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Questions remain on legislating the objective of superannuation

In February 2023, the Government released a consultation paper initiating public consultation on the proposal to enshrine the objective of superannuation into legislation. There is now a follow up on the Exposure Draft Legislation. 

The Government considers that:

the objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”

and this should be embedded in legislation to:

provide stability and confidence… that changes to superannuation policy will be aligned with the purpose of the superannuation system”.

Assistant Treasurer and Minister for Financial Services, Stephen Jones MP, had previously indicated that legislating the objective of superannuation would be a precursor to consideration of the concessional tax treatment of superannuation from a budgetary perspective. Indeed, on 28 February 2023, he, together with Treasurer Jim Chalmers MP, announced plans to scale back tax concessions, in a proposal to introduce an additional 15% tax on earnings on superannuation balances over $3 million. 

That proposal was supported by the release, on the same day, of the Tax Expenditures and Insights Statement, which estimated that the combined aggregate tax revenue forgone from concessions on superannuation for the year 2023-24 will be $49 billion, with 30-40% going to those in the top income decile. Concessional tax treatment is more favourable for those with higher balances and higher marginal income tax rates. APRA statistics reveal that 292,449 accounts with balances over $500,000 are held by women, and 511,974 by men, revealing a clear gender inequity within the system.

The Australia Institute reported in February 2023 that tax concessions for superannuation were estimated at $52.6 billion, just shy of the cost of the Age Pension, at $55.3 billion.[1] Generous tax concessions on 'high balance' superannuation accounts seem not to fit within the Government’s articulation of the objective of superannuation, although the notion of what constitutes a 'high balance' will inevitably change with time.

This raises the question of whether a legislated objective of superannuation would ever be able to constrain political tinkering with the system to achieve one or other policy objective on the basis it could be justified, one way or another, within the framework of its legislated objective.

Struggle for consensus

Public debate on the objective of superannuation has revealed that while the basic concept of the superannuation system may seem straightforward, an individual’s experience with their own superannuation, and the expectations they have of it, is unique to their personal circumstances, and puts in doubt whether political consensus is achievable.

Former Prime Minister Paul Keating, influential in the design and implementation of Australia’s compulsory superannuation system, has previously described it as “a system designed to augment the age pension for income in retirement”[2]. This factual description leaves little room for subjectivity. However, the subsequent Retirement Income Review recommended that the objective of the superannuation system should be “to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way“, reflecting a somewhat more aspirational element and introducing the concepts of adequacy, equity and sustainability.

The question of adequacy is highly subjective. ASIC’s Money Smart website says that “if you own your own home, you will need two-thirds (67%) of your pre-retirement income to maintain the same standard of living in retirement”. The Association of Superannuation Funds of Australia (ASFA) has devised its own “ASFA Retirement Standard”, ranging from an annual cost of $30,063 to cater to a ‘modest’ single person’s needs to $66,725 for a ‘comfortable’ retirement for a couple.

All estimates assume home ownership, and all estimates exceed the current rate of the age pension ($26,689 for a single person and $40,238 for a couple, plus rent assistance for those who do not own their own home).

The latest proposal builds on earlier formulations of the supposed objective of superannuation, elevating it to an aspiration for a ‘dignified’ retirement and introducing the concept of preservation, in an apparent reaction to concerns of ad-hoc early release of superannuation that was permitted during the COVID pandemic. It was a clear shot across the bow at those who consider that superannuation should be accessible to financially assist those facing financial pressures pre-retirement that prevent many Australians from building their personal wealth outside the superannuation system, for example by purchasing their own home, or recovering from financial detriment caused by domestic violence.

The three pillars of the retirement income system

Superannuation is one of three pillars of the retirement income system in Australia.

The first is the age pension, which can best be described as a ‘safety net’ that prevents retirees from descending into abject poverty (with women more likely than men to require this support).

The second is compulsory superannuation, which requires workers to set aside part of their salary and preserve it for their retirement years, which was introduced as the product of wage bargaining negotiations to constrain wages at a time of high unemployment and inflation, and to support productivity growth.

The third pillar is personal equity, which comes in the form of individual savings, voluntary superannuation contributions and property ownership.

The superannuation system should therefore not be viewed in isolation from its place in the retirement income system as a whole. This is precisely the issue that trustees of superannuation funds have been grappling with since the introduction of the Retirement Income Covenant[3] on 1 July 2022.

In recognition of the demographic shift of Australians moving from the accumulation phase of their superannuation to the retirement phase, and living longer post-retirement, superannuation trustees are now subject to the fiduciary obligation to develop a specific retirement income strategy for their members. Trustees must determine the meaning of retirement income, having regard to income from the age pension, and potentially the income ‘from any other source’.

This has raised clear challenges for trustees as to how they are to determine the correct strategy for various cohorts of their membership, when each individual member, with their own life trajectory, is bound to experience their individual retirement needs, objectives, and income, differently.

Impact of the proposal

Enshrining a secondary, or subsidiary, set of objectives or principles in legislation (as the Financial System Inquiry originally suggested) is not a part of this current proposal. However, introducing a legislated objective does have the potential to add another layer of complexity to a trustee’s decision making, despite the lack of clarity as to how such an obligation could be enforced.

For example, how does it intersect with the sole purpose test which contemplates benefits pre-retirement when a member ceases working due to ill-health. Does it impact how a trustee should meet the insurance covenant to only offer insurance “if the cost of insurance does not inappropriately erode the retirement income of beneficiaries”?

The proposed wording of the single objective reflects the following concepts:

  • preserve savings: restricting access to superannuation for retirement only
  • deliver income: emphasising the principle that superannuation is to provide income
  • dignified retirement: denoting worthy of respect
  • Government support: highlighting interaction with the age pension pillar, and
  • equitable and sustainable: fair and able to be maintained.

It is not clear that these concepts are compatible with each other, and if there are competing elements, which one takes priority? Structural inequity already exists in the superannuation system – the gender pay gap and other social inequalities continue into retirement, longevity risks (and how these are estimated) impact the income that an individual might achieve from their preserved savings, and investment and inflation risk can threaten sustainability. The level of access an individual has to each of the three pillars of the retirement income system is dependent on that individual’s personal circumstances and heavily influences their retirement outcomes.

The retirement income system will evolve

The macroeconomic circumstances that affect workers and retirees will change over time, with shifting demographics, and the superannuation system should evolve with it. The current cohort of retirees generally will live longer than those before them and benefit from relatively high rates of home ownership, and less personal debt.

Research from the Gratton Institute indicates that most Australians can look forward to a comfortable retirement, with an average retirement income of 89% of pre-retirement income and many low-income Australians will receive more income when they retire than in their working life, because of the combination of the age pension and the income from superannuation. The picture, however, is less rosy for retirees who do not own their own home.

Younger generations are facing stagnant wage growth, higher costs of living, education related debt, higher costs of housing, the inability to own their home, the impact of climate change, rising interest rates, and rising inflation, which all put financial pressure on their ability to generate personal wealth (the third pillar of the retirement income system).

Against this backdrop, compulsory superannuation contributions are increasing from 10.5% to 12% in 2025, and the $3.5 trillion of funds under management keeps on growing. Higher superannuation contributions are predominantly borne by workers, and lead to lower wage growth and, says the Grattan Institute,

the trade-off between more super in retirement and lower living standards while working isn’t worth it”.

The objective raises as many questions as it answers

Is the increase in compulsory contributions compatible with the proposed objective of superannuation?

It might meet the preservation requirement but is it equitable that this is at the expense of building personal wealth?

Will increasing superannuation balances preclude more Australians from accessing government support?

Is it sustainable for the funds under management in superannuation to outweigh the relative size of the economy?

How do dignity, equity and sustainability interact when it comes to addressing the gender gap in retirement?

And will changing social and economic conditions require us to revisit the legislative objective of superannuation from time to time, to ensure that it reflects those changes?

The background paper refers to the opportunity to leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities. Although this reflects the current Government’s appetite for using superannuation to support nation-building projects, it is not immediately clear how this issue is aligned with legislating the objective of superannuation as proposed.

Is it because preservation until retirement aligns with the long lead time of major infrastructure projects? Is that sufficient to 'pass the test' of meeting the objective of superannuation and implementing policy change?

There appears to be broad support for legislating an objective for superannuation. It will certainly be interesting to watch whether it will have any impact on the structural inequities inherent in the system.

 

[1] “Self-funded or State-funded Retirees? The cost of super tax concessions” The Australia Institute February 2023
[2] In his speech at the Australian Pensions and Investment Summit in 2007
[3] Section 52(8A) of the Superannuation Industry (Supervision) Act 1993 (Cth)

 

Emma Higgs is a Senior Associate at Mills Oakley and a member of the Victorian Committee of Women in Super. This article is general information.

 

5 Comments
Fund Board member
September 11, 2023

I've always had an issue with the way people understand, or misunderstand, the need for 'income' in retirement. People need to understand that all payments from your super to you so you can spend on your retired life are 'income'. This is the case even if they're sourced from capital rather than from the interest, dividends, rent etc that your super fund earns.

Too many think that because retired people need 'income' then they have to adjust their strategies to invest in bonds instead of shares once they're retired. Even Jim Chalmers thinks that, and so does Paul Keating. But it's not true.

When you put money in the bank to save for a holiday, you put today's income aside to spend in the future. Super is the same! You can grow the funds by earning some interest on the bank account, but you then spend the capital on your trip. Super grows by reinvesting income and by owning growth assets (which grow because the income they earn grows, so they become more valuable over time), but the point of it is that if you don't earn enough income in the fund then you can - and should - draw down some of the capital that you have when you retire. This is partly spending the income you didn't spend 10, 20 or 30 years ago, and partly spending the additional capital that's accumulated.

You don't have to suddenly stop investing in growth assets because you need 'income'. If necessary you gradually sell some of those assets to top up the income the fund generates to give you the CASH FLOW you need to live on.

It's cash flow, rather than income, that's needed in retirement. How you invest to generate that cash flow shouldn't be determined by incorrect notions of needing 'income'.

This is part of the challenge super funds face in delivering on the Retirement Income Covenant - communicating with retirees about how to think about their investment strategy in retirement appropriately, rather than based on common myths.

Dudley
September 12, 2023

"People need to understand that all payments from your super to you so you can spend on your retired life are 'income'.":

Withdrawals from super are Return of Capital Cash Flow.
Super income is taxed (15%, 10%, 0%) and hence capitalised in fund.
Super withdrawals are like withdrawals FROM bank account, Capital.

"This is the case even if they're sourced from capital rather than from the interest, dividends, rent etc that your super fund earns.":

Interest, dividends, rent, wages, capital gains cash flow are income.
Like interest IN bank account.

"then spend the capital on your trip":
Exactly.

Calling Capital 'Income' invites taxation.

Fund Board member
September 12, 2023

Dudley I wouldn't call it income. I think we should call it cash flow and the language should be that retirees need cash to spend. They do that by saving income during their working lives then spending it (and the growth in its value) when they stop working. Super is a form of saving, pure and simple, and when you retire you draw from it.

Disgruntled
September 08, 2023

I saw the writing on the wall years ago and stopped contributing extra to Super.

It was a given that some sort of Cap would be applied and even limiting lump sum payments from Super down the track to make Superannuation last longer.

Jack
September 08, 2023

Thanks, Emma. I can understand why bodies such as the industry funds support the objective because tighter rules on large balance do not affect 99% of their members, but something like the SMSF Association should realise that its members will become a bigger target when an objective is legislated for sustainable and equitable.

 

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