Former prime minster Paul Keating says compulsory superannuation contributions may have to rise to 15 per cent to meet a looming blowout in the cost of caring for Australia's ageing population.
Mr Keating says the promise of superannuation is no longer about retirement lifestyle but instead must be about managing old age and disability as Australians live longer.
The former Labor treasurer and prime minister, who was responsible for the introduction of Australia's compulsory superannuation system, said the nation needed to create a "phase two" super system to meet the needs of two distinct cohorts of retirees: 60 to 80 year-olds, and those in the 80 to 100 years age group.
"The policy promise of superannuation is understood by people to be about having a good retirement but adequacy with longevity means that promise cannot be fulfilled," he said.
Older retirees would require a focus on health and aged care and income support, which the pension and public health care systems would not be able to meet.
Mr Keating, speaking at the Association of Superannuation Funds of Australia (ASFA) conference in Sydney on Wednesday, said two options were either withholding part of a superannuation lump sum payout until the retiree reached 80, or increasing the superannuation contribution by three per cent.
"This final compulsory three per cent of wages could come in two ways, through the labour market via the SG (superannuation guarantee) ... or through a government pooled insurance fund," he said.
Currently at nine per cent, the superannuation contribution will increase to 12 per cent by 2020 after legislation was passed this year.
Mr Keating criticised changes to tax exemptions for personal super contributions, which were capped by the Gillard government at $25,000 a year in the last budget.
He said people over 50 should be allowed to contribute $100,000 without penalty, as was previously the case.
$25,000 is simply too little, he said.
Mr Keating warned that the growth in the self-managed superannuation fund (SMSF) sector, which now accounts for about 30 per cent of total super assets, was dangerous.
"Generally this group have unrealistic expectations as to how much is a good return, he said.
"Single-digit returns sour their enthusiasm for managed funds - they think they can do better themselves.
"Some sophisticated investors probably can ... but how many self managers have the required level of investment expertise? And by investment expertise I do not mean falling prey to financial advisers," he said.
Mr Keating said at least $600,000 in assets was needed to make self-managed funds a better proposition than a major fund.
He also said there should be a mandated minimum level of investment in low-risk fixed interest assets such as bonds.
Treasury secretary Martin Parkinson, who also spoke at the ASFA conference, also expressed concern about SMSFs and questioned whether the high costs of major funds were driving people away.
"It is clear in terms of what's said to us that many people have gone into self-managed funds are doing it because they think that this will lower the cost of management," Dr Parkinson said.
"Some of those people actually have the capacity to take on and manage that risk, but not all do."