Superannuation in Australia

Superannuation is Australia’s main way of saving for retirement. With a history reaching back to the 1850s, superannuation is one of the world’s most established (and admired) pension systems.

Superannuation is reputed globally because it’s fairly unique. Firstly, the Superannuation Guarantee specifies that employers must contribute to their employees’ super funds. While many other countries have compulsory employer contributions, their schemes typically require contributions from employees, too. Here, Aussies can make voluntary contributions that come with an additional tax incentive.

Your super provider then invests your money on your behalf to try and grow your nest egg ahead of retirement. Within your super, you can invest in all kinds of assets, from safer ones like cash and bonds to high-growth ones including real estate and shares.

How does inflation work?

Now to inflation – a word you’ve probably heard a lot lately. Put simply, inflation refers to the increasing price of goods and services. It’s expressed as a percentage, which reflects the rate of change. For example, if an item costs $150 this year and $153 next year, the inflation rate is about 2%.

In Australia, inflation is determined using the Consumer Price Index (CPI). This is a measure of the change in price of a basket of certain household goods, like food, alcohol, housing, insurance, and more.

Governments generally try to maintain a sustainable inflation rate. Locally, the Reserve Bank of Australia aims for a rate of 2-3%.

However, several things can propel inflation. These can be broadly sorted into three categories:

• Demand-pull inflation. This happens when everyone wants something, but there’s not enough of it to go around. As a result, sellers can raise their prices and inflation is driven even higher
• Cost-push inflation. Cost-push inflation occurs when there’s a drop in supply, usually when the cost of producing things goes up. Producers then pass on this cost to consumers, thus jacking up prices and inflation
• Expected inflation. This is more of a psychological factor, whereby people effectively predict that inflation will occur and raise their prices in advance

Interest rates are used as a tool to help control inflation. When inflation rises too quickly, central banks (like the RBA) often increase interest rates. This makes borrowing money more expensive and saving more lucrative, ideally to slow down spending. If inflation is low, they’ll do the opposite to interest rates to encourage people to spend and stimulate the economy.

What’s going on with inflation right now?

At the moment, inflation is (understandably) a concern for many Aussies. As a flow-on effect of the last few years – namely Covid, global wars, and booming consumer demand – Australia is seeing an unusually high inflation rate and a rising cost of living. In 2022, inflation peaked at 7.8%. (Even then, it’s nowhere near the astonishing 17.7% hike in 1975.)

This level of inflation is concerning to many because as prices go up, purchasing power goes down. Without wage or savings growth that match the inflation rate, money doesn’t stretch as far. Over an extended period, the situation can worsen, resulting in lower living standards and major economic problems.

Does superannuation keep up with inflation?

So, how could all this impact your super? Is super at the mercy of inflation, or is it able to keep up with it?

When inflation is high – as it has been – it’s certainly more challenging for super providers to maintain their investing targets. Many succeed, but some don’t.

There’s also the possibility that the historical returns of high-growth assets like property and stocks can’t surpass inflation rates. In fact, research by Hartford Funds shows that 90% of equities do well in a low-inflation period (less than 3%). Any more than that, though, and their performance starts faltering.

But remember that super is very much a long-term investment, and it kicks off decades before you’re likely to access it. Short-term periods of high inflation can certainly affect your super returns, but possibly only temporarily. Chant West research shows that super funds have produced average annual returns of at least 5.3% (for conservative funds) over the last 15 years. The average inflation rate over the same period was 2.49% – indicating that super historically has an edge over the long term.

Many superannuation providers also offer investing strategies that aim to outperform the CPI by at least a couple of percentage points. These strategies typically include a mix of high-growth assets like growth stocks (which are traditionally considered the best investments to overcome inflation ) and defensive ones, which help offset losses.

Assuming that inflation evens out at an average rate of 2-3%, it all largely hinges on how much your super is returning.

You effectively want your super to outdo inflation over time. Let’s say inflation is at 2.5% on average. Your super return will need to be a minimum of 2.5%, too, just to ensure your purchasing power remains more or less the same.

You’ll also need to adjust your returns to account for inflation to get a more accurate idea of them. So if your super is going up at a rate of 8%, the real value would be 5.5% with an inflation adjustment.

How to grow your retirement savings

To safeguard your retirement savings and improve your chances of enjoying a comfortable life once you stop working, here are some strategies to think about.

Keep tabs on your super

Treat your super much like any other investment – because that’s exactly what it is. Re-evaluate it at regular intervals (such as when you switch jobs, or even just annually) and consider the following:

• Your super investing strategy. Super providers typically have several investing strategies to choose from, ranging from conservative to all-growth. While there’s no one-size-fits-all approach, choose one that suits your retirement goals, retirement timeline (i.e. how long you have until you retire), risk tolerance , and how hands-on you want to be (several super providers offer DIY investments, too). It’s worth mentioning here that most balanced strategies are designed to try and beat inflation by a few percentage points
• Your provider’s performance. This can affect how well your super can match or top inflation. Find out more about comparing super providers
• Your super count. If you’ve had multiple jobs in the past and opened a new super fund with each one, you might have several under your name. This could mean you’re paying unnecessary fees and possibly insurance premiums. Here’s how to consolidate your super
• Fees. On the topic of fees, compare funds to see which one offers the best balance of cost and performance

Consider voluntary super contributions

By making voluntary contributions to your super , you can boost the amount of money in your fund. There are also tax incentives for voluntary super contributions, which may potentially reduce your income tax.

If you’re a low income earner, you could also take advantage of government co-contributions. Every time you make an after-tax contribution to your super, the government will chip in too.

Remember, though, that voluntary contributions don’t work for everyone. In some cases, that extra money may be more valuable to you now. This could be to cover your day-to-day expenses or to make an additional mortgage repayment, which could mean a smaller loan to pay off when you stop working.

Look into long-term share investing

You could also invest outside your super via the stock market, perhaps via individual stocks or Exchange-Traded Funds (ETFs) .

Some shares also do better during periods of high inflation. By diversifying your investing strategy and putting some of your money into the stock market, you may be able to take advantage of their relatively strong growth and outperform your super’s return rate.

However, shares do come with risk, and there’s no guarantee you’ll make a profit. Plus, unlike super, you’ll need to oversee your investments yourself. Consider the time it takes to research and manage your share portfolio.

Open a high-interest savings account

High-interest savings accounts have an average interest rate of 4-5%, but many offer bonus or variable rates that are even bigger. Any less than the average rate and your money is likely to dwindle with inflation.

The drawbacks of savings accounts include limited (or no) withdrawals to maintain a high interest rate or unlock bonus rates. And remember to factor in inflation to calculate your actual returns.

Set up passive investments

You’re entitled to the Age Pension when you retire, which supplements the amount you get from your super. But it’s not the only form of income you could be getting.

You might consider investments that offer passive income, such as dividend-paying stocks or an investment property that provides rental payments. Property has the additional benefit of potentially delivering capital growth.

Of course, both options do require you to front up extra funds. Assess whether you’ve got adequate capital before putting your money into either.

The path to retirement is yours and yours only

Ultimately, the way you work towards retirement is your decision. Not every investment will work for every investor. You need to assess all the investing fundamentals (financial goals, investing horizon, risk tolerance, how much time you want to spend on investing, and so on) before adjusting your strategy.

If you’re ever unsure of what to do next, think about reaching out to a licensed financial adviser for guidance.