tag:theconversation.com,2011:/us/topics/retirement-incomes-review-83238/articlesretirement incomes review – The Conversation2020-12-10T18:59:12Ztag:theconversation.com,2011:article/1516932020-12-10T18:59:12Z2020-12-10T18:59:12ZHome ownership and super are far more entwined than you might think<figure><img src="https://images.theconversation.com/files/374140/original/file-20201210-24-1a8idms.jpg?ixlib=rb-1.1.0&rect=109%2C141%2C2734%2C1485&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">rudolfgeiger/Shutterstock</span></span></figcaption></figure><p>When the government’s <a href="https://treasury.gov.au/review/retirement-income-review/TOR">retirement income review</a> of which I was a part examined superannuation, the age pension and voluntary savings, home ownership had a surprisingly important role. </p>
<p>The home is the largest form of voluntary saving and is far more entwined with super and the pension than might be thought, with threads that travel from homeownership to access to the pension, from homeownership to the size of the pension, and from superannuation to homeownership.</p>
<h2>Homeownership keeps pension costs low</h2>
<p>At present, about 76% of retirees own the homes they live in, about 12% rent and a further 11% either live rent-free with family or are in residential care or another arrangement.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/374112/original/file-20201210-14-tfvimx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Retired Australians have been unusually likely to own the homes in which they live.</span>
</figcaption>
</figure>
<p>This is an unusually high rate of homeownership by international standards that not only benefits individuals but the public purse.</p>
<p>It lowers age pensioners’ living expenses and lowers the required size of the pension. </p>
<p>At 2.4% of gross domestic product, Australia has one of the lowest-cost age pension schemes in the OECD.</p>
<p>But there are indications that homeownership is on the decline.</p>
<p>People are entering the workforce, marrying, forming households and buying their first home later in life. </p>
<p>Between 1981 and 2016 the average age at which Australians purchased a home climbed from 24 to 33. </p>
<p>As a consequence, the average age at which mortgages were paid out climbed from 52 to 62. </p>
<p>Now, one in every ten retired Australians enters retirement with a mortgage.</p>
<h2>Wealth tied up in homes escapes the assets test</h2>
<p>As wealth tied up in housing is exempt from the age pension assets test, it is for many people a preferred form of retirement saving. </p>
<p>At present, around 15% of age pensioners live in homes valued at more than A$1 million, although these figures partly reflect Sydney and Melbourne property prices which have escalated over recent years. </p>
<p>These retirees are often “asset rich and income poor”, having chosen to store their wealth in an asset that doesn’t pay income.</p>
<p>They do well out of the pension. One fifth of age pension expenditure goes to the wealthiest two fifths of retirees.</p>
<h2>Non-homeowners live poorly</h2>
<p>Non-homeowners, on the other hand, are among those most likely to experience poverty in retirement. </p>
<p>Commonwealth Rent Assistance helps with the rent of those reliant on the pension and other payments and is much more targeted than the pension, with 90% going to the poorest fifth of retirees. </p>
<p>But the indexation of rent assistance payments to the consumer price index instead of rents for more than three decades has eroded their value to the point where they now cover less than half the rental costs of the people who get them.</p>
<p>Boosting rent assistance would help, but it is only part of the solution.</p>
<hr>
<p><strong>Income poverty rates of retirees</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=263&fit=crop&dpr=1 600w, https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=263&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=263&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=331&fit=crop&dpr=1 754w, https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=331&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/374098/original/file-20201210-15-u79lct.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=331&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Retirement Incomes Review,</span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/1371/Retirement_Incomes_Review_notes.pdf?1607569573">notes</a></span>
</figcaption>
</figure>
<hr>
<p>Other parts of the solution include increasing the supply and affordability of housing, creating a market in longer-term rental contracts, and boosting access to public housing, outside the terms of the review.</p>
<h2>Super supports home ownership</h2>
<p>Super gets diverted into financing homeownership in three ways.</p>
<p>First, voluntary contributions can be <a href="https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/First-Home-Super-Saver-Scheme/">redrawn</a> by first homebuyers for the purpose of a home deposit, for a sum of up to $15,000 from any one year and up to up to a maximum of $30,000 plus earnings across all years. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/374121/original/file-20201210-15-3dwmaw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Super encourages people to borrow.</span>
</figcaption>
</figure>
<p>For couples, this can provide up to $60,000 plus earnings to buy a house.</p>
<p>Second, retirees can make a <a href="https://www.ato.gov.au/Individuals/Super/Growing-your-super/Adding-to-your-super/Downsizing-contributions-into-superannuation/">downsizer contribution</a> into their super fund of up to $300,000 per person from the proceeds of selling one home to buy another. Such contributions don’t count towards their super contributions caps.</p>
<p>The third way in which super is financing home ownership is the increasing tendency for people to use their super payouts on retirement to pay out their mortgages.</p>
<p>In addition there is what’s known as the “wealth effect”, a phenomenon seen in contributory pension systems around the world. </p>
<p>Research conducted for the review found that increasing compulsory super balances increase household wealth and provide a degree of <a href="https://cdn.theconversation.com/static_files/files/1372/What_is_the_relationship_between_voluntary_savings_and_changes_to_the_SG_Ummul_Ruthbah_and_Nga_Pham?1607572962">confidence</a> for households to increase debt to invest in property, knowing that superannuation savings can be accessed to extinguish debt in the future and that the residential home is not counted in the age pension assets test. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-matters-is-the-home-most-retirees-well-off-some-very-badly-off-150465">What matters is the home: most retirees well off, some very badly off</a>
</strong>
</em>
</p>
<hr>
<p>Over a four-year period, it was found that a $1 contribution to compulsory super increased net household wealth by $2.21, through an increase in super wealth of $1.51 plus an increase in housing wealth of $1.21, offset by a 51 cent decline in non-super, non-housing savings.</p>
<p>In each of these ways super makes a contribution to homeownership. The review did not conclude there was a case for allowing further withdrawals from super to enable it to more.</p>
<h2>Homes can contribute to retirement incomes</h2>
<p>For typical homeowner at retirement, home equity represents about two to three times as much of their wealth as does super.</p>
<p>It ought to make accessing the equity in the home through a schemes such as the government’s <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme">Pension Loans Scheme</a> attractive. </p>
<p>As an example, drawing down $5,000 each year against the equity in a $500,000 home would eat into only a quarter of its value by the time retiree reached 92. </p>
<p>Consumer protections around the pension loans scheme and other reverse mortgage products limit loan to value ratios, ensure that retirees have guaranteed occupancy and can’t run up negative equity in their homes.</p>
<h2>It’s time to use them</h2>
<p>These schemes are at last becoming more popular, perhaps in part to the growing proportion of lifetime income tied up in homes, a figure that has grown from about 6% in the mid 1990s to around 16% for homes bought today.</p>
<p>Homes are a critical part of the retirement system. They are not only a place to live, but are a substantial part of householder wealth and should be considered when planning retirement income. Especially for those older Australians who have not had the benefit of higher superannuation contributions over their working lives. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retirement-incomes-review-finds-problems-more-super-wont-solve-150529">Retirement incomes review finds problems more super won't solve</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/151693/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deborah Ralston was a member of the Retirement Income Review panel and received remuneration for this role.</span></em></p>Super helps fund homeownership, and homeownership helps retirees get the pension.Deborah Ralston, Professorial fellow, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1504652020-11-22T18:54:50Z2020-11-22T18:54:50ZWhat matters is the home: most retirees well off, some very badly off<figure><img src="https://images.theconversation.com/files/370635/original/file-20201122-17-cq4zkw.jpg?ixlib=rb-1.1.0&rect=29%2C275%2C3964%2C2688&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">zstock/Shutterstock</span></span></figcaption></figure><p>The government’s <a href="https://treasury.gov.au/publication/p2020-100554">Retirement Incomes Review</a> paints an encouraging picture of the finances of retired Australians. </p>
<p>Most are at least as well off in retirement as they were while working, and most are more financially satisfied and less financially-stressed than Australians of working age.</p>
<p>But not all. The <a href="https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-00bkey-observations_0.pdf">huge exception</a> is retirees who do not own their own homes.</p>
<p>Whereas very few retired home owners are in poverty, most retired renters are.</p>
<hr>
<p><strong>Income poverty rates of retirees</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=263&fit=crop&dpr=1 600w, https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=263&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=263&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=331&fit=crop&dpr=1 754w, https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=331&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/370621/original/file-20201122-21-a2q65q.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=331&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Note: Data relates to 2017-18 financial year. Elevated poverty rate defined as 5 percentage points above retiree average.Retirees are where household reference person is aged 65 and over. There is overlap between some categories, for example, early retired and renter categories. Early retired means aged 55-64 and not in the labour force. Housing costs includes the value of both principal and interest components of mortgage repayments.</span>
<span class="attribution"><a class="source" href="https://treasury.gov.au/publication/p2020-100554">Source: Analysis of ABS Survey of Income and Housing Confidentialised Unit Record File, 2017-18</a></span>
</figcaption>
</figure>
<hr>
<p>So bad is the divide, the review found that even a 40% increase in Commonwealth Rent Assistance (the payment for pensioners) would reduce financial stress among renters by only 1%.</p>
<p>This is because rent assistance is low, covering only about 13% of the cost of renting. </p>
<p>Retirees who own their own homes don’t have to pay rent (and can still get the pension should their wealth be tied up in their home), and have a source of wealth that usually eclipses both their own superannuation and the wealth of renters.</p>
<hr>
<p><strong>Equivalised household wealth by asset type for retirees</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/370628/original/file-20201122-15-18ab82j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note: Retirees are defined as households where the reference person is aged 65 or older and is no longer in the labour force. Household wealth has been equivalised using the OECD equivalence scale in order to take account of differences in a household’s size and composition. Values in 2017-18 dollars.</span>
<span class="attribution"><span class="source">ABS, Retirement Incomes Review</span></span>
</figcaption>
</figure>
<hr>
<p>Most people do not regard their home as a retirement asset, a view compounded by rules that exempt it from taxes and the pension assets test.</p>
<p>They are also reluctant to borrow against the value of their home using facilities such as the <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme">Pension Loans Scheme</a>, for the same reasons they are reluctant to touch any of the wealth they retire with.</p>
<p>Data provided to the review by a large super fund shows its members typically die with 90% of what they had at retirement.</p>
<h2>Most retirees don’t use what they’ve got</h2>
<p>Another study finds age pensioners die with about 90% of what they had on retirement.</p>
<p>Partly the reasons are psychological. The review says words such as “investments”, “savings” and “nest eggs” imply the assets aren’t for living on. </p>
<p>Before compulsory super, employer-sponsored schemes usually paid “defined” benefits that could be measured in terms of income per year. </p>
<p>In the new system, designed to break the connection between workers and specific employers, benefits were “accumulated” in funds that could most easily be measured by the amount in them. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">Why we should worry less about retirement - and leave super at 9.5%</a>
</strong>
</em>
</p>
<hr>
<p>It is difficult for most people to see how a lump sum converts into income stream, and even more difficult when it depends on the interaction with the pension.</p>
<p>Another reason retirees hang on to what they had on retirement might be a genuine (if misplaced) concern about the unexpected.</p>
<p>In fact, health and aged care costs are heavily subsidised. Most people’s spending on them doesn’t increase significantly throughout retirement, yet many people seem unaware of how little of their own funds they will need.</p>
<p>Partly this is because of the complexity of the aged care and health care systems and how poorly they are explained.</p>
<h2>It’s created two systems</h2>
<p>Providing help to retirees who actually need it (mainly renters, many of them single women) and getting people with assets in the form of superannuation, savings and housing to actually use them rather than pass them on in bequests are the two key challenges identified in the report.</p>
<p>They are problems that boosting the rate of compulsory super contributions (as pushed for by the funds and <a href="https://theconversation.com/retirement-incomes-review-finds-problems-more-super-wont-solve-150529">presently leglislated</a>) won’t help with.</p>
<p>They are set to become worse.</p>
<p>Although home ownership rates remain high for people over the age of 65, a growing number of Australians are not entering the housing market. </p>
<p>Over 15 years, the number of Australians over 65 who do not own their home outright is <a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">expected to double</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Fall in ageing Australians' home-ownership rates looms as seismic shock for housing policy</a>
</strong>
</em>
</p>
<hr>
<p>As the amount in super funds grows (boosted by the legislated increase in compulsory contributions, should it take place), Australians with super are going to have even more relative to what they need and even less need to make use of it.</p>
<p>The report makes no recommendations, and doesn’t suggest that the solutions are easy.</p>
<p>Widening the pension asset test to include the home would leave many homeowners worse off and could generate distrust and destabilise the system.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retirement-incomes-review-finds-problems-more-super-wont-solve-150529">Retirement incomes review finds problems more super won't solve</a>
</strong>
</em>
</p>
<hr>
<p>Getting more Australians into home ownership has proved difficult and could never be a solution for all Australians, in any case.</p>
<p>We already have in place rules that require retirees to draw down their super, but often they withdraw the minimum amount permitted and then reinvest much of it in another savings vehicle outside of super. </p>
<p>We’ve created a system where most have enough or more than enough to retire on and others get nothing like enough.</p><img src="https://counter.theconversation.com/content/150465/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson has received funding from the ARC, AHURI and CPA Australia. Helen is the Chair of the Social Policy Committee and a Director of the National Foundation for Australian Women (NFAW), and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. She is a Registered Tax Agent and a member of the SMSF Association.</span></em></p>Most retired renters are in poverty, very few home owners are.Helen Hodgson, Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1505292020-11-20T06:30:57Z2020-11-20T06:30:57ZRetirement incomes review finds problems more super won’t solve<figure><img src="https://images.theconversation.com/files/370504/original/file-20201120-17-3ehf2x.jpg?ixlib=rb-1.1.0&rect=107%2C425%2C3239%2C1832&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Robyn Mackenzie/Shutterstock</span></span></figcaption></figure><p>It would be a waste if the Friday’s mammoth <a href="https://treasury.gov.au/publication/p2020-100554">Retirement Incomes Review</a> was remembered only for its finding that increases in employers compulsory superannuation contributions come at the expense of wages.</p>
<p>That has <a href="https://theconversation.com/workers-bear-71-to-100-of-the-cost-of-increases-in-compulsory-super-150461">long been assumed</a>, and is what was <a href="https://treasury.gov.au/sites/default/files/2019-10/afts_retirement_incomes_consultation_paper.pdf">intended</a> when compulsory super was set up.</p>
<p>Compulsory super contributions are set to increase in five annual steps of<a href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage"> 0.5% of salary between 2021 and 2025</a>. </p>
<p>These are much bigger increases than the earlier two of 0.25% in 2012 and 2013.</p>
<p>And the wage rises they will be taken from will be much lower. The latest figures released on Wednesday point to shockingly low annual wage growth of <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/sep-2020">1.4%</a>. </p>
<p>Should each of the scheduled increases in employers compulsory super knock 0.4 points off wage growth (which is what the review expects) annual wage growth would sink from 1.4% to 1%. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/workers-bear-71-to-100-of-the-cost-of-increases-in-compulsory-super-150461">Workers bear 71% to 100% of the cost of increases in compulsory super</a>
</strong>
</em>
</p>
<hr>
<p>Private sector wage would sink from 1.2% to 0.8%, in the absence of something to push it back up.</p>
<p>Because inflation will almost certainly be higher than 1%, it means the buying power of wages would go backwards, all for the sake of a better life in retirement.</p>
<p>The review presents the finding starkly. Lifting compulsory super contributions from 9.5% of salary to 12% will cut working-life incomes by about 2%.</p>
<p>And for what? It’s a question the review spends a lot of time examining.</p>
<h2>Most retirees have enough</h2>
<p>The review dispenses with the argument that the goal of a retirement income system should be “<a href="https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-00bkey-observations_0.pdf">aspirational</a>”, or to provide people with higher income in retirement than they had in their working lives. </p>
<p>It finds that for retirees presently aged 65-74 the replacement rates for middle to higher income earners are generally adequate. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
</figcaption>
</figure>
<p>Many lower-income earners get more per year in retirement than they got while working.</p>
<p>If the increases in compulsory super proceed as planned, this will extend to the bottom 60% of the income distribution. </p>
<p>They’ll enjoy a higher standard of living in retirement than while working (and will enjoy a lower standard of living while working than they would have). </p>
<p>Most retirees die with most of what they had when they retired, leaving it as a bequest. They are reluctant to “eat into” their super and other savings because of concerns about possible future health and aged care costs, and concerns about outliving savings.</p>
<p>The review quite reasonably sees this as a <a href="https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-00bkey-observations_0.pdf">betrayal</a> of the purpose of government-supported super, saying</p>
<blockquote>
<p>superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation</p>
</blockquote>
<h2>It’s the pension that matters</h2>
<p>The pension does what super cannot. It provides a buffer for retirees whose income and savings fall due to market volatility, and for those who outlive their savings. 71% of people of age pension age get it or a similar payment. More than 60% of them get the full pension. </p>
<p>If there’s one key message of the review, it is this: it is the pension rather than super that matters for maintaining living standards in retirement, which is what the review was asked to consider.</p>
<p>It is also cost-effective compared to the growing budgetary cost of the super tax concessions.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">Why we should worry less about retirement - and leave super at 9.5%</a>
</strong>
</em>
</p>
<hr>
<p>The age pension costs 2.5% of GDP and is set to fall to 2.3% of GDP over the next 40 years as the super system matures and tighter means tests bite.</p>
<p>Treasury modelling prepared for the review shows that if more money is directed into super and away from wages as scheduled, the annual budgetary cost of the super tax concessions will exceed the cost of the pension by 2050.</p>
<h2>There’s a real retirement income problem</h2>
<p>A substantial proportion of Australians, about 30%, are financially worse off in retirement than while working, and they are people neither super nor the pension can help.</p>
<p>Mostly they are older Australians who have lost their jobs and cannot get new ones before they before eligible for the age pension or become old enough to get access to their super. Often they’ve left the workforce due to ill health or to care for others and are forced to rely on JobSeeker, which is well below the poverty line.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/forget-more-compulsory-super-here-are-5-ways-to-actually-boost-retirement-incomes-132655">Forget more compulsory super: here are 5 ways to actually boost retirement incomes</a>
</strong>
</em>
</p>
<hr>
<p>It’s much worse if they rent privately. About one quarter of retirees who rent privately are in financial stress, so much so that the review finds even a 40%
increase in the maximum Commonwealth Rent Assistance payment wouldn’t be enough to get them a decent standard of living in retirement.</p>
<h2>No recommendations, but findings aplenty</h2>
<p>The review was not asked to produce recommendations. Instead, while noting that much of the system works well, it has pointed to things that need urgent attention. </p>
<p>It finds that pouring a greater proportion of each pay packet into the hands of super funds is not the sort of attention needed, and in the present unusual circumstances could <a href="https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf">cost jobs</a> as employers who can’t take the extra cost out of wages take it out of headcount.</p>
<p>The government will make a decision about whether to proceed with the legislated increase in compulsory super in its May budget, just before the first of the five increases due in July.</p><img src="https://counter.theconversation.com/content/150529/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most Australians get enough to live on in retirement. Some get more they get while working, but 30% get less, and boosting super won’t help them.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1504612020-11-19T22:39:40Z2020-11-19T22:39:40ZWorkers bear 71% to 100% of the cost of increases in compulsory super<figure><img src="https://images.theconversation.com/files/370433/original/file-20201119-16-1j2fbo7.jpg?ixlib=rb-1.1.0&rect=543%2C107%2C2107%2C1211&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>The government’s much-anticipated <a href="https://treasury.gov.au/publication/p2020-100554">Retirement Incomes Review</a> has found that increases in employer’s compulsory superannuation contributions are financed by reductions in workers’ wage growth.</p>
<p>This isn’t obvious, and it certainly isn’t what the <a href="https://www.industrysuper.com/assets/FileDownloadCTA/No-magic-wage-rise-cutting-super-leaves-workers-worse-off.pdf">superannuation industry</a> has been saying.</p>
<p>Legally, those contributions (at present 9.5% of each wage) come from employers, on top of the wage. </p>
<p>Employers are required to pay them under a legal instrument known as the “<a href="https://www.fairwork.gov.au/pay/tax-and-superannuation">superannuation guarantee</a>”.</p>
<p>But employers have to get the money from somewhere.</p>
<p>Compulsory super was introduced in 1992 with the intention the money would come out of funds that would otherwise have been used for wage increases. The document said <a href="https://treasury.gov.au/sites/default/files/2019-10/afts_retirement_incomes_consultation_paper.pdf">workers would be</a> </p>
<blockquote>
<p>forgoing a faster increase in real take-home pay in return for a higher standard of living in retirement </p>
</blockquote>
<p>Government ministers encouraged employers to shave wage increases to pay for increases in compulsory super. In 2012 then minister Bill Shorten <a href="https://ministers.treasury.gov.au/ministers/bill-shorten-2010/transcripts/interview-neil-mitchell-3aw-1">explained</a>:</p>
<blockquote>
<p>a portion of what would have been employees’ increases will go into compulsory savings</p>
</blockquote>
<p>Modelling by the <a href="https://treasury.gov.au/sites/default/files/2019-09/foi_2534_document_set_for_release_re.pdf">Treasury</a>, <a href="https://www.rba.gov.au/information/foi/disclosure-log/pdf/202114.pdf">Reserve Bank</a>, <a href="https://grattan.edu.au/report/money-in-retirement/">Grattan Institute</a>, and the <a href="https://www.cis.org.au/app/uploads/2016/08/32-3-potter-michael.pdf">private sector</a> has long assumed that is what happens.</p>
<p>Then in February <a href="https://grattan.edu.au/report/no-free-lunch/">groundbreaking research</a> by the Grattan Institute on 80,000 enterprise bargaining agreements over three decades of compulsory super found that was indeed what has been happening. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retirement-incomes-review-finds-problems-more-super-wont-solve-150529">Retirement incomes review finds problems more super won't solve</a>
</strong>
</em>
</p>
<hr>
<p>Grattan found that on average, <a href="https://grattan.edu.au/report/no-free-lunch/">80%</a> of each increase in compulsory super has been taken from what would otherwise have been a wage increase.</p>
<p>And now, in work commissioned by the Retirement Incomes Review using completely different data (from the Tax Office instead of enterprise agreements) and an entirely different analytical approach, so have we.</p>
<h2>Here’s what we did</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/370443/original/file-20201119-14-zr1yww.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Imagine three companies (A, B, and C) offering an identical job in the same city with three different annual total compensation packages: $117,000 (A), $112,000 (B), and $109,500 (C). </p>
<p>The three companies offer the same wage ($100,000), they only differ in the amount of super they pay their workers: 17% (A), 12% (B) and the legally-required 9.5% (C). In this example, total compensation equals wages plus superannuation.</p>
<p>In a competitive labour market (which we largely have in Australia), job seekers would flock to company A, which offers the best compensation package.</p>
<p>How might B and C respond to get workers back? </p>
<p>By offering higher wage growth in subsequent years than A. Higher wage growth would ultimately lead to a catch-up in total compensation levels across the three firms, over time.</p>
<p>Examining the administrative tax records since compulsory super has been set at a single standard rate, that is indeed what we found – when a firm paid super at more than the standard rate, those firms that paid less or merely the standard rate lifted wages by more.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">5 questions about superannuation the government's new inquiry will need to ask</a>
</strong>
</em>
</p>
<hr>
<p>Put another way, the firms that paid their workers more than the legislated rate of super lifted their wages by less.</p>
<h2>What happens when compulsory super is increased?</h2>
<p>Legislated increases to the standard rate of compulsory super increase firms’ labour costs, but only for firms that pay the standard rate (in our example that’s firm C which we will call a super guarantee “SG” firm).</p>
<p>By comparing the difference in wage growth of employees in “SG firms” to “above SG” firms (companies A and B) during periods when the minimum super guarantee was increased, we can determine how companies pay for the increase in labour costs.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1219&fit=crop&dpr=1 754w, https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1219&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/370445/original/file-20201119-14-gd61xn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1219&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The ATO has insights into super and wages.</span>
</figcaption>
</figure>
<p>We already know that wage growth for “SG firms” is higher than “above SG” firms.</p>
<p>The question is: how does that change when the SG increases?</p>
<p>If “SG firms” find the money to fund the higher SG from somewhere other than wages, it won’t change at all.</p>
<p>If they pass on some or all of the cost to their workers in lower wage increases, then their wage growth should slow relative to that of “above SG” firms. </p>
<p>Our examination of Tax Office data finds this is what has happened.</p>
<p>Our results show that when the legislated compulsory super contributions increased from 8% to 9% in 2002 and again from 9% to 9.25% in 2013, companies passed on <a href="https://treasury.gov.au/review/retirement-income-review">71% to 100%</a> of the cost to workers in the form of reduced wage growth.</p>
<h2>What about other findings?</h2>
<p>Two <a href="https://mckellinstitute.org.au/app/uploads/Does-higher-superannuation-reduce-wages.pdf">other studies</a>, one <a href="https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/3125/attachments/original/1574168220/Relationship_Between_Superannuation_Contributions_and_Wages_Formatted.pdf">funded by Industry Super</a>, do not find a trade-off between super increases and wage increases (and in some instances present a case for superannuation increases leading to wage increases).</p>
<p>As we are seeing in the current debates about pausing increases in compulsory super, it tends to be politically easy to raise compulsory super when wage growth is robust and convenient to pause increases when wage growth is slow. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-top-economists-oppose-the-next-increases-in-compulsory-super-145111">Australia's top economists oppose the next increases in compulsory super</a>
</strong>
</em>
</p>
<hr>
<p>The correlations observed in these studies (that wage growth has been high when compulsory super has been increased) may well be picking up on the timing of increases in compulsory super – that they have been introduced at times when wage growth has been strong rather than having caused strong wage growth.</p>
<h2>Where does it leave us?</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
</figcaption>
</figure>
<p>Increases in compulsory super come at a cost to the wages of workers.</p>
<p>They might result in higher retirement incomes later in life (although this is uncertain because the settings of the age pension mean an increased superannuation balance is not directly correlated with an increase in retirement living standards).</p>
<p>But they leave less disposable income available to workers and their families to consume today or to save through alternative means.</p>
<p>They also cost the government money. </p>
<p>An increase in compulsory super contributions might one day reduce age pension expenditure, a question examined by the review.</p>
<p>But in the years before then, the government would forego substantial tax revenue because the extra super would be taxed at a lower rate than wages.</p>
<p>These are important things for the government to consider as it decides whether to proceed with the legislated increase in compulsory super from 9.5% of salary to 12% in five steps of 0.5% between July 2021 and July 2025.</p><img src="https://counter.theconversation.com/content/150461/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Tax and Transfer Policy Institute conducted two studies for the Retirement Incomes Review.</span></em></p><p class="fine-print"><em><span>Kristen Sobeck does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A leading-edge study conducted for the Retirement Incomes Review used Tax Office data to examine what happened to wages after firms paid more super.Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityKristen Sobeck, Senior Research Officer, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1434212020-08-13T00:42:01Z2020-08-13T00:42:01ZWe need super, but we’re taxing it the wrong way round<figure><img src="https://images.theconversation.com/files/352430/original/file-20200812-14-14cy6yi.jpg?ixlib=rb-1.1.0&rect=352%2C186%2C2387%2C1108&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Proxima Studio/Shutterstock</span></span></figcaption></figure><p>Many economists think that earnings in super funds should be taxed at a relatively low rate, compared to labour earnings and other types of earnings such as interest and dividends.</p>
<p>This is reflected in tax policy around the world. Among members of the Organisation for Economic Co-operation and Development, private pension plans (what we call super) have among the lowest tax rates of any savings instrument.</p>
<p>The Australian tax treatment of super aligns with this trend. But the Australian system is much more generous than other countries and very expensive.</p>
<p>In the past financial year the tax concessions on super fund earnings cost the government an estimated <a href="https://treasury.gov.au/publication/p2020-51153">A$17.8 billion</a>. The tax concession on employer super contributions cost $19.6 billion.</p>
<p>Do the benefits of these generous tax concessions justify their costs? </p>
<p>Our recent <a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">report on savings taxes</a> suggests that they don’t, in large measure because they are poorly aimed at their intended objectives.</p>
<p>In order to understand just how poorly they are aimed, it is necessary to identify the arguments typically used to justify their existence.</p>
<h2>Justification 1. The impact of tax compounds over time</h2>
<p>The first (and by far most convincing) justification is that superannuation is typically held for a long period of time. Since income from superannuation is taxed annually, the impact of the tax compounds over time, similar to compound interest.</p>
<p>Lower tax rates can offset the increase in effective tax rates over time.</p>
<p>But in practice they are applied poorly because they apply equally, irrespective of whether the asset is held for a short or a long time.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">Progressive in theory, regressive in practice: that's how we tax income from savings</a>
</strong>
</em>
</p>
<hr>
<p>Ideally the concession would be the greatest for workers at the start of their careers. </p>
<p>They are the ones who hold super for the longest time, but the system actually awards the highest concessions to the high earners, who tend to be the oldest and closest to retirement.</p>
<h2>Justification 2. Super tax concessions encourage saving</h2>
<p>A second rationale for superannuation tax concessions is that they help ensure people save enough money for retirement.</p>
<p>This argument is less convincing, because there is relatively strong evidence suggesting that it is the compulsory nature of superannuation, rather than how it is taxed, that drives retirement savings.</p>
<p>In other words, if people are not saving enough for retirement, superannuation concessions are the wrong tool – increasing the compulsory percentage would be better.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/early-access-to-super-doesnt-justify-higher-compulsory-contributions-143087">Early access to super doesn’t justify higher compulsory contributions</a>
</strong>
</em>
</p>
<hr>
<p>Moreover, if increasing retirement savings is a goal of tax policy, it would be best achieved by charging the least to the people most likely to respond to tax rates.</p>
<p>Existing research suggests that low income people are among those most likely to respond to tax concessions. Yet at the moment the concessions are directed to high earners.</p>
<h2>Justification 3. Super concessions take weight off the pension</h2>
<p>A third argument is that super tax concessions reduce dependence on the age pension.</p>
<p>But super tax concessions only improve the government’s financial position if savings on the age pension are greater than the cost of the concessions. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Superannuation has only a modest impact on the likelihood a retiree will claim the pension.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/@adamsky1973">Adam Nieścioruk/Unsplash.</a></span>
</figcaption>
</figure>
<p>It is a <a href="https://theconversation.com/myth-busted-boosting-super-would-cost-the-budget-more-than-it-saved-on-age-pensions-119002">far from decided</a> question.</p>
<p>There is a good deal of evidence suggesting that the amount placed in super has only a <a href="https://www.pc.gov.au/research/completed/ageing-australia">modest impact</a> on the likelihood that the superannuant will claim a pension, and a relatively modest impact on the amount claimed.</p>
<p>Increased savings of almost any form will reduce dependence on the age pension to some extent because most savings, other than owner-occupied housing, are counted in the means test. </p>
<p>If the government wanted a stronger effect it could tighten the means test.</p>
<p>Alternatively, it could direct concessions toward those Australians most likely to receive an age pension.</p>
<p>At the moment the biggest concessions are directed to the Australians wealthy enough to be unlikely to receive the pension.</p>
<h2>So how should we tax super?</h2>
<p>In the long-run there’s a case for taxing the earnings from all types of savings <a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">at the same rate</a>.</p>
<p>Short-run, super tax could be reformed by</p>
<ul>
<li><p>making all superannuation contributions out of post-tax income (potentially with an upfront subsidy, but a smaller one than currently exists)</p></li>
<li><p>taxing earnings in the retirement phase in addition to the pre-retirement phase and using the resulting revenue to reduce the tax rate on all super earnings </p></li>
<li><p>taxing super earnings at a lower annual rate for younger Australians to account for the fact that they hold super assets for a longer</p></li>
<li><p>Removing “catch-up provisions” that allow older Australians to put in more at lower tax rates and lowering the annual concessional contributions cap</p></li>
</ul>
<p>The savings made could help fund a reduction in personal income tax rates, greater government support payments, or a combination of both.</p>
<p>The government’s <a href="https://treasury.gov.au/consultation/c2019-36292">retirement income review</a> has examined some of these questions. It was delivered to the treasurer <a href="https://www.news.com.au/finance/work/coronavirus-australia-workers-could-face-years-of-lower-wages/news-story/3117f234b6690c868b862ed2761c3806">late last month</a>.</p><img src="https://counter.theconversation.com/content/143421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kristen Sobeck works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Robert Breunig works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Peter Varela does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We give the biggest concessions to those least likely to need persuasion to save well.Peter Varela, Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityKristen Sobeck, Senior Research Officer, Crawford School of Public Policy, Australian National UniversityRobert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1326552020-03-01T19:04:40Z2020-03-01T19:04:40ZForget more compulsory super: here are 5 ways to actually boost retirement incomes<figure><img src="https://images.theconversation.com/files/317730/original/file-20200228-24659-1z33le.jpg?ixlib=rb-1.1.0&rect=0%2C11%2C4000%2C1988&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>This morning the Grattan Institute releases its <a href="https://grattan.edu.au/">submission</a> to the government’s <a href="https://treasury.gov.au/review/retirement-income-review">retirement incomes review</a>, a review called in anticipation of five annual increases in compulsory superannuation contributions, scheduled to begin in July 2021.</p>
<p>Our research shows the super increases aren’t necessary. For most Australians, retirement incomes are <a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">already adequate</a>. Since higher super contributions will come <a href="https://theconversation.com/think-superannuation-comes-from-employers-pockets-it-comes-from-yours-130797">at the expense of wages</a>, the scheduled increases should be abandoned. </p>
<p>But there are big problems the review will need to confront. </p>
<p>Here are <a href="https://grattan.edu.au/">five changes</a> that would tackle them.</p>
<h2>1. Boost rent assistance</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>While most Australians are comfortable in retirement, the system is failing too many poorer Australians, especially low-income women and retirees who rent. </p>
<p>Senior Australians who rent privately are more likely to suffer financial stress than homeowners or renters in public housing. And it will get worse because young Australians on lower incomes are <a href="https://theconversation.com/three-charts-on-poorer-australians-bearing-the-brunt-of-rising-housing-costs-87003">less likely</a> to own homes than in the past.</p>
<p>The government’s priority should be boosting <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/rent-assistance/how-much-you-can-get">rent assistance</a>, which has not kept pace with rent increases. Raising rent assistance by 40%, or roughly A$1,400 a year for singles, would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to other renters. </p>
<p>A common concern is that boosting rent assistance would lead to higher rents. But that’s unlikely: households would not be required to spend any of the extra income on rent, and <a href="https://theconversation.com/rudds-rental-affordability-scheme-was-a-1-billion-gift-to-developers-abbott-was-right-to-axe-it-122854">most would not</a>.</p>
<h2>2. Ease the age pension asset test</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>While retirement incomes are adequate for most retirees, the age pension <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get">assets test</a> excessively penalises people who save more for their retirement. </p>
<p>Before January 1, 2017 retirees with assets above the threshold lost $1.50 of pension per fortnight for every $1,000 of assets above the threshold. In 2017 the Coalition lifted the threshold but also lifted the withdrawal rate to $3 of pension per fortnight for each $1,000 of assets.</p>
<p>The changes resulted in very high effective marginal tax rates on retirement savings, so much so that a typical worker who saves an extra $1000 at age 40 increases their retirement income by only $25 each year, or $658 over 26 years
of retirement, which is a <a href="https://grattan.edu.au/report/money-in-retirement/">negative return</a> on money saved for decades.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-pensioners-are-cruising-their-way-around-budget-changes-42544">Why pensioners are cruising their way around budget changes</a>
</strong>
</em>
</p>
<hr>
<p>The age pension withdrawal rate should be cut to $2.25 per fortnight for each $1,000 of assets above the threshold. This would cost the budget about $750 million a year. </p>
<p>For middle and high-income workers, this change would have a bigger impact on retirement incomes per government dollar expended than boosting compulsory super.</p>
<h2>3. Boost Newstart</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/newstart-allowance">Newstart</a>, together with the disability support pension, provides an important safety net for Australians who are unable to work right through to retirement age.</p>
<p>Yet while the <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension">age pension</a> and <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/disability-support-pension">disability support pension</a> are indexed to wages, Newstart is not. It only climbs in line with inflation. It should be increased by $75 a week and then indexed to wages going forward. </p>
<p>This would <a href="https://www.theguardian.com/australia-news/2018/sep/17/push-to-raise-newstart-allowance-by-75-a-week">cost a lot</a> but it would help the <a href="https://theconversation.com/5-charts-on-what-a-newstart-recipient-really-looks-like-125937">growing legions</a> of older Australians, many of them women, who find themselves among the long-term unemployed in the years leading up to retirement, or are forced to retire early. And it would lift many more younger Australians out of poverty. </p>
<h2>4. Include the home in the pension assets test</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><a href="https://www.smh.com.au/national/soaring-cost-of-housing-for-poorest-australians-is-driving-inequality-grattan-institute-20190906-p52ot2.html">Falling rates of home ownership</a> mean we are at risk of creating an underclass of retirees who rent. </p>
<p>And our retirement incomes system makes this worse by favouring homeowners over renters. Once a person is retired, their home is <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test/assets#assetstestlimits">treated differently</a> to their other assets. Which is why <a href="https://www.theaustralian.com.au/nation/politics/elderly-in-1mplus-homes-raking-in-63bn-in-pensions/news-story/30cbe2423577d46f5489ec39b673f8f4">$6 billion</a> in pension payments go to people with homes worth more than $1 million. </p>
<p>It’s time for more of the value of the family home to be included in the pension assets test. Counting more of the home above some threshold (such as $500,000) would be fairer and would save the budget up to $2 billion a year. </p>
<p>No pensioner would be forced to leave their home. Pensioners with valuable homes could continue to stay at home and receive the pension under the Government’s <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme">pension loans scheme</a>, which recovers debts only when homes are eventually sold.</p>
<h2>5. Fix super tax breaks</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Superannuation tax breaks <a href="https://treasury.gov.au/sites/default/files/2020-01/complete_tbvs_web.pdf">cost a lot</a> – tens of billions each year in foregone revenue, with half the benefits flowing to the top one fifth of income earners, who already have enough resources to fund their retirements. </p>
<p>And the costs are set to climb further as super balances climb. The cost of the earnings concessions alone is set to climb from $17.4 billion to $20.8 billion over the next four years.</p>
<p>Three reforms would keep them in check.</p>
<ul>
<li><p>Voluntary contributions from pretax income should be limited to $11,000 a year. This would save the budget about $1.7 billion a year.</p></li>
<li><p>Contributions from post-tax income should be limited to $250,000 over a lifetime, or to $50,000 a year. It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the tax system. </p></li>
<li><p>Earnings in retirement – currently untaxed for people with <a href="https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Transfer-balance-cap/">superannuation balances less than $1.6 million</a> – should be taxed at 15%, the same as super earnings before retirement. Doing so would save the budget about $2 billion per year at first, and much more in future.</p></li>
</ul>
<p>These changes to super taxes free up money to help Australians who need help without hurting the retirement prospects of middle Australians. </p>
<p>Australia’s retirement incomes system works well, but there are things that need fixing. </p>
<p>The reforms we propose would make retirement fairer, save taxpayers’ money, and ensure that all Australians can enjoy a comfortable retirement free from poverty. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/think-superannuation-comes-from-employers-pockets-it-comes-from-yours-130797">Think superannuation comes from employers' pockets? It comes from yours</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/132655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Jonathan Nolan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government’s retirement incomes review should concentrate on boosting rent assistance and Newstart and fixing the pension assets test. These would achieve more than boosting super.Brendan Coates, Program Director, Household Finances, Grattan InstituteJonathan Nolan, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.