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Four big fat myths of superannuation

Welcome to 2014, yet another year of policy debate and wealth industry developments. We have a lot on the slate, including:

  • the Financial System (Murray) Inquiry
  • FOFA amendments and associated draft regulations and legislation (released on January 29, 2014), and
  • the Assistant Treasurer’s November 2013 discussion paper, 'Better regulation and governance, enhanced transparency and improved competition in superannuation'.

… and much, much more.

With such debate, scrutiny and change, it’s important we start with firm foundations, and dispel some myths. I hope readers can use my observations to influence opinions in the community.

Today we consider four broad myths or sources of misinformation relevant to public policy. Next week I will address other interesting developments in 2014.

Myth #1: $32 billion of superannuation concessions

Our retirement incomes system gives concessions now to encourage us to save for later, mainly retirement, and relieves the Government of paying for social security in future.

The $32 billion per annum Treasury estimate is, at best, an incomplete measure of the cost of superannuation concessions and the impact on the Federal budget. It’s only a snapshot at a point in time, and makes no allowance for offsetting current and future social security savings, the so-called longitudinal effects. Nor is there an allowance for alternative tax-effective investment strategies that people would use if not investing via super, such as family trusts, negatively- geared residential investment, and income from shares with high imputation credits.

Regardless of the estimated cost, Treasury can’t escape the fact that Australia’s population is ageing, with the proportion of working age people to those aged 65 and over reducing from around 5:1 currently to around 2.7:1 by 2050. Any policy changes which undermine self provision in retirement are not helpful for this future dependency.

Myth #2: Superannuation doesn’t fulfil its purpose because retirees just spend their money

A common criticism of our system is that super doesn’t fulfil its purpose because people just spend their money in their immediate post-retirement years, then ‘double-dip’ by claiming social security benefits. This claim is sometimes used to argue for compulsory annuitisation of retirement benefits, rather than allowing lump sum withdrawals.

For example, in October 2012, CPA Australia/KELLYresearch released a report entitled, “Household savings and retirement – where has all my super gone?” It calls into question whether superannuation, especially mandated superannuation, and the fiscal support for superannuation is fulfilling its purpose, and it was widely reported in the media.

A close look at the KELLYresearch report highlights some concerns with the process for reaching their conclusions, including a lack of causal analysis in some cases and inconsistency with other sources including ASFA research. For example, it is stated in the Executive Summary that “people approaching retirement age are using the equity in the family home as a source of funds to assist their children into homeownership, to fund an overseas trip, retire early or simply to live a lifestyle their income cannot support”. The report does not provide strong causal evidence supporting this assertion.

There is clear evidence, especially in SMSFs, that superannuation meets its purpose. On 16 December 2013, the Australian Taxation Office (ATO) released a publication ‘Self-managed super funds: A statistical overview 2011–12’. Over five years to 30 June 2012, benefit payments from SMSFs averaged $18.9 billion per annum. This report found in 2012, 72% of all benefit payments were as pensions. This has steadily increased from 64% in 2008. There was a corresponding fall in the proportion of lump sum payments over the period. Further, at least a portion of the 28% in lump sum benefits is reinvested in income-producing investments.

Myth #3: SMSF property investments are driving a price bubble

Alarmist comments about investment in property in SMSFs cite property spruikers, Limited Recourse Borrowing Arrangements (LRBAs), and SMSFs favouring residential property as all contributing to a property bubble. These comments are not always well informed by the facts.

It’s even more worrying when the comments come from the Reserve Bank (September 2013 Financial Stability Report warning: the SMSF sector represents a potential source for speculative demand) and ANZ (ANZ’s January 2014 submission to the Senate’s ASIC review highlighted the potential dangers of geared real estate investments by SMSFs).

The facts are:

1. SMSF borrowing growth is moderate. The ATO’s Statistical Overview (sic) says,

At 30 June 2012, SMSFs held $6.3 billion in borrowings and $3.5 billion in other liabilities. The level of borrowings is equivalent to 1.4% of total SMSF assets. The proportion of SMSFs (by number) with borrowings increased progressively to 3.7% in 2012.”

This is hardly rampant expansion. LRBAs amounted to $2.3 billion as at June 2012, or 0.52% of SMSF assets, and only 1.04% of SMSFs were involved in such arrangements.

2. The total residential housing market is Australia’s single largest asset class (total estimated value $4.89 trillion as at June 2013, per RP Data). Investment by SMSFs in residential real estate as at June 2012 was $15.9 billion or 3.6% of SMSF assets. SMSF investment in residential real estate is around 0.35% of the estimated value of the residential real estate market – not enough for SMSFs to drive a property price bubble.

Myth #4: Superannuation is massively skewed in favour of the very well off

A sound superannuation and retirement incomes system should be grounded in adequacy, affordability, equity and simplicity. Ideally it would also be supported by stable medium-long term policy so confidence isn’t eroded in the system.

It is acknowledged that there is a real vertical equity issue to be addressed, and super concessions are skewed to higher income earners, so it is a regressive system. However, the degree is often exaggerated. As mentioned above, if superannuation didn’t have tax advantages, high net worth individuals would (and do) use other tax planning and efficiency structures, including geared property, investment in high yielding shares with imputation credits and management of affairs through family trusts.

Very high income earners benefit from super because in addition to getting a bigger tax concession for each dollar they put into superannuation, they also make on average bigger contributions. The Higher Contributions Tax (HCT) partly addresses vertical integration issues. The equity could be improved by the Government recommitting to the Low Income Superannuation Contribution for people on incomes up to $37,000 pa. In general, vertical equity is an issue requiring further policy consideration.

So, by all means, let’s have healthy debate on superannuation public policy matters, but let’s have such debate informed by the facts.

 

Andrew Gale is co-owner and Executive Director at Chase Corporate Advisory and a board director for the SMSF Professionals Association of Australia (SPAA). The views expressed in this article are personal views and are not made on behalf of either Chase Corporate Advisory or SPAA.

 

5 Comments
Neil
February 15, 2014

Not totally convinced about Myth 4 Andrew, although you do concede there is an equity issue.
Based on ATO figures (estimates) for 2012/13 the top 20% of income earners will receive HALF (49.8%) of all super tax concessions. The top 10% receive 31.8% -these people (good luck to them) would not need the age pension, with or without super tax concessions. Indeed, they receive almost as much in concessions as the bottom 10% receive in welfare. Clearly this is a problem for a system introduced to help reduce everyone's dependence on the aged pension.
How is Australia a better place for these distortions?
Some commenters have suggested that high income earners pay too much tax in the first place, and this enables them to get some back. That is a separate argument - and superannuation should not be the vehicle to address it. The fact that other tax reduction possibilities exist for the wealthy is also not an argument for maintaining this particular distortion.

Ramani
February 14, 2014

There is a bi-partisan almost universal 'faith' in super in Australia. As though it is our state religion! As in the case of religions, myths attach to faiths, almost parasite-like. One could even argue a symbiotic link, where each supports the other.

Myths cannot flourish without an underlying element of truth. Let us examine the slivers of veracity embedded in the myths, then:
1. While $32 billion of tax forgone is simplistic, no one can argue that there is a cost to the exchequer. Will we advocate treating super like any other investment: no compulsion, no tax relief and no preservation? As Andrew argues, the expense is worthwhile given the alternative. That does not make it a myth, simply a crude estimate.
2. For all the reasons cited in 1, we should wean people off the lump sum mentality and encourage, if not mandate, income streams at least up to the actuarial value of age pensions at retirement. Remember the industry is founded on compulsion through the cumulation phase, so a spot of compulsion in withdrawal would not be out of place. Our over-reliance on lump sums is a fact, not myth. Look at other regimes, and Australia being marked down in the Mercer Survey because of inadequate post retirement planning.
3. This is indeed a myth, driven by the fallacy of conflating property growth, Aussie fixation with residential investment, growing SMSF sector with higher per capita balances and unsuitable nature of lumpy assets in a greying membership. With the shameless spruiking we see, they result in a rational fear of property bubble, but association is not causation: SMSFs are no more responsible than other investors. Easy to beat up a big target such as SMSF, though.
4. Apart from the truism that progressive taxation entails reliefs reaching the better off in the same way, it is true that the richer segment can use concessions better than others. Check out those who breached the contribution caps, or accessed TTR pensions.
Our system is good, but not so good as to preempt improvements.Let us not treat it as the only true 'faith' to reach retirement redemption.

Chris
February 14, 2014

The quoting of ATO statistics to support any argument is disingenuous. The ATO relies purely on the tax return process to collect statistics, and even then rely on people completing them correctly. In any event, they are 18 months stale and cannot and should not be used to commentate on what is currently happening in market. The statistic that Andrew quotes is for the 11/12 financial year.

In mid 2013, Liberty Financial issued $250 million MBS of which 27% related to loans to SMSFs. These are real data points which highlight the activity of SMSFs in the loan market.

Cranky Pants
February 14, 2014

Mr Gale,

I think the bigger myth is that superannuation (and its tens of billions in concessions) will significantly reduce social security costs. Apart from many Australians not contributing enough to super to make this possible, let alone those that don't contribute at all (those not in the workforce, self-employed, welfare and disability recipients, etc) we allow large sums to be transferred out of super and spent from age 55.

We also allow the relatively well-off to transfer hundreds of thousands of dollars into a tax free environment as long as a pension is being paid (e.g. Small business concession, or $1.2 million over 2 years for a husband and wife using the multi-year concessions). This isn't encouraging extra saving, just allowing existing savings to receive even more favorable tax treatment.

vince scully
February 14, 2014

Andrew

In relation to the skew towards the well off, I think you miss the real point as to why this is a myth and why in practice the system is not in fact regressive as you suggest.

You start with stating the obvious that for a given dollar of contributions the after tax effect is bigger and extrapolate to reach the conclusion that this therefore gives top rate tax payers a better deal. This ignores the fact that top rate tax payers are restricted in making contributions relative to their income and so benefit less as a whole.

The top 20% of taxpayers (those earning over $75,000) pay a greater share of tax than they receive of the super tax benefit.

These taxpayers pay 61% of the total tax paid but receive only 43% of the concession. The higher the income the worse this looks. The top 1% pay 17% of the tax and receive only 9% of the concession and only 7.2% of the concession attributable to super contributions.

On this measure the real winners are taxpayers in the 3rd and 4th deciles (those earning between $34,000 and $46,000.

This would suggest that measures like capping concessional contributions is having an impact and limiting the benefits received by wealthier taxpayers.

In fact the numbers I have presented suggest that Myth #4 truly is a myth and the system is in fact mildly progressive.

 

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