The Turnbull government is legislating a new objective for superannuation “to provide income in retirement to substitute or supplement the Age Pension”. Twenty-five years after the passing of the Superannuation Guarantee (Administration) Act 1992 (Cth), this represents a significant departure from the original stated objective of superannuation to (1) achieve a higher savings level to supplement the age pension for better retirement living standards; (2) relieve budget pressures due to population ageing; and (3) increase national savings.
The inclusion of the intention to “substitute … for the age pension” represents a shift in superannuation policy and raises the questions: who will be impacted by the new objective, and is it achievable?
In an economy where 70% of retirees access some form of age pension, this objective is ambitious to say the least.
While average superannuation balances for people approaching retirement doubled over the decade to 2013-14 to $332,000 for men and $180,000 for women, they fall well short of the capital amount required to generate an income stream capable of substituting for the age pension. In 2015, Rice Warner, a financial consultancy and research firm, estimated this amount as $816,000 for a couple, $419,000 for a single male, and $482,000 for a single female.
Consequently, closing the gap between super savings at retirement and the capital required for a modest life style presents a challenge. Achieving a comfortable lifestyle would require significantly more savings.
Modest average superannuation balances are the product of early lower contribution rates, which only reached 9% in 2002[1], and the fact that those approaching retirement have only been making contributions for around half of their working lives.
Nevertheless, achieving sufficient retirement savings for financial independence in retirement will remain a challenge for those on lower incomes, the self-employed and those earning less than $450 per month who are not required to make Superannuation Guarantee (SG) contributions, and those who are not in the full time workforce, especially women taking time out to care for families.
Women are further disadvantaged in a system where contributions are linked to wage and salary due to the substantial gender pay gap that exists. Despite the potential to make additional voluntary contributions over and above the compulsory SG to supplement retirement savings, few workers elect to do so.
Government needs to reduce leakages and increase savings levels
To achieve the new objective, policy makers will need to be alert to opportunities to reduce leakages from existing balances and increase savings levels.
Leakages are evident in the current system of pension savings, wherein contributions and earnings are taxed at a concessional rate and benefits are tax-free, has a detrimental effect on final balances because of the front-end deductions. Measures such as better design of tax in super, increasing the SG rate, broadening the coverage of superannuation, and ensuring the right incentives are in place to encourage savings are all necessary parts to improve retirement savings.
As most people on lower and middle incomes are not in a position to make voluntary contributions, the scheduled increase of the compulsory SG to 12% by 2025 will be of critical importance.
Additional schemes that encourage take-up of products to manage longevity and inflation risks could also help the disadvantaged such as women and non-homeowners to manage retirement income needs better.
Further, there is a clear need for better coordination of policies to ensure that the three pillars of the retirement system, compulsory superannuation, the age pension and voluntary savings, act as an integrated whole.
The different legal foundations of the age pension and superannuation pose a challenge in this regard. Introduced in 1908, the age pension is a means-tested income safety net governed by social security law, while superannuation is regulated by the Superannuation Guarantee (Administration) Act 1992 (Cth) and the Superannuation Industry (Supervision) Act 1993 (Cth).
As a consequence, there are some conflicting policy aspects of the retirement system.
For example, the fact that owner-occupied homes are exempt from the age pension means test has incentivised householders to store savings in their homes, rather than make voluntary superannuation contributions or otherwise provide for their own retirement.
In addition, traditionally access for retirees to superannuation balances occurred from the age of 55, and eligibility for the age pension at 65 years. The gradual rise of the superannuation preservation age to 60 years, and age pension eligibility to 67 years will not entirely close this gap, which means that many retirees may have spent their retirement savings prior to becoming eligible for the age pension.
It can also be argued that the recent increase in the age pension assets test taper rate further disincentivises people to save for retirement.
Scrutinizing superannuation policy changes
Transparent, efficient, and effective monitoring of policies will be required if the objective is to succeed.
Over the 25 years since the SG was introduced, superannuation has been subject to constant change. Superannuation tax concessions have been a feature of 14 Budget speeches and many policy changes being contested at a political level. Political and budgetary goals have sometimes been inconsistent with retirement system objectives, thereby undermining trust in the system.
Further eroding the trust is the lack of regular reports on how investment in the superannuation system is offset by reduced take-up, and therefore costs, of the age pension. Without an agreed and well-accepted methodology and framework to incorporate both the cost of superannuation tax concessions and age pension payments, it is difficult to determine if superannuation is meeting its new objective.
To date, many superannuation policy changes have not received a necessary level of objective scrutiny, as they have often been exempted from objective analysis via a regulation impact statement (RIS).
Subjecting policy changes to efficient and timely RISs will be critical to track the progress of superannuation against the new objective. The proposed Superannuation (Objective) Bill 2016 also introduces requirements for a “statement of compatibility” to be prepared by a member of parliament who introduces a Bill into the parliament relating to superannuation. Such a statement must include an assessment of whether the Bill is compatible with the primary and subsidiary objectives of the superannuation system, as set out in the Bill and accompanying regulations.
These benchmarks, together with more targeted and transparent superannuation policy would go a long way towards building greater trust in the system, keeping the focus on member benefit, and guarding against unintended consequences.
Will we see a growing number of self-funding retirees as superannuation substitutes for the age pension in the future? As we have outlined, the groundwork has been laid, but there is still much more to be done.
[1] The SG commenced at 3% in 1992–93, gradually rising to 9% in 2002, and increased to 9.5% in 2014–15. See Swob0da 2014.
Further reading
Ralston, D & Feng, J 2017, ‘Towards a self‑funded retirement: will superannuation substitute for the age pension?’, Australian Tax Forum, vol. 32, no. 3, pp. 607-628.
Recent Comments