It’s easy to miss the big picture when short-term fixes seem to offer solutions to the daunting challenges confronting Australia’s economy. In the scramble to plug Budget deficits, however, sometimes the pillars of our national wealth are taken for granted. Superannuation is one of those.
We need to step back and consider the whole scene. The latest FSC-UBS State of the Industry Report reveals that financial services is now Australia’s largest industry, surpassing previous powerhouses of mining and manufacturing. The fuel driving this new economic turbine – which employs 451,000 people and annually contributes $141 billion to the economy – is our $2 trillion pool of superannuation savings, which is expected to reach at least $8 trillion within 20 years. Without this pillar, we could not have pulled through the Global Financial Crisis comparatively unscathed and we would not be enjoying current levels of economic growth.
It is extremely short-sighted, therefore, to speculate about increasing super taxes, capping contributions, restricting lump sums and exempting low income earners. When any structure is undermined, cracks appear. Confidence is sapped and support wanes. The last thing we need is to weaken our fastest growing industry when other sectors are under pressure to perform.
What we should do is remind ourselves that the purpose of superannuation is to provide adequate self-funded retirement incomes for every Australian while reducing the pressure on the Government’s age pension safety net. Defining the purpose of superannuation and making it law has commendably been initiated and led by Assistant Treasurer Kelly O’Dwyer.
We should also keep in mind that our national retirement savings system has little to do with taxation. So, changes to super should not be mistaken for credible tax reform. The gates have long been closed on people stuffing millions into super, but the imperative remains to reduce the amount that future governments need to outlay on age pensions. The pension now costs $44.7 billion and is rising at seven per cent each year. It eats up 10 per cent of the Federal Budget.
To clearly view the big picture, serious consideration needs to be given to demographic trends. They show that life expectancy will climb to 96.6 years for women and 95 years for men by 2055. By that year, no fewer than 40,000 people will pass the age of 100. The number of working Australians for every retiree over 65 will shrink alarmingly to just 2.7, compared with 4.5 today. A lower proportion of working people could result in lower economic growth for all.
So, even with the great strides made by our far-sighted superannuation system, substantial challenges lie ahead. It needs to remain robust to underpin Australia’s success. But we also need to design a better retirement system, without undermining the one that we currently have. We should examine the tax treatment of super, but let’s do so while also looking at issues such as the superannuation guarantee rate, aged care affordability, the age pension entitlement, the assets and income test and also access ages to both the pension and super.
The FSC is leading this debate. We have a six-point plan to improve super at no cost to government, while also delivering higher retirement incomes for the majority of Australians. We want to strengthen the pillar not weaken it. Put simply, we need to:
- Give every Australian cast-iron confidence that super will be removed from the Budget cycle and that politicians stop tinkering with their savings.
- Define the purpose of super and enshrine that in law.
- Increase the superannuation guarantee rate to 12% by 2022.
- Encourage people to save voluntarily above the 12% rate, and maintain contribution caps high enough so that women, carers and others can catch up after breaks from the workforce.
- Provide tax concessions so that all Australians – in particular middle and lower income earners – have incentives to save.
- Increase the preservation age in line with the age pension and life expectancy.
This is a comprehensive and far-sighted plan. If we follow it, analysis by Rice Warner shows that the super system can meet its objective and that the present value of our age pension liabilities will be slashed by 60 per cent for middle Australia by 2050. That increases the likelihood that the living standards we all enjoy today will also be shared by our children and grandchildren.
That is the big picture. In that frame, there is no room for the clouds that have gathered.
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