The Superannuation Paradox:

Would You Be Better Off With Your 12% Today?

Every week I go to work, and 12% of what I could take home ends up in a future fund, run primarily by large organisations. Superannuation has been a success story in Australia, but for a lot of people, dealing with the here and now matters more than parking dollars for a future they may never get to enjoy. So here's the question I keep coming back to: would that 12% be better off in your back pocket today? Let's look at the economics of superannuation, where the money goes, and what it might mean for your home loan.

How Big Is Australian Superannuation?

Australia has the fourth best pension fund of any country in the world. We've set up something that compounds on itself and builds a lot of future wealth.

The scale is huge. Australian superannuation assets total $4.77 trillion. For perspective, every property in Australia added together sits at around $11 trillion. Super is relatively new, yet it already equals roughly 160% of GDP.

That size has also created an entire industry. There are union super funds and other funds that need huge numbers of people to work inside them. Building a future for workers is a brilliant idea, but along the way it has also built an industry.

The real question is whether Australians are getting the full benefit. Are enough of us ending up in a position to retire early, stop working and live off super?

What Changed for Self-Managed Super

Recent changes to superannuation law removed residential real estate from the equation when it comes to lending and leveraging super. It used to be very popular to set up a self-managed super fund, buy a property with a 30% deposit and borrow the other 70%.

Often the rent could cover the debt, leaving you cash flow positive while owning a property that grew through the traditional housing market. Plenty of investors did this because they understood property and leverage.

Property bought this way and held for around 10 years or longer proved to be one of the best ways to build wealth in super, thanks to the low tax base, the predictability of Australian housing and the leverage. That option has largely been shut down.

Mum and dad investors can still do commercial real estate, but it has its own fundamentals and trade-offs. If you're considering it inside your super, I'd encourage you to learn more about it first.

Where Your Super Money Actually Goes

Some people assume the government simply takes super and spends it. That's not how it works. Super funds have legal duties to their members and are meant to invest in diversified strategies. The government can't ring a fund and ask for another $10 billion.

Still, government is one of the strategies those funds use. Here's the rough picture:

• Around half of super is invested in shares, including ASX-listed and international companies.
• Around 19% is in fixed income, such as government bonds.
• Around 10% of your money is in Commonwealth government debt.

Government bonds are attractive because they pay a return, and there is no safer bond than an Australian government bond. Super funds can also invest in overseas bonds, infrastructure, cash and direct property, including build to rent. But government bonds offer a risk-free return, so many funds buy them.

The Circle Your Money Travels

Here's how the loop works:

• Money comes out of your wages and into your super fund.
• The fund invests it, and some goes into government bonds.
• The government receives that borrowed money and spends it in the economy.
• The government then pays interest back to the bonds, which the super fund owns.

It's a cheap source of financing for Australia, and if it's used wisely, a great source of capital. You don't need to go overseas when you can rely on local money. Some of it is also building hospitals, airports and roads, and part of ASX companies like the Commonwealth Bank.

My concern is this. Outside of super, when governments borrow too much, it creates inflation, and we're going through inflation now. If it were harder for the government to get its hands on this deep pool of capital, perhaps it would be a little more fiscally responsible. That's the paradox.

What If You Used the 12% on Your Home Instead?

I've recently heard from a few people in Parliament, including Gerard Rennick, who argue Australians should be allowed to access more of the 12% they're forced to put away. Many Australians can't get into the housing market or are carrying enormous mortgages, with huge interest bills to the banks.

Owning your home outright is a great way to control your future. If a lot of Australians are entering the market at 40, they may not pay off their homes fast enough by retirement. A home owned outright is also capital gains tax-free, and you can sell it and use the proceeds in retirement.

The Numbers for a Couple

For the average Australian household with dual income earners, that 12% is close to another $17,000 per annum. Apply it to debt reduction on a 25-year home loan and you could effectively turn it into a 15-year loan.

You could even imagine a rule where, for every dollar you match from your super into your home loan, you pay the loan down faster again. That might get a home paid off in 12 years, or even 10.

I don't know the complete answers here. But one of the best ways for Australians to get ahead is to be debt-free on their principal place of residence by age 60, and owning your own asset is a cornerstone of wealth creation later in life.

Could There Be Guardrails?

I'm not saying everyone should simply get the cash and do whatever they like. There's merit in the money being tied to a financial instrument, and a mortgage is a financial instrument. A policy could allow the 12% to be used as long as it pays down the principal of your owner-occupied home.

It's your money, and you should have the right to use it as long as it's fiscally sound. Paying off your home loan is one of the most fiscally sound things you can do.

The Trade-Off Worth Considering

Superannuation is a great vehicle, and broadly it's an amazing thing. But the gap between how super accumulates and where most Australians actually are creates friction.

When the option of managing your own super with a low-risk strategy like residential property was removed, everyone moved back into industry funds. Those funds are also a domestic source of capital for the federal government. It's worth asking whether the 12% is being sent to the future version of you before the current version has been sorted out.

Your money goes to the government to fuel debt, and debt contributes to higher interest rates. It's a sneaky little paradox to think about.

If you're weighing up your own position, look closely at your mortgage, your time horizon and what your super is actually invested in.