The debate on superannuation reached farcical levels with Labor MP Joel Fitzgibbon claiming that “In Sydney’s west you can be on a quarter of a million dollars family income a year and you’re still struggling”.
Are households on $250,000 gross income per year ‘the battlers’? No! They are in the top 5% of households by gross income. While family circumstances matter, few if any of these households are ‘doing it tough’.
The problem with such argument is that it diverts attention from the real need to reform our superannuation system.
Is the Australian superannuation system broken? No! It is half a good system – but only half.
Should the government reform aspects of the superannuation system? Yes! But it should do so carefully. Otherwise it risks stuffing up the ‘good half’ without fixing the ‘bad half’.
Let me explain.
Nine months ago Monash and Warwick universities ran a joint conference on superannuation. It quickly became clear that the rest of the world is envious of the pre-retirement part of our superannuation system. It has led to sizable funds being accumulated to fund retirement. And it has broad community support. Most other developed countries have been less successful and face government pension problems as baby-boomers start to retire.
However, it also became apparent that Australia’s post-retirement scheme is ad hoc. Superannuation is to fund retirement and reduce the need for government pensions. But our superannuation system almost ignores post-retirement. Our overseas guests greeted the idea that a retiree could withdraw a large percentage of his or her superannuation as a lump sum, spend it, then go on a government pension, with laughter. In countries like Finland, savings through ‘superannuation’ must be channelled into an annuity that replaces or supplements government support.
If superannuation is designed to deal with post-retirement then it must provide a pension-replacement. However, annuities have not been popular with Australian retirees. This is to be expected. In 2009-10, average superannuation balances for men entering retirement were about $200,000. Roughly speaking, this buys an annuity that pays only about $10,000 per year. For women the average balance on retirement was just over $110,000 or about $5,000 per year in an annuity.
Given the small annual payouts, it is little wonder that the government pension looks an attractive (and necessary) alternative.
While annuities may provide a small supplement to government support for many retired people, they still reduce the burden on the government. And at the high end of the spectrum, they ensure that those retirees with substantial superannuation balances will not draw on government support.
So the real area for government superannuation reform is post retirement. Should retirees be required to turn some or all of their superannuation savings into an annuity? And if this is required, how does the annuity affect their ability to also gain government support in retirement?
Requiring retirees to take their superannuation as an annuity makes the policy objective transparent. Superannuation is required savings that receives preferred taxation status today in order to reduce government expenditure in the future. In particular, high income earners are required to save through superannuation, and they get tax benefits on this forced saving, but they are effectively excluded from government pensions in retirement.
Of course, there will always be debate about the right level of the tax concessions. But what the government must avoid is undermining support for the existing world-class pre-retirement system that we have in place. And the best way to undermine that support, as we have recently seen in Cyprus, is uncertainty and the fear that the government is about to ‘steal our money’.
The government has raised the spectre of changing the tax benefits on superannuation. But it is not clear how these changes will be brought in – or if they will occur. The prospect of taxing superannuation payouts has been raised. But what level of superannuation will this apply to? Reducing tax concessions for high income earners has been mentioned. But it is not clear who will be counted ‘in’ this group. The government is not helping by fuelling this pre-budget speculation.
People view their superannuation balances as ‘their money’. As the experience in Cyprus shows, if a government threatens to ‘take’ some of that money, people get very upset. And this threatens to undermine the community support for the superannuation system.
By focusing on short term ‘opportunistic’ reforms and failing to quell rumours and speculation, the federal government is undermining Australia’s superannuation system. It is also diverting attention away from real reform that is needed to make the system sustainable.