Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 4

Superannuation is losing its lustre

The framework for Australia’s retirement policy set up in 1992 was original and even world-leading. It offered great promise that, once the new arrangements settled in, the retirement needs of our ageing population would be well-provided.

Alas, in recent years, our retirement arrangements, and particularly the superannuation component, have been losing their lustre, because of the many changes in regulations already made and in prospect.

The framework proposed twenty one years ago

The original framework had four components.

First, the taxpayer-funded age pension would continue to provide for a relatively frugal lifestyle and be means-tested. This was in line with the traditional approach in this country to the age pension, but stood in contrast with the higher, and universal, age pensions paid in much of western Europe which, in recent years, have contributed to government financial problems across a lot of Europe.

Second, there would be compulsory contributions into superannuation, mostly paid from employers, with recognition these payments would lessen the rate of increase in average wages. These compulsory contributions would start at 3% of wages and the required minimum would be raised, over time, so that a large proportion of the future retirement needs of middle Australia would come from the compulsory contributions and the accumulated earnings on them.

Third, there would be tax benefits provided for superannuation savings, to boost the return on compulsory contributions and to give some encouragement for voluntary savings in superannuation.

The fourth feature of the proposed retirement arrangements attracted surprisingly little attention at the time: most Australians would have defined contributions superannuation rather than the defined benefits superannuation that traditionally applied to the small proportion of the workforce who had participated in superannuation.

In the future, the amount of superannuation most of us would draw on in retirement would be defined by the amount of contributions paid into our superannuation accounts and the accumulated earnings on those funds.

The retirement framework is not working out as well as was hoped

But 21 years on, the goal of sustainability in Australia’s retirement system is proving to be elusive.

In part, that’s because we are, on average, living much longer and have more years of retirement to fund than was earlier expected. For the most part, that’s a good problem to have. (As average longevity is likely to rise further in the future, let’s make enough allowance for that, both in thinking about future strains in the retirement system and when individuals plan their own retirement).

But there are other and more deep-seated problems. The rules for superannuation keep changing, making it unnecessarily hard for people to plan for their retirement years. For example, there’s the imposition of a cap of $25,000 on the annual tax-favoured contributions into an individual’s superannuation fund (including, of course, the contributions paid by employers on behalf of their employees).

This will prevent many people, particularly parents in their late fifties and sixties who are better placed to save when their offspring have finally left home (some for the third time) from building up enough superannuation to carry them through what could be several decades in retirement.

There have been widespread suggestions that taxation of superannuation will be increased in this year’s budget, in part because the government needs additional revenues to fund existing and proposed spending programmes and in part because the current tax treatment of superannuation is said to unreasonably favour high income groups.

Taxation of superannuation: the main options

Superannuation has four possible taxation points:

  • contributions

  • investment earnings

  • benefits

  • death of the superannuation member

My preference was always to have superannuation taxed when the benefits are paid, whether taken as lump sums or as superannuation pensions.

But the decisions of successive governments have left us with taxation arrangements that run as follows: there’s taxation (at rates of 15% or 30% depending on the income of the contributor) of most money going into superannuation funds; also, investment earnings are taxed while the individual’s superannuation is in accumulation phase; but superannuation benefits paid to people aged over 60 are untaxed; and tax applies to most undrawn, tax-benefited contributions left in the estate of superannuation members when they die (any taxable component of superannuation benefit not paid to a dependent spouse or minor child is taxed at 16.5%).

The exaggerated numbers of taxation foregone

The Federal Treasury publishes figures each year for ‘taxation expenditures’, or how much tax revenue is forgone by existing tax concessions. I have trouble accepting the Treasury’s estimates that $30 billion (and soon to be $40 billion) a year of tax revenue is forgone because of the favoured taxation treatment of superannuation – estimates that the government is using to justify increased taxation of superannuation.

Those calculations make inadequate allowance for the front-ended taxation of superannuation. They assume the $1.5 trillion of assets currently held in superannuation funds would be invested elsewhere with all earnings taxed at marginal rates, and none would be spent or invested in tax-effective ways. In addition, the calculations ignore future collections of tax from estates.

Even without any further tax imposts on superannuation, superannuation isn’t the preferred vehicle for additional retirement savings it was intended to be. Many Australians now find they’d be better off putting further saving for retirement outside rather than within their superannuation account.

An increasing number of Australians will even find they’d improve the after-tax returns on their investments by moving some current savings in superannuation to other categories of their wealth holdings.

What’s needed?

It would be great to see a review and renewal of Australia’s retirement system, with:

  • caps on life-time contributions to superannuation set at a level that permits adequate self-financing of retirement

  • taxation arrangements leaving superannuation as the preferred vehicle for retirement savings

  • fewer year-by-year changes in the design of retirement arrangements

  • the ages for various entitlements to the age pension and superannuation moving up in parallel with average longevity.

Sadly, breathing this new life into the structure of retirement policy would require standards of leadership and bi-partisanship lacking in Australia these days.

 

Don Stammer is an advisor to the Third Link Growth Fund, Altius Asset Management and Philo Capital Management. He writes a weekly column on investments for The Australian newspaper. The views expressed in this column are his alone.

 

 

RELATED ARTICLES

Super performance test will destroy viability of some funds

Designing a world-class post-retirement system

Super contributions a $1 million opportunity

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.