Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 154

Superannuation and the budget (written pre-budget)

Once again changes to superannuation are being flagged in the forthcoming budget.

This should not be surprising as superannuation tax concessions have been a feature of 13 Budget speeches in the 24 years since the Superannuation Guarantee (SG) was introduced. Competing political and budgetary objectives can mean that these changes are inconsistent with retirement system objectives.

There is also evidence to suggest that these continuous changes to superannuation policy have undermined trust in the system. Conflicting changes indicate the lack of a clear objective for superannuation.

As a consequence, the recent Financial System Inquiry (FSI) recommended that the objectives of the superannuation system should be defined, enshrined in legislation and reported on regularly. The objective proposed by the Inquiry is to provide income in retirement to substitute or supplement the Age Pension.

The suggestion that superannuation should substitute for the Age Pension is  new and flags a major policy change. With the proportion of Australians over 65 increasing from 14% to 21.5% over the next 20 years, the combined costs of tax concessions and the Age Pension under current policy settings becomes unsustainable.

Since the Howard government’s Simpler Super Reforms in 2007, which abolished the Reasonable Benefit Limits, invited a one-off voluntary contribution of $1 million, and removed the taxation of superannuation benefits over the age of 60, superannuation has become a highly tax preferred savings vehicle for middle- to high-income earners. As a consequence, the majority of tax concessions now go to this group, the cost of which has increased, and with only a marginal fiscal offset in terms of reduced reliance on the Age Pension amongst low-income earners.

Ensuring adequate superannuation retirement income to substitute for the Age Pension will need a concerted policy push, as it provides an income for around 70% of older Australians, with the majority receiving the maximum rate.

So what is an adequate retirement income? The OECD recommends an adequate retirement income as a replacement rate of 70% (see Pensions at a Glance 2015: OECD and G20 Indicators). This means low, average and high income earners would need, respectively, an income of: 70% of half the average weekly wage; 70% of the average weekly wage; and 70% of one and half times the average weekly wage.

This equates to a range of outcomes from $28,000 to $82,000, based on average weekly income as at December 2015. The range of superannuation balances required to support this minimum level of retirement income would be $500,000 to $1.5 million. Most low-income earners do not make voluntary contributions so to achieve this outcome the level of the SG needs to increase to 12%, as currently planned.

Other policies required to ensure more older Australians can substitute super savings for the Age Pension would include:

  • adjusting incentives to offset the tax disadvantage of contributions on low-income earners with the proposed phasing out the Low Income Subsidy Contribution (LISC) from July 2016

  • broadening the coverage of superannuation (20% of retirees reach the preservation age with no superannuation savings)

  • raising the preservation age closer to Age Pension eligibility, to extend working life and ensure balances are not depleted before retirement

  • increasing the allocation of tax concessions to lower income workers, and reducing concessions to higher income earners, while at the same time ensuring its fiscal sustainability. Some measures that might assist in this regard include:

- Applying earnings tax at 15% to both pre and post retirement phases, simplifies the system, allows a more seamless transition from accumulation to retirement phases, and increases fiscal sustainability (as suggested by the FSI)

- Reviewing existing salary sacrifice and annual contribution caps which currently sit at $30 000 per annum and $35 000 for those over 50 years

- Extending Division 293 Tax, which applies a 30% tax on contributions for incomes over $300 000, to all those in the highest tax bracket on incomes of more than $180 000

- Reviewing post-tax concession limits and imposing a lifetime cap of say around $540 000, instead of every three years.

In the long run the success of the retirement system will depend on ensuring a steady and cohesive approach to policy, and minimising change to build greater trust in the system.  It is evident, however, that in the foreseeable future superannuation policy will need to be revised to meet the proposed objective, and ensure the fiscal sustainability of the retirement system.

Ultimately, the quality of life for both retirees and future tax-payers will rest on achieving an appropriate fiscal balance between supporting the aspiration of more self-reliant retirees, and the continuation of a strong social safety net for those who need it.

 

Dr Deborah Ralston is Professor of Finance at Monash Business School, Monash University and Associate, Australian Centre for Financial Studies. Dr Jimmy Feng is Research Fellow at CSIRO-Monash Superannuation Research Cluster.

 

2 Comments
David
May 01, 2016

All reasonable points, but like so many discussions of retirement funding and government policy it completely overlooks the largest and most concessionally treated asset in the savings plans of almost every Australian - the family home.

Once upon a time it was reasonable to say that the home should be exempted from consideration in such matters because it just provides a basic human need and is not a financial asset. But this long ago ceased to be the case.

Due to the uncapped CGT exemption, Australians are incentivised to invest as much money as they possibly can into the biggest house they can afford, rather than setting aside more money to fund their retirement.

Due to the uncapped means test exemption for the aged pension, Australians are incentivised to stay living in large expensive houses when they retire, rather than downsizing and using the profits to fund their retirement.

These incentives have become huge drivers of behaviour. And they are a big part of the reason why Australia now has a both a housing affordability problem and a retirement funding problem.

Discussions about changing concessional cap limits or reducing Div 293 thresholds are just minor tinkering on the edges. There are far bigger underlying problems and far simpler and more obvious solutions.

Just put a limit on the amount of family home value exempted from CGT and the age pension means test. The amount above say $1M in property value should be treated like any other asset for CGT and means test purposes. Doing that would:
- Improve the budget position through increased CGT receipts
- Improve the budget position through reduced age pension burden
- Improve housing affordability by removing some of the drivers of excessive property prices
- Free up more savings for self funding of retirement
- Improve social equity by ensuring the age pension is used as a safety net, rather than a way to preserve inheritance values.

And it wouldn't force old people to move out of their homes if they really wanted to stay where they are. Centrelink already has a good service called the Pension Loans Scheme that allows people to draw against the value of their home to top up their age pension payments without having to move or sell.

Dauf
May 02, 2016

Yep, all obvious if the aim is to match super to sustaining retirement....the treatment of the family home is currently a joke. Why should rich people invest in a house and claim benefits paid for by people with far less money

You could also forget the "70% of what you previously earned" rule for government policy as its more a personal target. I always fail to understand why the government doesn't just say "we'll help everyone save up for a super that allows a self funded pension of say $50K with tax breaks etc...so a balance of say $1million for a couple"...after that, you are on your own and should keep saving if you want a better lifestyle in retirement, but why should the other people subsidise it? Joint assessments are done for centrelink etc and so could be done for super and everything else

So, its pretty easy to say once your combined super is over $1million ( or even $2million, whatever), the tax incentives stop and by all means keep investing but we can't subsidise it

 

Leave a Comment:

     

RELATED ARTICLES

CIPRs are coming and that’s exciting

My 'purpose of super' is probably not yours

Back to the future with Murray's super objective

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

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.

Website Development by Master Publisher.