Two courageous responses to the Retirement Income Review

I agree that in an ideal world personal insurance would be separate from retirement savings. In the world which we actually live in though, very few people have personal insurance beyond whatever the default is in their super funds, and it seems unlikely to me that there would be a huge takeup of insurance in their own names if the insurance within their super was cancelled.

So the result would be that yes there would be more money saved for retirement for most people, but almost everyone would be uninsured or underinsured and a decent percentage of those people would at some stage have something happen to them and there would be no insurance payout to help them get through it.

And although personally I think if people have chosen not to get insurance in place then they should have to take both the good (lower expenses due to no insurance) with the bad (no money coming in if you do have an accident) it seems unlikely to me that this won't be another problem where it will be decreed that the government must take responsibility for it, and we'll be throwing however many billions of dollars at the problem at some point in the future.

Remove contributions tax and impose a new consumption tax?

Tell him he's dreaming. No votes in that.

Hi Bruce,

Thank you for your interesting article. However I would query the merits of abandoning insurance within superannuation: it is simply the cheapest way to get lump sum cover due to the purchasing power of the super funds. And at some times the insurance margins have been materially negative!

With regard to the contributions tax, I am not quite sure what is the main motivation for a shift from ttE to EtT would be. Partly you seem to dislike the fact that people don’t realise why their super balance isn’t as large as they expected but this does not seem to be a strong enough rationale to jump horses midstream. But perhaps you will argue that there are also equity considerations that you have not yet elaborated?

I like the 2 suggestions to increase the net SG by 2 %.
Rather than adding HST to a flawed GST with all its exemptions, why not extend the Covid change to a totally cashless economy and apply a transaction tax with no exemptions. Then with time we may head toward true taxation reform that all politicians are afraid to address.

The problem I had with the insurance being link to my SG, was the rate at which the Super fund increased my cover and as the cover increased the insurance premium increased ... moving $$ away from the SG. Whilst the cover was appreciated early in life, as my super accumulated the insurance cover was to much...

I realise that this is a bit off topic but a major reform to eliminate aged care bonds forever would simplify retirement and alleviate the fear of many older people that they won't have the entry price to aged care when they are in their latter years. Funding the aged care industry on more of a user pays basis as in North America would help people plan.
For example: knowing that aged care will cost me $60,000 a year if needed is less scary than knowing that the nice aged care place in my area requests a million dollar entry bond.

joan yes Peter aged care bonds need to be explored well before entering a aged care home If one is there for a few years before dying the lar can be changed by money hungry governments. A lot of faith needed to expect that the one million dollar bond would find its way back into your estate,

Any thoughts on transitional arrangements...eg...all those accounts (and retirees) that have paid the contributions tax...?

That's a great point Chris. It would be patently unfair to tax people at pension stage on contributions that they have already paid tax on. So equity would seem to require an 80-year transitional period. Shouldn't we be trying to simplify our super environment rather than adding still more complexity?

Hi Bruce, Interesting article. I think on the insurance component, only having death cover in super is better as disability insurance makes more logical outside super. My reasoning is that for certain employees, disability insurance is more relevant that others so allow this to be more an individual based decision. However, death cover is relevant to everyone, its just the timing. The idea of removing the contribution tax and replacing it with an effective widening of the GST is interesting but sadly the politics will be tough.

Death insurance and/or life insurance cover is NOT relevant to those without dependents.
The GST is a regressive tax so increasing will fall much more heavily on those on lower incomes. Tax loopholes used by the wealthy should be removed instead.
The contributions tax also disadvantages the less well-off. 15% is more or less at their marginal tax rate or greater. There should be a sliding tax rate on super.

From the comments it seems worth adding to the future policy agenda, restriction of compulsory insurance from SG to death only. With regard to what level of death cover SG finances I would go further and set the insurance as a standard insurance formula of Years remaining to age pension age (currently 67) times SG Rate times AWOTE (currently about $75,000). For a 25 year old that would be insurance of about $300,000. On death of the member, this amount could be added to a dependents SG account and therefore be available at retirement to replace SG accumulation the dependant may have relied on in retirement from the member's future working life. This insurance would progressively reduce as the member ages and years remaining to 67 reduce.

I note comments on taxing end benefits in retirement if contributions tax is eliminated. My view is that we should be heading towards the day when all drawdowns in retirement from SG are taxed as income with a deductible in any year of 150% of annual age pension (and current compulsory drawdown minimums would be abolished). This would still be (over lifetime) concessional at low to middle income and would discourage excessive super accumulation for high income people. For transition to this new world, existing members could do a one off transfer of existing super to this new world or stay with the ramshakle mess of current contributions tax and contribution rules.

Multiple retirement schemes can have different taxing points. In the US, members often have two retirement plans accordingly. e.g. 401(k) versus Roth IRA have differing tax timing. We spend much longer working and accumulating than we do in pension phase and in the latter years of work or in retirement many of us leave the funds we were with while working and set up an SMSF, in part to minimise fees on our nest egg. My biggest concern with replacing the 15% contributions tax with a pension phase tax is that it leaves even more FUM for fund managers to clip for 40 years of accumulation, without regard to performance.