It seems that no matter which way we turn, the government, regardless of which side of politics is in at the time, is stuck in a conundrum. As a nation, we have been told that the tax payer will not fund all our retirement, so we must save for ourselves, but the government has found it difficult to resist the temptation to increase superannuation taxes or wind back contribution limits.
Back in 1983, the Labor Government formalised the tax system on super and, with the cooperation of unions, started 3% award super (non-compulsory at that time). The framework commenced for a compulsory superannuation system which took 10 years to implement. We are better as a nation for it. Our country started down the path of a savings-based future rather than debt-based which we were facing in the days of the ‘banana republic’.
The superannuation era is therefore relatively new for Australia. Compulsory super is only 20 years old, or just one generation. In previous generations, the first investment people made was usually in their own home. This is no longer true. The day someone enters the workforce, their first investment is the 9% of their salary that goes into super. People who are entering the workforce today are the first generation born into compulsory super. We used to be told by our grandparents that in order to retire with the same lifestyle as when you were working, you needed to put away 10% of what you earned. It is little wonder that compulsory super will soon be at that level.
So do we need super? What really is a retirement asset? It’s not just me asking these questions. This was a focus of both the Henry Tax Review and the Cooper Review of superannuation.
A confronting statistic is that for every person on the age pension, we currently have about 7 people employed, but this number will fall significantly over coming decades, reaching about 3.5 people by 2042. After that, it is not expected to fall substantially more because the Baby Boomers will have passed away in large numbers by 2050, and the Gen Xers experienced a birth rate of less than two (ie there were fewer children than parents). Life expectancy depends on many factors such as the extent of further advances in medical science or rising obesity, but we know for certain that we will have a significant retirement funding problem for at least the next 30 years.
To put the outlay into perspective, the age pension for a male retiring at age 65 until normal life expectancy has a net present value cost of $400,000. In addition, it costs $440,000 for health benefits, giving $840,000 in total. This is our current age pension which we are told meets only subsistence living standards. Women are more expensive (no, not shoes!) because they are eligible for the age pension at a younger age and live longer.
We need super to reduce the future tax burden on those employed. Incentives must be provided to help us finance the next 30 years, targeted towards the retirees who this period directly affects. Otherwise, the remaining people who are in the work force will not be able to afford the increased tax required to fund the support system. Do we really want to create a nation where taxes are so high that there is no incentive to succeed, prosper and develop? There is benefit in being a tax payer if the money is well spent, and we must be careful to maintain the balance between overtaxing and taxation which creates value. This is a fine line.
Tax is inevitable, however, our administrators seem to have forgotten that our superannuation system is there to build a retirement asset. The legislative structure of our superannuation pension system says that all the money (plus or minus performance gains or losses) in the fund will be paid back to the people who put it in there and spent over their lifetime. Legislation entrenched that in the Simple Super changes in 2007. However, our age pension system needs to change to ensure people exhaust their own resources before drawing on tax-financed benefits. Tough call but change is needed. The Henry Review discussed this but no one was prepared to confront it.
There is no doubt that a larger tax base will be required over the next 30 years, but where from is the key. There are clear political problems in most alternative revenue raisers, such as an increase in the GST. For example, a 2% change in GST would fund the large majority of the current expenditure proposals but that’s not being considered.
The face of super is changing and will continue to do so. The expectation by 2020 is that we will have $3 trillion in super. Superannuation investments will change. We are likely have access to assets that we did not have before, such as an efficient mechanism for all super funds to invest in government or corporate bonds, or infrastructure projects, or investments that provide natural income streams rather than life offices actuarially creating them in a volatile market. We will have the ability through super to fund all of our banks’ home loans without foreign borrowing. Everyone is learning how collaboratively we can work together to ensure an effective investment and retirement system that benefits all.
So do we need super? Yes, absolutely. We can fund, grow and build a better nation together. We can better provide for the retirement of our people and reduce the burden on workers to support their forebears. Encouraging people to look after themselves, then taxing them for doing so, is not an appropriate answer.
The next five years of superannuation will be the most important of the coming 30 year conundrum. Let’s hope our legislators listen to all sides and create a balanced view.
Andrew Bloore is Chief Executive Officer of SuperIQ, a provider of administrative services for Self Managed Super Funds.