The limits, caps and new rates for superannuation announced in the May 2016 budget have generated plenty of commentary, particularly amongst the small number directly affected. But the much more significant change is a decision that the purpose of superannuation is to provide income in retirement to substitute or supplement the age pension.
This decision is important because it makes clear that superannuation is not designed – as some have suggested – to reduce the tax rates on savings in general. Instead, superannuation should not support savings beyond the point at which a person is unlikely to qualify for any age pension.
The government has used precisely this rationale to justify changes that seek to “target superannuation at its purposes”. New limits on pre-tax and post-tax contributions, and a modest tax rate on large balances in retirement, are all designed to reduce the tax breaks for those unlikely to qualify for an age Pension.
Scaremongering as well as tinkering
There has been plenty of scaremongering, as usually happens when interests are adversely affected, claiming that these changes will increase the number of people on the age pension. But the evidence for this is scant. A six-line spreadsheet will confirm that a couple that jointly saves $25,000 of pre-tax contributions every year between the ages of 35 and 65, for example, will enjoy a balance of over $1 million in today’s terms, which will clearly disqualify them from an age pension from January 1, 2017.
In reality, people contributing at this rate are likely to have much larger retirement assets that comprehensively disqualify them from the age pension. Most households have two contributing partners. Most households save as much outside of superannuation as they do within superannuation.
Given this decision about the purpose of superannuation, future reforms will be driven by perceptions of what problem we are trying to solve.
Those who worry that super doesn’t do enough to supplement the age pension are likely to focus on increasing compulsory contributions from 9.5 to 12 per cent of salaries. But while this will raise post-retirement incomes, it does so by making pre-retirement incomes lower. There is increasing evidence that our system already strikes a reasonable balance between post-retirement and pre-retirement incomes. Spending (other than on housing) in retirement is currently at about 70 per cent of spending before retirement for almost all income deciles. Most households in retirement who qualify for the age pension do not materially consume their assets through retirement. Levels of financial stress are generally lower for retirees than pre-retirees.
The ‘super’ penny drops
Others worry that super doesn’t do enough to substitute for the age pension. However, the penny is starting to drop that if super is redesigned so that it materially reduces the number of people qualifying for a part age pension, then it will simultaneously provide very large and unaffordable tax breaks to a much greater number of people, who were always going to save so much that they would not qualify for the age pension.
Finally, some are worried that superannuation isn’t targeted enough. The tax breaks remain “very generous”, as the Prime Minister said recently, with substantial concessions for those unlikely to qualify for an age pension. They are particularly generous once one takes into account the many opportunities to circumvent the new limits through partner contributions; by holding assets outside superannuation to utilise the $30,000 tax-free threshold available to older Australians due to the Senior Australian and Pensioner Tax Offset, and other measures.
John Daley is chief executive at the Grattan Institute