Super system far from 'certainty'
The superannuation industry body wants a 15 per cent tax applied to lump-sum withdrawals, rising to 30 per cent for withdrawals over a certain, yet to be defined, limit. Yes, we are a long way from a stable and settled super system, despite all the talk about needing "certainty".
The Association of Super Funds of Australia, representing all super funds, suggests fundamental changes to the system, such as the inclusion of the self-employed, contractors and domestic carers in compulsory super, a limit of $2.5 million on the amount eligible for tax concessions, an increase in the age at which super can be accessed, and a default option on retirement of an account-based income stream with maximum and minimum payment levels.
Overshadowed by last week's budget noise, ASFA launched a white paper on what it calls "super evolution" but what would be billed as outrageous revolution if proposed by any politician in the present climate. The paper is an attempt to get beyond the politics. A five-month discussion period for members aims to develop proposals to improve the system, so it can cope with Australia's changing demographic and economic realities.
"The core of the [present] system was designed when the proportion of older people in the Australian community was not very high and the average life expectancy was much lower than it is today," the paper states. "In essence, the system was designed to provide a retirement income for people who lived into their 70s, not into their 90s. Now is the time to re-look at the system and to modernise it."
ASFA hopes the process will provide it with a comprehensive policy to present to a new federal government. The Coalition was happy to make whatever political capital it could out of Labor's minor changes to superannuation for a relatively few well-off individuals, but the relevant shadow minister, right-winger Mathias Cormann, is known in the industry as a person who has said super is socialism. Coalition superannuation policy effectively penalises anyone whose taxable income falls below $18,200 and offers only a 5 per cent contribution and earnings incentive for the 3.6 million people on a 19 per cent marginal tax rate (plus Medicare levy).
A genuinely comprehensive tax white paper, as promised by the Coalition within two years, would also need to include a fundamental review of the role of superannuation.
ASFA's review aims for better retirement incomes and affordability, as well as coping with an ageing population: "In essence, the system should be designed with a focus on the needs of the great bulk of Australians, say, 80 per cent or more of the adult population, to save for retirement by way of both compulsory and voluntary contributions which mostly receive tax concessions. While the aim is for an inclusive system, it might be necessary to accept that at the very low end of the income scale superannuation may not be very relevant, while at the very top of the income scale, the provision of substantial tax incentives is not necessary."
At first, it might seem a brave decision for the super industry to want a tax on lump-sum withdrawals, or a cynical soul might suggest it is self-interest at work for the big super funds wanting to keep their hands on individuals' savings and thus continue to clip a bigger ticket. ASFA argues it is necessary to encourage individuals not to run down their retirement savings.
"The primary purpose of superannuation is to provide financial security in retirement. This purpose is not currently being achieved with any certainty as there are many potential leakages that are a cost to the system's integrity and the taxation concessions provided," it states.
ASFA says the leakages include both using superannuation benefits too slowly for estate planning purposes and using them too quickly. In the latter case, the result is having insufficient protection against the financial consequences of living a long time or longer than most other people.
The paper summarises the demographic case for continuing to try to improve the superannuation system, including: the ratio of workers to retirees today is five to one, but it's projected to be just 2.7 to one in 2050; the percentage of Australians aged over 65 rises from 13 per cent today to 22 per cent; the life expectancy of men and women today is 86 and 89 respectively but that will be 91 and 93 in 2050; the cost of healthcare as a percentage of gross domestic product will rise from 4 per cent today to 7.1 per cent in 2050, and the cost of the age pension rises from 2.7 per cent to 3.9 per cent.