Originally published in the Australian Financial Review on 3 May 2015.
“Australia’s visionary retirement system needs an overhaul that will return it to the spirit of its original purpose – a decent retirement for everyone”, writes CSRI executive director Patricia Pascuzzo.
The decision by the Hawke-Keating government to introduce the superannuation system, allowing the majority of workers to receive an income to supplement the age pension, was visionary. It was not led unilaterally by the government, but emerged from an extended process of engagement and consensus building.
But many critical elements of the system were far from ideal. The decision to apply tax at the contributions phase rather than only at the benefit phase was driven by the desire to bring forward revenue collections, rather than effective tax design principles.
Since that time the superannuation system has been subjected to frequent and significant changes, such as annual changes to super contribution caps. These changes have not been part of a grand design (more often than not, they have been in conflict), but rather were based on short-term budgetary or political circumstances. The frequency of the changes has created uncertainty and undermined confidence in the system.
It is very hard to sustain good policy if there is confusion about the objectives of that policy. In the case of the retirement income system there is a lack of clearly articulated goals and objectives that has contributed to a number of fundamental problems.
- Poor targeting: Whichever way you measure it, the value of super tax concessions strongly favours high-income earners. Equally concerning is the availability of part-pension payments, and associated health card in-kind entitlements, to retirees with substantial assets.
- High complexity: The superannuation tax and pension systems have evolved largely independently without sufficient consideration given to their interactions. This was less of an issue in the past when the vast majority of retirees were either subject to the pension system or the tax system but not both. With the majority of retirees now being part-rate pensioners, the interactions between the systems takes on an added significance.
- Waning community support: Most superannuation members are not highly engaged. This has been linked to low financial literacy and the difficulties of decision-making within a highly complex system. Support for the system relies on engagement, certainty and stability, all of which are lacking.
- Limited sustainability: The cost of assistance to the aged has risen by more than 50 per cent in the past decade, outstripping real GDP growth. The cost of superannuation tax expenditures is also large and rising.
- Poor longevity risk management: The system provides no incentive for lifetime annuities, so that longevity risk is left to individuals to manage, with the age pension acting as a minimum guarantee. As people live longer, there is a growing risk that they will exhaust their assets before they die, or live too frugally and (intentionally or unintentionally) leave unused superannuation savings to their estates.
The system has therefore evolved into what can be better characterised as a government-subsidised wealth generation vehicle. What we need is to refocus the system on the provision of sustainable income throughout the years of retirement.
Articulation of goals for the retirement income system which are broadly accepted, including for superannuation as recommended by the Murray Inquiry, would guide future policy development and ensure the coherence of the whole system. It would also help to counteract calls for using superannuation for other purposes – infrastructure, housing, and education – that undermine the system’s ability to fulfil its fundamental purpose.
Australia’s public policy record shows that real reform can be brought about only through broader acceptance of the need for change and agreement on essential features of a reform program.
To facilitate enduring reform, an independent platform is needed to bring together government, industry, media and community leaders to debate the issues and allow the alternative perspectives to be heard. This is the role of the CSRI.