Neil Howard says the only way to engender public confidence in the retirement income system is to ensure politics stays out of the picture.
There are some widely held beliefs in respect of Australia’s current superannuation system, including that the vast majority of the current generation of working Australians will not have sufficient funds available to achieve a “comfortable” standard of living in retirement; and that for most people, the superannuation system should be the most appropriate vehicle to use in funding such a comfortable standard of living in retirement.
No-one doubts that the superannuation system is a tax-advantaged savings vehicle. There is some doubt, though, on the actual quantum of the tax concessions afforded to the system, with estimates of these concessions varying enormously from those given by Treasury, to those given by groups with vested interests.
The need to save more for retirement, and the existence of a tax-advantaged vehicle to achieve that, should complement each other.
Have the various Federal Governments, over time, created an environment where the population at large is actively using the superannuation system in order to fund a comfortable standard of living in retirement?
For most people, the answer has to be a resounding “no”!
This paper will take a historical look at Australia’s superannuation system to explore why the system is not working effectively, and identify what needs to happen to fix the status quo.
Superannuation Guarantee
The Superannuation Guarantee (SG) system was introduced in 1992 as a replacement and extension of the award superannuation system that had been in place since the mid 1980s.
The award system had its origins in agreements between various unions and employers to trade off a wage increase for a superannuation contribution.
The SG system stipulates the minimum level of superannuation support that must be provided by employers for most of their employees.
If this level of support is not provided, employers are subject to the penal Superannuation Guarantee Charge.
Under the SG system, contributions commenced at the rate of 3 per cent of Ordinary Time Earnings (OTE) and the rate of contribution gradually increased over the following 10 years, to reach the rate of 9 per cent by 2002-03.
The recently released report on the Henry Review of Australia’s taxation system recommended no change to the rate of contribution under the SG system.
The Labor Government’s response to the report, however, was to announce that it intends to increase the rate of contribution under the SG system from 9 per cent to 12 per cent over the period 2013-14 to 2019-20 (Note 1).
Many employees view SG contributions as being made by them, because of the trade-off between wage increases and superannuation contributions that have occurred over time.
On the other hand, most employers view SG contributions as a de facto tax paid by employers. In any event, we have a system of compulsory contributions for most working Australians.
It is commonly accepted that a contribution rate of close to 15 per cent of earnings over a full working life is the level required to fund a comfortable standard of living in retirement. Only those commencing employment 10 years from now will have the benefit of a contribution rate of 12 per cent throughout their working lives. (At the time of writing, Australia had elected Labor as a minority Government. Whether the Labor Government will receive the support of the Independents for this increase to 12 per cent SG is yet to be seen.)
If additional contributions need to be made, is the Government making it easier for people to get money into the superannuation system?
Again, the answer has to be no. There have been many changes to the rules over time and there are likely to be many more changes into the future.
So, what have been some of the changes from a contribution perspective?
Pre Budget night 2006
Because of the tax advantages given to the superannuation system, the Federal Government has to be able to control the amount of money in the system, in order to ensure that the tax advantages are shared on a reasonably equitable basis. Prior to Budget night (May 10) in 2006, the Liberal Government controlled the amount of money in the system through the Reasonable Benefit Limits (RBLs) regime. The RBLs were the maximum superannuation (and like) benefits that could be received in a lifetime on a concessionally-taxed basis.
Fixed-dollar RBLs were introduced in 1994. By 2006-07, these had been indexed to $678,149 (lump sums) and $1,356,291 (where at least 50 per cent of the benefits were taken in the form of a pension that met the standards). Penalty tax was applied to any benefits in excess of the RBLs.
There was no limit on the amount of after-tax income/resources that people could contribute to superannuation.
The after-tax (undeducted) contributions were excluded from the RBL regime when benefits were eventually accessed, but the investment earnings on those amounts were not.
There was also no limit on the amount of taxable contributions that could be made. There were, however, age-based limits on the amounts of those contributions that could be claimed as tax deductions. By 2006–07, these limits had been indexed to:
- $15,260 (under age 35);
- $42,385 (ages 35 to 49); and
- $105,113 (aged 50 and over).
More than one age-based limit could be contributed and claimed as a deduction in respect of a particular individual — where the contributions were made by unrelated employers; and/or the individual was eligible to claim a personal tax deduction for the contributions.
