed to the principal through taxation in their working life?
The principle for the super fund was taken from retirees when they were still working and they were forced to forgo many infrastructure and other capital expenditure during this time, to build the principal.
So sick and tired of boomers being blamed for the fiscal drag that the wait for the super fund, to start returning interest to the government, funding retirement.
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