So much of the national conversation about superannuation simply assumes that "savings for retirement" is synonymous with "superannuation savings". This is a big mistake.

This mistake partly explains why we got into such a mess with excessively generous tax breaks for super. It also underlies misguided plans to increase superannuation contributions to 12 per cent of earnings.

Super doesn't equal retirement savings

Any sensible conversation about superannuation policy must start by recognising how households save for retirement, and why.

It's become conventional wisdom that people will retire on their superannuation savings, perhaps topped up by the Age Pension. Even ASIC's retirement savings calculator — which enables people to estimate their future retirement income — presumes that superannuation and the Age Pension alone will fund retirement. The assumption that superannuation accounts for the bulk of households' retirement savings has underpinned claims that most Australians aren't saving enough for their retirement.

Yet the stark reality is that superannuation savings account for only a small portion — about 15 per cent — of the wealth of most households. Even without counting the family home, the average Australian saves as much outside as inside the super system. For older households close to retirement, assets other than super are often even larger than the value of their homes.

Younger households continue to save a lot outside super and the family home. ( Supplied: Grattan Institute )

Super's modest contribution to retirement savings is true for households of most levels of wealth and income, as confirmed by new analysis for the Grattan Institute of both ABS data and the Melbourne Institute's HILDA survey.

It is true that many of those with little wealth report a larger share of savings in superannuation than in other assets, but only because their total savings are small. For such low-wealth households, the Age Pension will always be their main source of retirement income.

Non-super savings matter for middle Australia. ( Supplied: Grattan Institute )

Even younger households save a lot outside of super

When confronted with facts about the modest contribution of super to retirement savings, super's cheerleaders point out that the system is immature. Compulsory super only began in 1992, with compulsory contributions of 3 per cent of wages, rising to 9 per cent by 2002 and 9.5 per cent since 2014-15.

It will be another two decades before typical retirees will have contributed at least 9 per cent of their wages to super for their entire working lives. So surely super will account for a larger share of household savings in future?

While we might expect younger households to save more in super, and less outside, that's simply not true. Their assets outside are typically as large as their assets inside superannuation, even without counting home ownership. This is so even for households in the 25-34 and 35-44 age groups who have had high levels of compulsory super for most of their working lives.

Non-super savings will remain large

The enduring importance of non-super savings should come as no surprise. While compulsory superannuation forces people to save more via superannuation, there's little evidence that non-super savings have fallen very much in response.

A recent Reserve Bank of Australia study found that each extra dollar of compulsory superannuation savings was accompanied by an offsetting fall in non-super savings of only between 10 and 30 cents. As a result, compulsory super has added a lot to private savings in Australia — an estimated 1.5 per cent of GDP a year over the past two decades.

There is little reason to expect this pattern of non-super saving to change radically. Households hold a material portion of their wealth outside of super so that they have an option to use it before turning 60, and because they are nervous that government may change the superannuation rules before they retire.

Other asset classes, such as negatively geared property, are taxed lightly and so will likely remain an attractive vehicle for accumulating wealth. Whatever the motivation, most households heading towards retirement have substantial non-super, non-home assets to draw on.

Super as a proportion of total assets is somewhat higher for 55 to 64-year-olds when compared to younger households. This is partly because households aged over 55 contribute more voluntarily. They transfer assets they have already accumulated into super to attract a lower tax rate, knowing that if necessary they can withdraw immediately, or within a year or two. While this asset shuffling reduces their tax bills, it adds little to genuine retirement savings.

One implication: super tax breaks should be more limited

Acknowledging super's more modest contribution to retirement savings has big implications for retirement incomes policy.

Since most Australians will rely upon a range of assets and income sources to support their retirement, we shouldn't expect superannuation alone to provide an "adequate" or even a "comfortable" retirement, as the super industry demands.

A number of prominent studies claim we face a retirement savings crisis, but they ignore non-super savings. This leads them to advocate ever-more-generous tax breaks so that super alone is enough to provide an adequate retirement income, even though the reality of retirement incomes will be different for most households.

The government plans to legislate that the purpose of superannuation is to provide income to supplement or substitute the Age Pension. This implies that super tax breaks should cut out at the point that people no longer qualify for even a part Age Pension (a pre-tax income of $75,000 for a couple). If the earnings on non-super savings are ignored, then this leads to super tax breaks for a lot of people unlikely to qualify for an Age Pension.

The next round of reforms to super tax breaks will need to do better on this score.

Another implication: no need to increase the Super Guarantee to 12 per cent

Ignoring non-super savings may also lead policymakers to force people to save too much through superannuation. A common aim of retirement income policy is to support lifetime consumption smoothing: maintaining a more consistent standard of living across people's lives.

Compulsory saving via the Superannuation Guarantee forces people to save while they are working so they have more to spend in retirement.

But there is no magic pudding when it comes to superannuation. Higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today.

In fact current levels of compulsory super contributions and Age Pension are likely to provide a reasonable retirement for most Australians.

If we project forward the retirement income for a median income earner working for 40 years, and account for just compulsory super contributions — in other words, we ignore any voluntary superannuation contributions and savings outside of super — we find that today's 9.5 per cent Superannuation Guarantee and the Age Pension would provide the average worker with a retirement income equal to 79 per cent of their pre-retirement wage (also known as a replacement rate).

About two-thirds of income earners can expect a retirement income of at least 70 per cent of their pre-retirement income — the replacement rate for the median earner used by the Mercer Global Pension Index and endorsed by the OECD.

Under existing super policy, most will largely replace their pre-retirement income. ( Supplied: Grattan Institute )

Once non-super savings are taken into account, many workers are likely to have a higher standard of living when they retire in 40 years' time than during their working life. This is before we consider that people have much lower spending needs in retirement, particularly in the later stages of life when government covers much of their largest costs of health and age care.

This modelling of the future shouldn't be a surprise. It matches what is already happening today. The non-housing expenditure of retirement-age households today, many of whom did not retire with any super, is typically more than 70 per cent of that of working-age households today.

Older household replacement expenditure is remarkably consistent. ( Supplied: Grattan Institute )

Current levels of retirement spending appear to be sustainable. Most households in retirement only draw down very slowly on their superannuation and their broader savings. Consequently, most are likely to leave material bequests.

The policy implication is that there is no compelling case to compel households to save 12 per cent of their income through the Super Guarantee as currently legislated. This would effectively compel most people to save for a higher living standard in retirement than they enjoy during their working lives.

In practice, given typical retiree spending patterns, a 12 per cent Super Guarantee will primarily result in larger bequests. It would be better to leave the Super Guarantee where it is — at 9.5 per cent of wages.

This is consistent with the 2009 Henry Tax Review, which found that the Super Guarantee of 9 per cent then in force would be enough to give most Australians "a substantial replacement of their income, well above that provided by the Age Pension".

Ignore the vested interests

Powerful vested interests are pushing the idea that super equals retirement savings. Yet such a view is inconsistent with the facts. Super's importance to retirement savings has been overblown for far too long.

As the debate heats up over policy for Australia's $2 trillion super sector, recognising what households actually save, and why, would be a big step in the right direction.

John Daley is the Chief Executive Officer, Brendan Coates is a Fellow, and Hugh Parsonage is an Associate, all of the Grattan Institute.

Originally published in The Conversation.