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Tuesday 10 May 2016

Inconvenient Truths on Superannuation

In my last post (Inconvenient truths of Education spending) I covered the problems with Education spending election commitments, today lets look at Superannuation.

As with education, Superannuation is another key election battleground with each party claiming they are making the system more sustainable by clamping down on unreasonable concessions to wealthy individuals.

But are they?

Inconvenient Truth 1:

Super is not meeting its core objectives to enable individuals to achieve self-funded retirement and reduce the welfare burden on the state.
In earlier posts (Not so super , Making Super work and Super Solutions ), I wrote at some length about the failures of our Super system so here is just a summary;
  • Under current prevailing conditions of inflation, contribution rates, rates of return, most workers will have to rely on an aged pension in their retirement.
    • A person on minimum wage, after sacrificing 9.5% of their salary for 30 years, will have an annual pension return of a mere $6,000 pa. This is not nearly enough to meet their living costs and well is below the Single Person Aged Pension rate of $20,498 pa. 
    • A person on average earnings will earn $15,000 pa from their super after 30 years, still below the aged pension. 
    • You have to be earning above $150,000 pa to be self funded on retirement.
  • Projection to 2050 shows that this will not improve (see National Commission of Audit
    • By 2050, the same proportion of the workforce will be on pensions as there are today
    • By 2050, Government expenditure on pensions is expected to increase by over 40%

In short, the Super system is broken.

Inconvenient truth 2:
The policies of neither party attempt to remedy the failure of the system. Indeed by their changes they further threaten its viability.

Both parties have prepared a whole raft of changes to Superannuation. So whichever party wins the electtion there will be changes.  The proposed changes are detailed widely (see 2016 Federal Election: What superannuation and retirement policies can you expect? ) but here are just the core elements; -

The LNP plans to ; -
  • Introduce a transfer balance cap of $1.6 million on retirement balances.
  • Lower the concessional contributions cap to $25,000.  
  • Lower the 30% contributions Tax income threshold from $300,000 to $250,000.
  • Introduce a $500,000 lifetime cap for non-concessional (after-tax) contributions. 
  • remove the age and working status limits on contributions
The ALP plans to ; -
  • Introduce a 15% Tax on super pension investment income in retirement when it reaches above $75,000.
  • Lower Contributions caps similar to LNP (but not fully confirmed)
  • is yet to indicate its position on some of the LNP provisions announced in the budget
As we are in the throes of an election campaign these policies are ill-defined and may be massaged given electorate reaction. 

But the direction is clear. Both parties plan to clamp down on what are seen as overgenerous concessions to the wealthy and collect some much needed funds for the very real need for 'budget repair'. 

But are they throwing out the baby with the bathwater?

I have not seen any modelling of the impact of the changes proposed by either party and I suspect we wont during the election campaign. The parties will avoid this scrutiny because their measures are likely to impact negatively on the effectiveness of super for achieving self funded retirement. By targeting high income earners some individuals will no doubt fall below the self funded threshold resulting in an increased number of retirees relying on the aged pension and further increasing the welfare burden on the state. Certainly the constant fiddling with Super has already undermined confidence in the system.

Rating the measures

With a system already failing to meet its objectives what could the government have done? And how do the proposed changes measure up? 

No doubt the treatment of Superannuation has been very generous to the very well off, and capping of the concessions is justified.  The LNP's introduction of an indexed cap on the tax free retirement balance is a sensible way to limit concessions.  If inflation indexed $1.6 m represents the single person threshold for self funded retirement then the government should encourage all contributions up to that point but give no concessions above that value.  

For example consider the following Super rules as an alternative to those proposed by the parties.

While the retirement balance is below the $1.6m threshold;-
  • there should be no limits on the value of non-concessional contributions
  • similarly there should be no limit on the value of concessional contributions. Why limit the contribution in any year when there is a limit to the total?
  • the tax discount on concessional contributions should be expressed as a discount on the marginal rate of the individual, say 50%. This avoids the arbitrary 'class' defining cut-offs between the 'average' and the 'well-off' that seems to be a point of debate by small minded politicians.
  • retain the concessional tax rate on a superannuation fund's earning during accumulation phase, I would stick with the current 15%
Once the balance reaches the $1.6m threshold there should be no tax concessions at all.
  • no compulsory deduction from salary
  • no concessional contributions at all
  • no non-concessional contributions
Withdrawals in any year that would take the balance below the $1.6 m threshold should be limited to at most 5% of the fund.

Of the key measures announced by the parties only two stack up as being beneficial. The balance cap serves to limit tax concessions for the wealthy without affecting the goal of self-funded retirement. Similarly the removal of age and work status related limits on contributions encourages individuals to contribute to their super.

All the other measures impose limits that discourage savers and only undermine what little faith the electorate still has in Super as a source of self-funded retirement.

Looting the electorates'piggy bank

The grab for the glistening Superannuation gold is counterproductive. The industrious will be discouraged from saving, Aged Pension welfare costs will rise, and governments will no doubt have soon spent whatever few dollars they saved from these measures and once again be looking for funds.

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