Policy wonk heaven over the Christmas break will surely be relaxing on the back deck with a beer and a copy of the recently released Retirement Income Review.
If you take the time to do it, it will give you pause for thought. There were several uncomfortable assertions in its 650 pages, but two will test the mettle of both sides in Australia’s ancient partisan political war over superannuation.
The first, the Review’s assertion that generous tax concessions overwhelmingly favour the well-off, will be uncomfortable for the Government. The Coalition’s surprise 2019 election win was largely due to the franking credit recipients of Australia, many of them self-funded retirees, so they won’t want to rattle this cohort again. They still bear the scars from a civil war with a wealthy group of self-funded retirees over the last bout of tax tinkering to make the system more equitable.
Another assertion is that these tax concessions are so generous that any lifting of the Superannuation Guarantee (SG) to 12 per cent will, by 2055, cost taxpayers more in tax breaks than would be saved on the Age Pension. As The Australian’s economics editor Adam Creighton recently wrote: “You could scrap the concessions and pay the Age Pension twice over and give everyone a tax cut."
Surely this wasn’t a consequence envisioned by Paul Keating and Bill Kelty when they set up compulsory superannuation as a substitute for wage rises back in 1992?
The FSC’s tax and economics senior policy manager, Michael Potter, has examined the Review’s analysis on tax concessions for superannuation, and has produced a different view. Much of the supposed cost of the concessions are a result of the Review comparing super taxes against the taxation of bank accounts, which are arguably overtaxed. Everything looks very concessionally taxed compared to bank accounts. But the largest asset for most people is the family home and compared to this superannuation is overtaxed.
Whichever way tax concessions are evaluated, the FSC argues for an efficient, equitable retirement income system which favours neither the very wealthy (they can look after themselves) or people on very low incomes (the State will always provide a decent safety net) – but in fact one which provides the best possible outcomes for the vast bulk of middle-income earning Australians.
In its work on the SG, the Review strongly suggests it should remain at 9.5 per cent, but this is based on its assumption that income for workers should grow more quickly than income for retirees. The FSC prefers the approach with worker and retiree incomes growing at the same rate – workers and retirees are the same people before and after retirement, they don’t suddenly become non-aspirational when they stop working. And notably the Age Pension safety net grows at the same rate as worker incomes.
The Review also found that more efficient use of savings in retirement can have a greater impact on improving retirement incomes than increasing the SG. It said that the SG could stay at 9.5 per cent, if “retirement savings were used more efficiently.”
But that’s a big “if,” and one which would require some significant cultural and behavioural shifts.
Firstly, Australians would need to overturn the way we view retirement savings, to live off the entire corpus of our nest eggs, as well as other related assets, rather than what we do now, which is to try to live off the interest generated by the corpus. To do this without fear of outliving our nest egg, policy levers will need to be applied and age-old cultural norms overturned – super savings wouldn’t be preserved as bequests to our children; our family home could become an asset to be “eaten” in retirement (to quote Keating); every super fund would need to provide access to a default retirement product; there would be higher mandated levels of superannuation or pension drawdowns.
The debate has also opened a plethora of other, more radical ideas – some economists have suggested that super should be voluntary for the under 25s; some have suggested that the SG is reduced for low-income workers to give them more spending power in their working years. Others have raised the idea that the SG moves to 10 per cent and then Australians are given the choice of putting any remaining increase into super or taking it as a wage rise. And is anyone going to grasp the nettle and suggest reducing super tax concessions for the well-off and wealthy?
What was clear from the Review was the finding that our system does not require a demolish and re-build – it effective, sound, and sustainable. It’s working too, the growth in superannuation balances means our age pension costs are among the lowest in the OECD. But it is a classic old structure that has suffered from multiple add-ons of differing quality and needs more efficiency overhauls.
The FSC’s policy position is that the SG should rise to 10 per cent in July 2021 and to 12 per cent by 2025, however we are open to ideas from the Review and we welcome the current debate. We’d urge the Government to think carefully about any deviation from the law and expectations of working Australians, and whether people would embrace some of the Review’s more controversial ideas like much smaller bequests and including the family home as an asset. We reject the current push in some quarters to use superannuation savings for home deposits. We agree that home ownership is incredibly valuable in retirement but changing superannuation policy won’t solve the complex problem of the decreasing levels of home ownership by itself.
My guess is that if the politics play out as they always have, the Government will tread very carefully in waging a full-blown ideological war over super with Labor and the unions in 2021, which could be an election year. The burning platform of a recession has gone, so any economic crisis policies can be shelved. I think the Government will quietly allow the SG to increase to 10 per cent in July and worry about the move upwards to 12 per cent, due in 2025, later. In the meantime, we hope Parliament will agree to the sensible renovations to our superannuation structure which will go a long way to improving the system for all Australians.
OPINION PIECE - by Sally Loane, CEO, FSC.