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.