The subject of women’s inadequate superannuation has been in the news for a long time. I remember attending a seminar on this issue eight years ago at Griffith University, run by a group of female economists. Those discussions were insightful, and there have been legislative changes aimed to improve the situation since then, so it’s frustrating to see that we’re still circling back to the same challenges today.
The realities of the gender gap
The harsh reality is that most women retire with significantly less superannuation than men. This makes it particularly difficult for older single women and widows, exacerbated by the fact that, on average, women live almost five years longer than men.
A key reason for the disparity in super is obvious: there is a 16% pay gap between men and women. Males tend to dominate in higher paid managerial positions; in families with children, it’s usually females who take time off from work to raise them. 75% of part-time workers are female: if you look for a GP, a vet or a dentist, it’s odds-on the person you deal with will be a woman who works three days a week. To me, that looks like getting the work–life balance right, but it does come at a cost.
Once money is inside superannuation, women still tend to earn less. Why? First, because they often have a number of low-paying jobs in their working life, they accumulate multiple superannuation accounts. Amalgamating them seems just too difficult. I can vouch for that – my daughter has four small superannuation accounts, and I’ve been trying for three years to get her to consolidate them, but the paperwork always gets in the way.
There is another issue which tends to be swept under the table: different approaches to finances, reflecting the different temperaments of males and females. Norwegian studies have shown that men and women play the financial game with different rulebooks. For men, the focus is on maximising opportunities; for women, the focus is on security — building steady, reliable pathways to financial well-being. The bottom line is that women tend to be more risk-averse than men are.
Possible solutions
So what can be done to change this situation? There’s been a lot of talk about increasing financial literacy, but as far as superannuation goes it’s as simple as ABC. Three main factors determine how much super you will have when you retire: one, the amount of money contributed; two, the rate of return you achieve; and three, how long a timeframe you have. The employer makes the contributions, leaving the employee responsible for the return and the timeframe.
Young people need to invest in options that give high returns over the long term. The highest returns come from growth assets such as local and international shares, but these are described as ‘high risk’ assets. Industry professionals understand that in this context risk means volatility, but many investors think it means you might lose all your money. This is primarily a problem of terminology. As a result, people tend to keep their superannuation in overly conservative options from the time they start work, particularly if they are risk averse. The cost of this in later life can be huge.
Case study
Two people start work at age 20 on $35,000 a year. Let’s assume their salaries grow at 4% per annum and employer contributions remain at 11.5%. The first person is extremely conservative, so their fund earns only 4% per annum. At age 65 their superannuation balance is $900,000. The second person adopts a more growth-orientated asset allocation and as a result their fund earns 8% per annum. At age 65 their superannuation is worth $2.4 million.
I believe that high growth investments should be the default option for everybody under, say, 50. This would boost their superannuation in the long term and get them used to more growth-orientated assets along the way.
More education is needed to teach people the difference between investing with pre-tax and after-tax dollars. Retiring mortgage-free should be a major goal, and anybody 50 or over with a mortgage should focus on making tax-deductible contributions up to the $30,000 allowed each year. This is much more valuable than increasing mortgage payments. It’s a no-brainer: a good superannuation fund should be paying a higher return than the interest on the home loan, and the tax advantages give you much more bang for your back.
We also have to educate people about the importance of time. Think about a person aged 60, who earns $70,000 a year and has $300,000 in super. If they retire now, they have $300,000; if they work for just five more years and retire at 65, they end up with $500,000. That extra $200,000 could make a massive difference to their retirement.
Catch-up superannuation contributions were introduced specifically to help women recover from time spent out of the workforce. If there comes a time when you’re back at work and school fees are behind you, this could be a great opportunity. As long as your super balance is under $500,000, you can make substantial tax-deductible contributions to help offset the years when your employer wasn’t contributing on your behalf. It’s a valuable strategy to get your retirement savings back on track.
Now, laws to pay the superannuation guarantee on parental leave have been introduced to parliament, aiming to reduce the part of the superannuation contribution gap caused by maternity leave. In addition, the COVID-19 early release withdrawals showed that women were more likely to withdraw funds from superannuation in times of difficulty.
Of course there is still much to do, and improving financial literacy for all Australians continues to be one of the greatest challenges facing us. But the better we understand the problem, the better chance we have of solving it.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au.