There is much debate about the superannuation system. Constructive and informed debate is welcome on any social and economic issue and in particular super, but we really need to raise the quality of the discussion. So-called facts and figures are quoted and relied upon by commentators, public figures, stakeholders and interested parties. I often feel there is not enough done to balance the debate, which is the aim of this article.
Some examples of misleading statements heard or read are in italics below.
- The tax assistance for superannuation costs about $32 billion in 2012-13. It is actually about half that and the pool contributes many millions in both direct and indirect tax.
- Most retirees are still on a full or part pension so the system is not doing its job. Without superannuation, the age pension bill might be some $7 billion per annum higher than it currently is. By 2037 it could be $55 billion per annum higher without superannuation on the basis that the growing pool of superannuation savings will reduce expenditures on age pensions by about 1% of GDP. Further, with compulsory superannuation, a single person who is on average earnings of $70,000 a year will retire with around $425,000 in today’s dollars and have an income in retirement which would be nearly 90% higher than provided by the age pension alone.
- The very wealthy get the best deal from super. This was probably true in the past but the amount of government assistance provided to individuals at high income levels has been substantially decreased by lower caps for concessional contributions (reduced to $25,000). In addition, the majority of those on above average incomes will receive either no or only a part age pension when they retire. When all these factors are taken into account, the amount of assistance for retirement is broadly comparable across all income tax payers. The Treasury estimates that the present value of government assistance for both the age pension and superannuation is just under $300,000. A low income person will receive this mostly in the form of age pension, while a person at the top of the income distribution will receive it as tax concessions for super. The elephant in the room in this debate is the ability for people to put in $150,000 a year in after-tax dollars and then receive tax concessions in both earnings and withdrawals after retirement age. At this time, few people can and do take advantage of the opportunity – this may or not change in the future.
- The super pool provides no real economic value to the Australian economy. Superannuation is projected to lift household savings by around 2.5% of GDP, thereby enhancing the ability of Australian businesses and governments to finance investment and infrastructure without undue reliance on foreign savings and investment. As well, superannuation will mean that an increasing proportion of retirees in the future will be important contributors to domestic demand. Current benefits boost domestic demand by over $50 billion a year and this figure could increase four fold by 2040.
- The super pool is not used for infrastructure investment. About one third of large super funds invest in infrastructure with asset allocation ranging from 2 to 10%. Both figures are expected to increase as funds get larger, mergers occur and investments focus more on delivering post retirement incomes. There are however a number of stumbling blocks including liquidity requirements, portability and the fact that only about $400 billion of super is in default portfolios. The bulk of the $1.5 trillion is in SMSFs and choice portfolios where the investor decides the asset allocation. This is clearly the major difference between the Australian super system and overseas pension systems which are predominantly defined benefit.
There is no doubt that some of the rules on the transfer of business assets and the previous ability to put large amounts of money into super favour certain groups of people, particularly if all income and benefits (no matter at what level) remain tax-free in retirement. Any retirement system must have a ceiling as well as a floor. We need to review the anomalies that promote estate planning rather than retirement incomes, and we also need to fix the gaps (particularly for the self-employed), and move the system to an income-orientation. But let’s stop the hysterical and ill-informed debate.
Pauline Vamos is Chief Executive Officer of The Association of Superannuation Funds of Australia (ASFA), a Director of Banking and Finance Oath Limited (BFO), and a member of the Advisory Council of the Centre for International Finance and Regulation (CIFR).