Superannuation contributions: the soft option

13 Mar 2008

Soft compulsion is a method to increase retirement savings by automatically increasing the individual employee’s superannuation contributions, but allowing the individual to opt out of this arrangement. It is based on the assumption that individuals, left to their own devices, will often fail to make sufficient superannuation contributions to ensure that they receive an adequate retirement income. It also assumes that most participants will not opt out of such a scheme if introduced.

New Zealand, the United States and the United Kingdom have, or will have, a soft compulsion regime to boost retirement savings. Tasmania already has such arrangements in respect of its public sector workers, as do a number of private sector employers. The Commonwealth also has default member contribution arrangements in one of its superannuation schemes.

There appear to be few practical obstacles to the introduction of such a regime elsewhere in Australia, though the success of such a regime would depend on its design. The introduction of a soft compulsion regime may significantly increase government outlays, depending on its design, and interaction with other parts of the retirement income and taxation systems, particularly the government superannuation co-contributions regime.

Further research may need to be undertaken on the adequacy of current arrangements and the total resources available to retirees to clarify whether there is a need for a soft compulsion regime in Australia.

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