Twenty years ago the future ageing of the population and the resultant decline in taxpayers who could pay for a large pool of age pensioners was already recognised. The purpose of the Superannuation Guarantee (SG) was to provide employees with retirement income so the strain on the public purse would not be so severe.
The SG demands that employers contribute an amount equivalent to 9 per cent of each employee’s salary to a superannuation fund. This has seen Australia’s super assets explode. It also often makes people think the system is already successful.
I hope the large asset pool – and the work, wealth and prestige that come with it – is not leading us to a false conclusion. It’s true that the SG system seems to be tracking reasonably well. However it’s too early to say if it will actually reduce Government age pension outlays for a large enough segment of the workforce. Unfortunately we will have to wait another 20 years to find out if it achieves its stated purpose.
Perhaps this midway point in the policy’s life cycle would be a good time to ask the Productivity Commission to conduct a wide-ranging review of the SG system, to determine if it’s fit for purpose and operating as efficiently and transparently as possible.
Some might argue that the Cooper Review has already done this work. The starting point of that review was the structure and operation of the super industry. Its purpose was not to look at compulsory super itself and assess if it’s still the best way to solve our impending age pension funding problems.
Like any law, the SG rules are not perfect. Here are some issues that need to be thought about:
LOW-INCOME EARNERS Employers have to make SG contributions for anyone earning more than $450 in any calendar month and this has not changed for 20 years.
By way of comparison, between June 1991 and June this year, average weekly ordinary time earnings have increased from $560.20 to $1,304.70, an increase of almost 133 per cent. If the $450 figure had been indexed it would now be about $1048 a month.
Most lower-pay workers, once the super preservation rules allow access to their super assets, will be withdrawing lump sums. Because of the way the super tax laws work, these with- drawals will be tax-free. But these lower-paid people are forced into a savings vehicle that has a tax rate higher than their own personal tax rate, which is nil. Super’s flat tax rate is 15 per cent for earnings on pre-retirement money.
Taking into account the low-income tax offset, an individual earning more than $48,000 a year will pay about $7200 tax – an average tax rate of 15 per cent. The amount of tax is lower if someone is eligible for a wide range of other tax offsets, such as the family tax benefit.
The Government has proposed that from next year it will hand back up to $500 of the contributions tax for many low-income earners. While welcome, this doesn’t address the earnings tax and cuts out at a fairly low income amount.
If the Government believes low-income earners must save for retirement it should ensure these savings aren’t subject to higher taxes than those applying to a person’s take-home salary. For example, their Super Guarantee contributions (and the earnings on those contributions) should be automatically tax-free. If this is not possible from a cost perspective then the system needs to be redesigned.
At a dinner to celebrate the SG’s twentieth anniversary, Paul Keating noted that the increases in the SG rate which occurred during its first years did not lead to a blow-out in employers’ operating costs because the increases were included in most employees’ normal salary increases. In other words, the SG is actually forgone salary. If that is true, then it should be taxed liked salary.
One of the long-term features of the superannuation system has been the concept of tax concessions, which are a form of compensation for the fact that your money is locked away and can’t be personally accessed for many years. But as the above shows, there are many wage and salary earners who are forced to save in a vehicle that provides no tax concession for them – in fact, it applies a tax penalty. Perhaps this situation has been allowed to develop because
the combined super, tax and offset processes are so complicated no one can quite work out how much tax they’re actually paying.
At the other end of the spectrum we have too much tax being paid by some high-income earners.
The concessional contribution cap for many people is $25,000. Contributions above this threshold are taxed at the highest marginal tax rate.
If someone earns more than $277,777 and their employer automatically contributes 9 per cent of salary into super, they will breach the $25,000 threshold. This means the highest marginal tax rate is paid on those contributions. These contributions will be classified as a taxable component and may face additional tax on withdrawal from super.
Many employers don’t realise that once a person earns more than $43,820 in a quarter (or $175,280 a year) they only have to contribute up to 9 per cent of that lower figure.
SG Super has not completely solved the problem of under funded retirement but it has certainly assisted. For many it started too late. If they can do a super surcharge for high income earners than the can do a super tax rebate for low income earners. The reality is people need at least 20 times the income they want in retirement in income producing assets by retirement. This won’t happen with 9% or 12%. It really needs about 20% like most public servants get, this does require a salary sacrifice component by staff but should be available to all employees.