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Wednesday 11 November 2015

Super solutions

The Tax Reform whack-a-mole has seen many an idea thrust into the limelight by some interest group, only to be thumped by opponents pushing their own favorite policy. Superannuation seems to be the focus, at least for a few days. So I thought I would take the opportunity to highlight the 5 reform suggestions I raised in an earlier post (Making Super work).

Don't throw the baby out with the bath water

Lets start by observing that there is a purpose for Super. It is to allow workers to save during their working life for a fully self-funded retirement. We know from previous posts (see Not so Super) that without reforms this will not happen for all but the very highest income earners.

The current focus on Super started from a tax reform perspective, and the reason the tax reform debate has turned to Superannuation is to squeeze money out of the system. Specifically to tax the rich, or more politically, to reduce the unfair tax discounts enjoyed by high income earners.

Remember from our projections that these are the only people who will live off their Super without a welfare supplement. So lets make sure that any changes to Super do not end up increasing the number of people on the aged pension.

Keep an eye on the prize

In order for a worker to be fully self-funded in retirement their Super fund balance at retirement must yield an annual income greater than the Aged Part-Pension cut-off.
Lets call this target balance the Self Funded Retirement Threshold. Today with the Aged Part Pension cut-off at just below $50,000 pa, at a yield of, say, 5% the Self Funded Retirement Threshold (SFRT) is $1,000,000. 

All superannuation policies should be focused on every retiree reaching this super balance.

5 Changes to Improve our Super

This objective leads us to consider a wide range of changes that can both lower the burden on our welfare budget and yet increase the number of workers achieving self funded retirement.

Here are 5 suggestions; -
  • Taxation discounts on super contributions should be capped. There should be NO tax discounts on super contributions if the projected balance is greater than the SFRT.
  • Super fund annual contribution limits should increase as the employee approaches retirement . There is no cost to the government in doing this as the tax discounts automatically cut off if the projected balance is greater thant SFRT
  • Retirees should not be allowed to withdraw a 'lump sum' from their Super if by doing so its remaining balance would fall below the SFRT
  • Government could issue a government guaranteed Superannuation Bond (SAB) with a fixed rate of return above inflation, say 5%.  There are two benefits to this approach. The government receives a ready source of funds in return for the tax 'discount' on super contributions. Funds that can be used for long-term infrastructure projects. At the same time the individual receives a guaranteed inflation adjusted return on at least part of their super contributions. There should be strict rules pertaining to this special purpose SAB. Here are some suggestions; - 
    • Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain. 
    • The maximum value of investment for any individual would be limited to the SFRT. 
    • The government could manage the SAB to reduce debt and to fund infrastructure projects. 
  • It could be mandatory for Super funds to purchase SAB as part of their annual contributions. This 'compulsory' contribution could be equivalent to the value of the tax discount provided on Super contributions. eg if a worker contributes $10,000 in any year to his super and has saved $1500 in tax in making this contribution he would have a mandatory contribution of $1500 to the SAB. 
The current spate of suggestions floating on the airwaves seem to be nothing more than a tax grab. Blind application of such schemes could save money but may further diminish any likelihood of the Superannuation system achieving its goals.

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