Access to superannuation became widespread from 1992 on when the then Government introduced legislation to provide for the Superannuation Guarantee (SG) arrangements. This scheme requires employers to make superannuation contributions on behalf of their employees to complying superannuation funds. The required contribution level commenced at 3% and increased significantly since then. Currently it is 9.5% and will stay at that percentage until 30 June 2018, and then increase by 0.5% each year until it reaches 12% from 2022/23.
The SG is aimed at:
Providing better incomes in retirement than can be expected from the age pension alone;
Boosting national saving; and
Reducing, over time, future growth in age pension outlays as the population ages.
Until the mid 1980s superannuation was generally only available to public sector employees and the employees of large private sector organisations, and even in these organisations it was frequently not available to all employees, or not taken up by those eligible.
The Hon PJ Keating in his address to the Global Pension and Investment forum on Wednesday 7th February 2007 said
“Since this current long economic wave of growth began in 1982; over those 25 years, so much has been achieved in world output and growth. At the same time, something else has happened. Those of us who were at work in 1982 are twenty five years older. If we were born in the 1940’s, as so many of the 1980’s workforce was, we are at or nearing retirement age.”
The philosophical foundations for the Commonwealth Government’s current approach to retirement income policy were set out in the 1989 Statement by the Honourable Brian Howe, (then) Minister for Social Security entitled Better Incomes: Retirement Income Policy into the next Century. The foreword gives the following rationale for the Government’s policy: “ . . .At the beginning of the next century the “baby boom” generation will begin retiring if current early retirement patterns persist. From 2011 the demand for age pensions will increase rapidly. It will be possible to meet the needs of an ageing population better by increasing the level of saving and by expanding labour market opportunities. However, future generations will probably expect higher levels of income and services. Consequently, a flexible and sustainable retirement income policy which delivers fair and adequate incomes needs to build on the twin pillars of the age pension system and private saving such as superannuation.”
For most Australians income in retirement will be funded from a combination of superannuation savings, other private savings and a full or part‐rate Age Pension. Some will choose also to draw down on the equity in their home and perhaps to obtain some paid employment while primarily retired. In combination with the taxation system, these income sources will provide retirees with a particular level of spending capacity. Whether this spending capacity is ‘adequate’ has been the subject of considerable examination and debate over a number of years.
An evaluation of the effects of Paul Keating’s proposed changes to the SGC must be explored in the context of Australia’s ageing population along with the cost and sustainability of the pension system.
The ageing population in Australia is certainly an issue for government and society as a whole but is further complicated because as a nation we are experiencing multiple tax revenue and expenditure challenges all at the same time. For example changes in working patterns are occurring in conjunction with increases in life expectancy and as the baby boomers move through to retirement, we will see an exponential increase in the ageing of the population over the next couple of decades.
Over the last decade there have been major changes in the working patterns for both males and females in Australia, including:
a general decrease in the participation rate for men,
a general increase in the participation rate for females,
the move from full-time to part-time employment
an ageing of women having their first child,
longer periods spent in education by the young, and
early retirement.
In Australia all the above factors will mean budgetary and monetary policies must address the reality that there will be an enormous cost of funding retirement liabilities and for many Australian’s, the length of working life is decreasing and the length of life in retirement is increasing.
The ageing demographic in Australia creates certain mathematical complexities for budgetary planning within government. For example, the longer people live, will tend to reduce average annual retirement incomes. A logical solution to this planning problem is to increase the amount of money people have in super to drawdown upon to create adequate retirement income streams.
Over recent years many policies of government have modified both the superannuation and taxation arrangements for senior Australians in ways that have raised retirement incomes, both for those that have only compulsory levels of superannuation (SG) and particularly for those who choose to save more within superannuation.
I believe there is a strong case for a higher SG contribution rate that serves the interests of government, tax payers, employers and employees.
At first glance a 12% contribution rate may seem like a considerable burden upon employers, still, this policy needs to be considered alongside the existing options for employees to increase their super balances for retirement planning. Consider the example of a member using salary sacrifice as their means of making personal contributions towards their superannuation (and receiving SG contributions only from their employer). The value of the total contributions suggested above is effectively the same as having an employer contribution level of approximately 12.0 per cent.
It’s not all bad for the employer as contributions by an employer on behalf of an employee are a deductible expense of the employer.
Those that argue against a higher SGC believe that the tax expenditure for retirement and other employment termination benefits is the difference between the tax actually collected from superannuation funds and benefits in a year and the tax that would have been payable on superannuation savings and benefits under the comprehensive income tax benchmark outlined above.
While there is some logic that tax expenditures can in be interpreted as the cost of taxable revenue leakage from the income base, it is not logical to insist that the tax expenditure associated with the SGC can be somehow clawed back by removing super concessions. The existences of other concessional treated savings avenues are available to Australian savers and wealth creators that are also a tax revenue leakage from the system. For example concessional taxed CGT against owner occupied housing investment or negatively geared investments. These strategies would be favourable to a fully taxed alternative such as conventional bank saving.
A higher SGC is not only argued against on the side of employers but many immediate beneficiaries of the policy are also against the policy change for compulsory super savings increases. There is no doubt that many people would much rather have the money now to invest in their own home, buy a car, go on a holiday or simply to raise their present standard of living.
These factors are important, but need to be balanced with the urgent need to address the future costs of an ageing population, and the interests of the next generation who would bear the costs of general revenue financing. Given competing pressures to increase age pensions or provide for the immediate needs of their own families, many workers understandably want the money in their pocket.
Still, the tax rate on the assessable income of superannuation funds is lower than the company rate and the effective tax rates on fund earnings are lower than the lowest non-zero personal tax rate. This means that investment in superannuation funds is tax advantaged for almost all members.
Similar to direct outlays such as health or education, tax expenditures like that on superannuation have an immediate economic and budgetary impact that the government measures. However, like many budget outlays, the budgetary impact of a tax concession (as measured by the tax expenditure on that item) does not provide much information about the overall value of the measure.
Essentially concessional rates of tax on end benefits compensate for tax on contributions and fund earnings, but with limits on concessions to high income earners. The taxation provisions are also intended to encourage retirees to invest their benefit in a continuing income stream.
Is the SGC and the concessional taxed superannuation environment good for the economy/ does it pay its way?
The issues raised so far recognise the very close links between retirement income policy and macroeconomic and microeconomic policies. Increased saving for retirement not only improves retirement income adequacy but will also improve investment and future economic growth and hence our capacity to finance future retirement income outlay.
References
SAVING FOR RETIREMENT: THE BENEFITS OF SUPERANNUATION FOR INDIVIDUALS AND THE NATION - RIMTF
PHIL GALLAGHER, GEORGE ROTHMAN AND COLIN BROWN RETIREMENT INCOME MODELLING TASK FORCE C/- THE TREASURY, PARKES PLACE, PARKES ACT
SENATE SELECT COMMITTEE, 2002) AND BY INDUSTRY GROUPS SUCH AS ASFA (ASFA, 2004). AN AGEING SOCIETY: A WORKING LIFE / RETIREMENT PERSPECTIVE, BRUCE R BACON RETIREMENT INCOME MODELLING TASK FORCE
TAXATION OF SUPERANNUATION AND DISPOSABLE INCOME IN RETIREMENT , ANNE MCDIARMID RETIREMENT INCOME MODELLING TASK FORCE* C/- THE TREASURY, PARKES PLACE, PARKES ACT
RETIREMENT INCOME MODELLING TASK FORCE - TAX EXPENDITURES AND MEASURING THE LONG TERM COSTS AND BENEFITS OF RETIREMENT INCOME POLICY
AUSTRALIAN MASTER FINANCIAL PLANNING GUIDE 17TH EDITION 2014/15 – CCH
ADDRESS BY HON PJ KEATING, GLOBAL PENSION AND INVESTMENT FORUM – 2007
TAX ADVANTAGES OF INVESTMENT IN SUPERANNUATION – IN BAD TIMES AS WELL AS GOOD, GEORGE ROTHMAN, RIMTF WORD COUNT 2888
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