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Super reforms not nearly enough

The Federal Government’s 5 April 2013 reforms are another indication we’re just tinkering around the edges of Australia’s retirement savings system challenges. The system will need far more radical policy changes if our nation is to survive its demographic time bomb.

As things currently stand in our system, the cost of supporting Australia’s aging population is likely to capsize the national balance sheet within 20 years. Three years ago, the Intergenerational Report 2010 said the age pension and health care bill from our swelling population of retirees will have the government running a structural fiscal deficit by 2030. By 2050, health care, aged care and pension costs will account for almost 13% of GDP, up from 8% in 2010.

And these figures are probably conservative. In its Global Financial Stability 2012, a report warning that governments are underestimating the rapid growth of longevity, the IMF concluded: “If individuals live three years longer than expected … the already large costs of ageing could increase by another 50% [by 2050].”

The current superannuation reforms are a step in the right direction, but have failed to consider the overall retirement system. Will we be in a position where the Commonwealth can no longer afford to pay the aged pension we are currently promising future retirees? Will we bankrupt the country to care for aging baby boomers who could have saved more and worked longer – but weren’t encouraged to do so? And are we really prepared to let future generations of workers (our children) pay that enormous price?

This is not a pleasant conversation, but it’s one we need to have – now.

To some extent, the purpose of the superannuation system is to take pressure off the Commonwealth budget by reducing outlays on the age pension via the means test. The questions we should be asking are: first, are our super reforms enough to enable more of retirement to be self-funded by those who will otherwise depend on the pension and the cost of doing so? Second, if not, what are we going to do instead?

The simple answer to the first question is: no, they are not nearly enough.

A CPA study (Household savings and retirement. Where has all my super gone? CPA Australia, October 2012) shows that compulsory superannuation has had a minimal impact on Australians' capacity to save for a self-funded retirement. Instead, it reveals those approaching retirement age are incurring greater debt levels (not less, as we would expect), and view their superannuation lump sum payments as windfalls to pay off that debt or to fund greater short-term consumption.

The study also shows that the Super Guarantee (SG) system has not predicted changing work and demographic patterns, leaving certain groups, especially those with interrupted work patterns (such as women and casual workers), at a distinct disadvantage.

There is no simple answer to the second question. But there are some obvious places to start.

Encourage longer employment

Australia needs to lift the pension and superannuation access age to match modern lifespans, encouraging longer accumulation phases and effectively putting a cap on the time people spend in retirement.

When the retirement age was set at 65 in 1909, we were expected to live another 10 years. Today, we expect to live about another 20 years and it’s increasing rapidly. By 2050, the average length of retirement could be 25 years. Europe has shown us what happens when countries allow early retirement they can’t afford.

We should be encouraging people to stay in the workforce, contributing to their super for as long as possible (health permitting) beyond the current average retirement age of 62. Faced with two decades of retirement, many people would actually choose to work past the current retirement age. Although the employer contribution age limit of 70 has been lifted, there is still more that can be done.

Make sure super is used for retirement income

We need to make sure super is actually used for retirement income – especially if we’re going to support it with tax concessions.

Most other countries require at least part of the benefit to be paid as income. But, in Australia, the means test of the age pension actively encourages retirees to spend their super lump sum, so they qualify for more of the pension. This is why, according to APRA, in fiscal 2012 retirees took out $35 billion in lump sums payments.

We also need to question the idea that people can access their super from age 55 to 60. It may not be tax-free until you’re 60, but this is yet another factor encouraging people to use their super for purposes other than retirement income.

Address those excluded from the super guarantee

Currently, a substantial portion of the working age population does not make contributions to superannuation. In particular, carers for children with disabilities, adult family members or older frail parents have limited opportunities to accumulate superannuation. If we’re not going to include them in the SG, should we provide incentives for these people to make voluntary contributions to savings or receive government payments?

Encourage smarter saving through financial education

If we’re going to shift policy levers to encourage behavioural change, we need to make sure people understand their new incentives. There are differing views as to whether this is or is not the job of government. Therefore, super funds need to educate their members about what changes mean to them as individuals.

Make the system equitable

It’s time to clean up the inequitable CGT concessions and borrowing advantages currently given to self-managed superannuation funds. We don’t need to create greater opportunities for maximising financial returns in a segment dominated by higher-income earners already capable of supporting themselves in retirement. Either give APRA-regulated funds the same advantages or level the playing field in the other direction.

If Australia is to have a chance of ageing gracefully, we need to evaluate policy changes using a different litmus test. Let us simply ask: will this change reduce future outlays on the age pension?  And, if not, then why are we doing it?

Maree Pallisco is the National Superannuation Leader for Ernst & Young Australia. 

The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

 

5 Comments
RJ Marrone
September 15, 2013

Maree, a timely article.

I wish to address the response from Lyn Ralph: Women who opt in and out of employment to raise children are not the only people affected by inadequate super. This applies to those underemployed, and casual workers, i.e. both males and females. Yes, men also experience periods of underemployment and are long-term casually employed too - just ask those in the hospitality and building industries.
Maree, I was particularly interested in the section: "Address those excluded from the super guarantee." I add 'those" to refer to both genders.

John McLennan
May 06, 2013

Over many years I have built up a SMSF to the extent that I don't receive an aged pension. I have no significant personal savings. Every now and then I have had to withdraw a lump sum for: a daughter's wedding; a new car; house maintenance etc. None of these withdrawals has entitled me to a part pension.
Most of the retirees I know have had to withdraw lump sums for similar contingencies. Some have been severely hit by the GFC and bec0me entitled to a part pension. So realistically, people should not be penalised for withdrawing lump sums (often their own non concessional contributions) from their super fund. I have never encountered anyone who has withdrawn all their super for overseas trips etc and gone on the lowly aged pension. I suspect proper research would verify this.

David Thorp
May 04, 2013

Agree, changes to superannuation rules will continue until there is fundamental reform to make tax concessions sustainable (and not excessive compared to other government spending options) and provide a new customer-focussed framework that provides the simplicity and flexibility that modern workers need.
That can be achieved with tax free contributions but full income tax rates on withdrawals (otherwise you have to have complex rules to limit unreasonable tax avoidance), and low or zero taxes on earnings to encourage savings whilst still 
allowing funds to be withdrawn at any time, as long as the balance exceeds a minimum amount that rises with age.
A transition would be required to manage near-term budget constraints and not penalise those who have banked on existing rules, but this could be done with a phased introduction of a voluntary parallel scheme.  The many that it suits better 
will vote with their feet and may even pay more tax for the flexibility.

John Maine
May 03, 2013

Thanks, Maree. Can I check your view on this - you say that retirees spend their lump sum so they can qualify for the pension. I thought there was evidence that they use their super to pay off their debts, not a deliberate strategy to receive more pension, although that might be the final outcome.

Lynn Ralph
May 03, 2013

Good article, Maree. Except you left out one important issue. That is to address the inequity in the system for women whose career patterns often disadvantage them in their ability to adequately provide for themselves in retirement.

 

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