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Superannuation is one part of a complex tax picture

A clear message from the budget is the ongoing and important role superannuation plays in minimising the fiscal cost to the taxpayer of the age pension system. Care needs to be taken when removing super incentives as there may be unexpected consequences when the entire system is considered.

Let’s have an informed debate

Whilst there is a lot of discussion about the age pension system moving to age 70, commentators overlook the fact that by the time this occurs, most people affected will have had compulsory super for about 40 years. Roughly half the people on age pension today had no compulsory super at all.

The superannuation system is offsetting the direct tax payer cost of the age pension. We cannot as a nation continue to tax higher income earners on the basis that they can afford it. When almost 60% of income tax (excluding GST, transfer taxes, etc) comes from high income earners, who make up 3% of income tax payers, we must ask where do we find more of those people. We need to watch incentives are appropriate when the effective top rate is 50.5% and you need to work till 2:30 pm Wednesday before you earn $1 for yourself.

I hear the calls for change in the super tax system and the access to super rules. It’s worth remembering that unless you have ceased gainful employment, or met a condition of release, technically the age of access to super is 65 already.

Transition to retirement pensions (TTR) were introduced to allow people to access their own capital rather than going on a Newstart Allowance. At age 55 if you lose your job and can’t find a new one, then before TTR’s your only option was to go on Newstart if you did not have other resources outside super. You may have had $500,000 in super but the rules said you couldn’t use it because you were looking for work. TTR’s had a direct result of reducing Newstart applicants.

What about the tax free super rules for people over 60? The actual tax paid went up under the current model compared with the old rules. The taxable part of the pension was taxed at marginal rates less 15% and the untaxed element was a return of Non Concessional Contributions (the old ‘Undeducted’). The net result based on average incomes including the pension less the offset was an effective tax rate of nil. In many cases, super funds were retaining PAYG, then the Australian Taxation Office was returning it to the members. Under the current rules, by retaining the money in the fund and allowing it to grow, there is more available for members who then spend more with less paperwork and cost. Furthermore, the tax free lump sum rules have not changed and are still significantly higher than the vast majority of superannuation balances.

Some super changes make sense

There are logical changes to superannuation as we move to a more mature system. For example, there is inequity in contribution tax and income tax rules. Some people pay more contribution tax than income tax and others receive a significant reduction in income tax whilst only paying 15% or at worst 30% contributions tax. We need to question if contribution tax should be scrapped and all contributions go into the fund from net pay.

The question is what incentive, if any, should be provided for people to do more and stay off the age pension system? By 2024 there will be only 3.5 people employed for every person on the age pension. The tax burden can’t be borne by those people alone.

It is time for us to get serious about the tax debate and work out what the country can afford to do and what individuals need. Superannuation, whilst being a cash cow and an ‘easy target’, is a big saviour for future pension expenditures that is understood by Treasury and the government alike. Despite the political difficulties, change will happen and superannuation must be considered as part of the overall position, not in isolation.

The best outcome for our superannuation system and individuals is being allowed and encouraged to take responsibility for our own futures, with the education and skills necessary to do so. Our compulsory system gives every working person that opportunity regardless of the type of fund they are in.

 

Andrew Bloore is Chief Executive of SuperIQ.

13 Comments
Ramani
June 12, 2014

Andrew

Thanks for the clarifications. Agree extremes are not the norm, but in responding to extremes through a welfare-state policy, we must not forget that those who untypically suffer a major setback (family, health, financial loss, relationship breakdown) cannot be left to their own devices merely because they are not the norm. Agree a debate is required, but it must distinguish between sustainable sharing of costs between taxpayers and consumers. In doing so it is worth remembering that the taxpayer is not someone remote, it is us.
I think harking back to the past (grand dad who paid 60% on 50k income) is unhelpful in addressing sustainability. While by current norms he did pay more, relative to his grand dad he has more advanced technology, medical help and access (his son can fly in from another continent now, instead of showering flowers on the grave, in memoriam). Taken holistically, he has a fair deal. He is living longer, remember?
If we seek an equal and opposite response to every past injustice (real or imaginary) no progress will ever be made. We should send our convicts to Britain, and as a person of Indian origin I must start an East Britannia Company to teach Liz and her subjects some culture and Sanskrit! It won't work....

Warren
June 04, 2014

I've had people say the same sort of things to me, too, Tim. But the point is that the government could potentially change the rules on any investment, not just super. They could get rid of dividend imputation, or change negative gearing rules, for instance.

But with super, for all the changes, it remains a tax-effective form of saving that there is bipartisan commitment to retaining in order to encourage people to save for their retirement. That will not change. The specifics will, but it is scary to think that people would forgo the significant tax benefits of investing in super rather than taking the same sort of asset class exposure outside of super just because they are worried about what policy changes might happen in the future.

Tim
June 04, 2014

I think the majority of Australians have little faith in super due to the government changing the rules pretty much every 12 months...whether it be lump sum tax, super surcharge or contribution caps. And on top of this, changes relating to income stream types, pension standards, preservation age, SG amounts, and Centrelink treatment thereof, what you can and can't invest in, etc etc

Its just an absolute dog's breakfast.

Tortoise
June 03, 2014

Sooner or later one of the political parties will use the super "cash cow" to fund spending. It is far too tempting.

Ramani
June 01, 2014

Andrew's arguments are seemingly logical, but they commit a number of fallacies. In the same edition Jeremy Cooper makes a powerful case about the limitations of averages, Andrew exhorts us not to bother about extreme cases that game against the spirit and sustainability of the system (though not the law) As Bumble the Beadle said, in most cases, the law could be an ass.

Perceptions influence behaviour. If the young worker supporting a growing family has to pay 34.5% marginal tax with medicare, when his grand dad can take whatever he likes out of his pension without paying tax, growing the pot taxless, we are sowing the seeds of social discord and in extreme cases, bloody revolution. The worsening dependency ratio makes this not unrealistic.

The other fallacy is to overlook the need for governments to fund current initiatives, long and short term with real money than IOUs. Justice Krishna Iyer, a famous Indian jurist said in a seminal judgement 'Governments, like people cannot run on guarantees, they need real money'.

The basis for the retirement Eldarado on which current tax subsidies are founded (including the unjustifiable Australian invention of salary sacrificing available just to the privileged few) requires relentless forgoing of current taxes in the untested hope that the burden on age pension will be materially relieved. This is faith, not finance: the reward if any is in the hereafter.

Before we laud ourselves on the compulsory super, note it excludes the self-employed who need no less retirement security.

Unless we cap subsidies at a reasonable level and remove tax rorts (even if legal now), we risk emulating many of the US Municipalities in pensions.

Governments are not immune from failure as Iceland showed.

Andrew Bloore
June 02, 2014

I didn't say don't bother about the extreme cases, what I wrote was don't try and make them the norm because they are not.

I am not advocating no change, far from it, I am suggesting we have an informed and open debate about the whole system.

I might also remind you that the Grandad had to endure a tax system where the top marginal rate kicked in at $50,000 and was as high as 60%, how quickly we forget.

Again, there is no simple answer to tax and revenue reform, otherwise we would be doing it, but a rational rebate needs to be had and not just one sided publicity that ends in the press that creates those influenced behaviours.

Geoff Walker
June 01, 2014

Andrew, can you explain what you meant by :

"What about the tax free super rules for people over 60? The actual tax paid went up under the current model compared with the old rules."

It's not at all clear to me how tax paid now is higher than under the previous rules. Personally, I was delighted with the reduction to zero of tax on my super pension when I turned 60 in contrast to the tax I had been paying on it from when I started it at age 55.

Kevin
June 01, 2014

It seems to me the Government (perhaps rightly) is only interested to provide tax incentives for Superannuation in order that individuals no longer require the Aged Pension. Currently the full Aged Pension is around $21K and is indexed to ensure its buying power remains. Interestingly $500K invested at age 65 in a Lifetime Annuity with full inflation protection currently provides around $21K per year or roughly the same as the full pension. So as I see it the Government will only be motivated to assist individuals to reach this target, after that perhaps we should be taxed at normal marginal rates?
I certainly agree that a person’s focus on Superannuation increases with the size of their Super balance, but it will also diminish in importance as their other assets dwarf their Super. The Government’s changes to Superannuation legislation over the years have certainly increased Australian’s wariness of this vehicle to retirement savings.
Regardless of what other generations say of the Boomer generation, Australia (and other countries) have benefited from a massive generational wave of productive labour which is soon to taper and then finish, it will be a very long time before the next generations can provide similar growth for our Nation and the Government is rightly fearful of this prospect.
This year once again I’ll pay around ten times the taxes of a median Australian worker, I have done this for at least the past 15 years which puts my tax contribution well above the $1 Million mark during that period, yet I still don’t have $500K in Super, would the Government not be better served reducing income tax and allowing Australian’s to have some chance of becoming self-funded retirees?

Chris
May 30, 2014

From their own admission on QandA on 19 May 2014, Hockey thinking about it means that they have not unequivocally ruled it out, otherwise, it would have been said so.

To take such a long term view of when other people can access super (let alone how, e.g. lump sum vs a “pension”), when a term of Office is four years, seems irresponsible to me, because such changes are rarely revoked when they do happen.

For Generation X and Y investors, they will be the people who truly ARE “self-funded retirees” in the full meaning of the term - not the bleating of the Boomer generation.

There is likely not going to be a pension when I retire in 30 years time. If there is, I might not have access to it, they might include my house in the assets means test and they might even delay the time at which I can have access to my own money that is tied up in super.

It is no wonder there is a whole generation of investors who don’t care about super and don’t want to put more money into it over and above the 9% (which will not be enough), when there is so much legislative change that happens with it.

I don’t see anywhere near the same degree of change happening (and at such a rapid pace) with the legislation concerning the sharemarket or property market, e.g. CGT rules etc.

Maybe Roger Montgomery was right when he said "Superannuation was designed by Boomers, for Boomers" and mentioned that we shouldn't be putting any more into it than we have to as Gen X / Y.

Andrew Bloore
May 31, 2014

Chris, I think change is inevitable. Change is the one constant in life but not to take a long term view is equally problematic. Ultimately Jeremy Cooper words ring true, we need to be thinking about retirement assets not "superannuation" thinking they are one and the same.

Super provides 1 tool in the retirement asset path but is not and should not be everything. The really important question we are yet to have any proper debate is where is the best use of an individuals cash flow that must be used for retirement, regardless of via home loan repayments, the tax system, superannuation or other forms of saving, are best placed for an individual. The more educated and sophisticated we become as a people the more we want things tailored for us as individuals.

I am very sure the rules of today will not be the same in 20 years as they are today, but I can tell you that there have been at least 3 time more changes to the other areas of legislation than there have been to super, it's just not as interesting to the media so we don't see them or see the effect of them publicised.

All the marketing that has been done on super and savings keeps saying the same thing, it's not till a person has $70,000 before people are interested in the returns, $100,000 before focused on the costs and $200,000 where people want a say in the decisions being made, so I do understand the apathy for someone to super when the balance is $10,000 but I assure you If you pay attention to it when it's $10,000 you will reap the benefits when you need it later on. The problem often is, if you are 20, being 70 is 2 1/2 times longer than you have lived, but remember 40 becomes the "old 30" and 50 becomes the "old 60" as the saying goes, all too quickly.

Chris Eastaway
June 05, 2014

I’m personally happy to pay a bit more tax in order to have the flexibility to retire when I’m financially able, rather than wait for my government determined “preservation age” – which is an arbitrary figure and an outlier on my families bell-curve of life expectancy anyway! But I digress.

I use super as a tax effective tool for providing life and TPD insurance. I choose to have premiums deducted from my account balance which is primarily built from concessional contributions, which effectively makes the premium tax effective too. I can’t find an issuer outside of the Super system who can compete on cost/value.

I assume you could also use an after-tax contribution into Super to pay for your insurance premium and still claim a government co-contribution, if you're eligible, which would allow lower income earners access to life and TPD insurance who may otherwise not consider it.

It’s one more thing to consider.

Pat Connelan
May 30, 2014

Superannuation was originally designed as a supplement to the age pension, not as a replacement for it. It has turned into a tax dodging vehicle for people who will never need the age pension and its cost to the budget is nearly as much. It fails on the grounds of equity. It fails on the grounds of outcome. It transfers massive risk to the shoulders of ordinary people and then gouges them with fees. We would be better off with a return to reasonable benefit limits.

Andrew Bloore
May 31, 2014

We always tend to take the extremes and consider them to be the norm. Whilst there are funds with 10's of millions of dollars in them about 80% of funds in Australia have a balance between $70,000 and $280,000. Given that the age pension for a male age 65 to normal life expectancy costs the tax payer about $440,000 and the health care another $400,000 so $840,000 in total the superannuation balances are only just supplemental.

We can't rely on a small number of tax payers to fund everyone's entitlement but we do have a tax system that is exactly designed to do that, it's the 9% compulsory super system. We should remember that that "tax" is put directly to the individuals benefit. Our age pension issues would be less if our directly funded super was 9% from introduction not just 3%.

We should not damn a system because a few individuals took full advantage of rules that have been subsequently altered. After all the law is the law.

I am not sure if the old RBL system would change any of the risk issues you noted, perhaps you were thinking about defined benefit pensions rather than RBL's but happy to understand your point on that. Either way, funded investments need to be managed. Just putting everything in cash does minimise the risk but also like everything if there is excess cash and no one wants it the return you get goes down and down. For example at the beginning of the GFC, when there was a flight to cash, some institutions where charging people to deposit funds not paying interest so again balance in what we do is important.

I am not saying we can't improve but a do say that a more open balanced debate is necessary to get us to the point of a refined system not a new one.

 

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