Consider the 63-year-old Melbourne tram driver who earns about $55,000 a year yet last year managed to make salary-sacrificed contributions totalling $35,000.

Not a bad effort!

The making of such large contributions despite the size of his income was no doubt made achievable through the combination of much discipline and his use of a transition-to-retirement pension. And he probably has much more discretionary income than in the past.

In a feature in the latest Superfunds magazine, financial planner Frank Gayton talks to journalist Michael Laurence about his tram driver client - in only very general, unidentifiable terms. Gayton wants to make the point that the making of large super contributions should not be regarded, in his view, as the almost exclusive territory of higher-income earners.

(The Association of Superannuation Funds of Australia publishes Superfunds).

Gayton, who is practice leader of Industry Fund Financial Planning, says there are plenty of people in similar circumstances to his tram driver client who are attempting to boost their super savings in the countdown to retirement.

As Laurence writes: "Since the Government [first] signalled in the federal Budget its intention to halve the caps on annual concessional contributions, financial planners, superannuation funds, investment managers and financial planners have been providing telling examples to illustrate how difficult it is to make accurate broad statements about who makes large contributions."

The debate over the appropriateness of the new reduced caps from July 1 will continue to rage and there are some interesting ideas being put forward.  (See article below that's bee added to the end of this one).

The broad challenge is how to fairly deal with fund members who may have had limited opportunities to make voluntary contributions for much of their working lives - given family commitments, broken work patterns and heavy mortgages - and who now want to try to catch-up.

As an actuary is quoted in the Superfunds' article, we all seem to have friends who wait until their final years in the workforce before trying to rapidly increase their super savings when they have more disposable income.

It seems that there are plenty of people in similar positions to that Melbourne tram driver. 

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Flexibility key to getting super back on track

By Robin Bowerman
Smart Investing
12th  August 2009
Principal & Head of Retail, Vanguard Investments Australia

The global financial crisis did not just impact individual investor portfolios, it also provided a severe stress test to our entire superannuation system.

As a sense of equilibrium returns to financial markets, the debate on how well our super system stood the test is set to heat up.

Funds with heavy exposures to unlisted asset valuations are coming under increasing scrutiny as valuations are updated and impact returns, but possibly the biggest issue to be resolved between now and the end of the year is what the contribution level to super should be.

The federal government's Henry Review is due to report on its wide-ranging review of our tax system - including retirement incomes - by the end of the year. Yet it has already signaled in an interim report that it believes the existing 9% super contribution level is adequate for most people.

Given the portfolio returns of the past year that is clearly open to debate - particularly when under our super rules contributions are now capped - making it much harder for people to catch up later in life if the portfolio balance is falling short of expectations.

A key consideration is that the impact is far from uniform across the super system.

The Henry Review's assertion that 9% is adequate is probably reasonable for people just starting out on their working careers - assuming they can find a job at the moment.

But the big losers are those people who have not had the full benefit of 9% super contributions for most of their lives - and they are the demographic group now close to retirement. So the inflexibility of the system regarding contributions is really the fundamental issue here.

But other groups are also disadvantaged - for lower income workers the tax incentives with super that are meant to compensate you for the fact that your money is locked up until retirement are either non-existent or far from compelling. Then people who have interrupted working lives - women who have extended time out of the workforce for family reasons for example - also suffer by not being able to catchup with higher contributions later on.

To illustrate the point take a 30 year old person earning $50,000 a year and only contributing the mandatory 9% to super. They retire at 65 after earning an annual investment return of 8% with a super benefit of $338,000*. If they wanted to draw down an income of $30,000 a year it is estimated it would last until they were 84.

Consider the same situation for a woman who takes 10 years out of the workforce to raise a family between the age of 35 and 45. When she gets to 65 the super benefit using the same return levels is just $214,000 - and would give the same annual income until age 74 - or eight years less.

You can make the case that when combined with the age pension the first scenario is adequate but clearly the impact of taking time out of the workforce and then not being able to ramp up contributions later in life disadvantages that person.

At the Investment and Financial Services Association conference earlier this month, there were calls for more flexible contribution caps to super - and even perhaps having flat dollar benefit targets for some people. For example an argument is being mounted to allow a single person to make flexible contributions up to (say) a $500,000 account balance. The $500,000 limit being generally regarded as the amount that would provide a single person with a reasonable or comfortable retirement income.

The super system has come through the global financial crisis relatively well but the impacts on portfolio balances and what that means for an entire cohort of retirees in the near future should not be ignored.

The Henry review's final report will be eagerly awaited to see if it heeds the calls for more flexibility in the contribution levels of the system.

* Calculated using Vanguard's Retirement calculator