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Monday 28 November 2016

Super needs real reform

Although the new superannuation legislation is still 'hot off the plate', this new incarnation is far from ideal. Despite ever larger contributions, the average worker even after 40 years will end up relying on an aged pension. This is a far cry from the picture painted by Keating/Hawke when superannuation was first introduced.

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    • Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain.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. 

No doubt more changes will come

Given the legislation has just passed the senate, it may seem that these suggestions have missed the boat. I guess in the short term that is true. But have no doubt the pollies have not finished fiddling with Super for long. Most likely it will be revisited in the not too distant future for another tax grab. Then again who knows, perhaps the inspiration fairy will strike some future PM with the fortitude to guide the parliament to sensible, long lasting Super reform.

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