Speculation that the poorly paid might be allowed to opt out of compulsory superannuation simply highlighted why it is critical to establish bipartisan agreement on the long-term objectives of superannuation, and to then enshrine them in legislation.
SMSFA Association CEO/Managing Director Andrea Slattery says exempting the lowly paid from the superannuation system is a poor, short-term policy option that will have long-term, negative consequences.
“If we establish the long-term objectives for superannuation, of which universality would be one, then it would go a long way to prevent superannuation being seen as a Pandora’s Box for every idea that comes along.
“The Financial System Inquiry recommended enshrining the objectives of superannuation, and it has gathered political support across the spectrum with the Treasurer, Scott Morrison, and the Opposition spokesperson for Superannuation, Jim Chalmers, both endorsing it at the SMSF Association National Conference last week. It’s time to act.
“Until we enshrine the objectives of superannuation, governments will still tinker around the edges of superannuation to solve a range of policy issues and fail to appreciate that superannuation is a genuine long-term retirement savings vehicle to give people security and dignity in retirement.”
Slattery says the notion that small amounts of income have a negligible impact on a person’s long-term retirement savings outcome simply reveals a lack of understanding about how compounding works.
“As the two scenarios below demonstrate, young Australians will be forgoing sizeable sums in their retirement years to have access to small sums now.
“The other downside of being outside the superannuation system is not having access to insurance. In the event of the untimely death of a young person or a serious work injury, these payments can be critical.”
Two scenarios: These are based on a conservative long-term earnings rate of 5 per cent net earnings rate and assumes the low tax rate continues on a taxable income of $37,000. It also assumes super tax is deducted at 15% and the LISC is available for the 2016 and 2017 financial years. Finally, it assumes SG will go to 12% by 1 July 2025.
Scenario 1: Where the contribution has been forgone for just the first year and the person has a taxable income of $37,000 in that year. This means that the loss of a contribution of $3,515 in that year (9.5% of $37,000) will result in an accumulated amount of $23,549 over 40 years after tax.
Scenario 2: Where the contribution has been forgone in each year and the person continues to have a taxable income of $37,000 in each year; however, the SG rate has been increased to 12% as currently set out in the legislation. This means that the loss of a contribution in each year as set out in the current legislation will accumulate to $427,000 over 40 years after tax.
