Just the Beginning

 The biggest changes in superannuation in a decade will help address issues of equity and sustainability, but the need for a holistic and flexible system that delivers adequate incomes for all Australians through retirement remains on the table, writes CSRI executive director Patricia Pascuzzo.

In agreeing to legislate an objective for superannuation as providing income in retirement, the federal government made the vital first step towards building a more sustainable system.

And in better targeting tax concessions to those who most need them, the government has made the necessary second step in both supporting that objective and lessening the call on the public purse.

However, the paring back of inequitable tax distortions should be just the start of reforms that increase flexibility for a changing workforce, address gender disparity and open the way to innovation in post-retirement products.

As the budget papers admit, every part of the tax system has to work together to drive prosperity. And that means the system must consider adequacy of incomes in retirement against a range of risks, both equitably and efficiently.

 

CSRI Graphic

One Step Forward

Since the start of our compulsory super system a quarter century ago, we finally have clarity that its purpose is to provide income in retirement, not as a nation-building vehicle or as a tax minimisation strategy or as an estate planning tool.

Setting the objective helps us address the other issues of improving fiscal sustainability, delivering greater fairness and equity and improving flexibility so that people with different working patterns can benefit from tax incentives.

This means we now have an objective basis against which all future policy changes can be assessed. This is significant because the system needs to evolve and change as it matures and in response to changing circumstances.

  • Lowering the income threshold for the 15% tax on concessional contributions and retaining support for low-income earners help simulate the outcome of a progressive rate scale while ensuring concessions are shared across the income scale.

  • Targeting is further improved by capping at $1.6 million the amount that can be transferred to tax-free retirement accounts. This sum could support an income stream of around four times the single age pension.

  • The introduction of the $500,000 lifetime cap for non-concessional contributions also will limit the extent to which the system can be used for tax minimisation and estate planning.

Improving Flexibility and Gender Equity

By allowing people with unused concessions to make catch-up payments, the budget seeks to increase flexibility for people with irregular work patterns, particularly women who carry most of the burden for unpaid caring roles.

While a lifetime contribution cap on concessional contributions would have provided greater flexibility, this measure provides some improvement on the inflexibility of annual caps.

The changes also increase the age limit from 60 to 75 up to which individuals can make concessional contributions, though few women or blue-collar workers would be in a position to take advantage.

As highlighted by the recent Senate Committee Report, there are no simple answers to the superannuation gender gap. A range of measures is needed if we are to make an appreciable difference to women’s security in retirement.

In the meantime, we still need measures to tackle sex and age discrimination in the workforce. And we need to reskill vulnerable groups so they can extend their working lives. That in turn should boost workforce participation and build private savings.

Making Income the Goal

Overlooked among the announcements on budget night, Treasury now proposes to remove tax impediments to products that provide pooled longevity risk. If approved, this would take effect in July 2017.

These comprehensive income products – as recommended in the Murray inquiry final report – could improve flexibility and choice for retirees and help them to better manage longevity, investment and inflation risk.

This is a complex challenge as it involves the intersection of the tax, super, age pension and age care systems.  The risk is that this complexity adds significant cost, favouring sophisticated, well-informed investors over the less financially literate with fewer resources.

So along with innovation in the retirement phase, we need to raise the financial literacy, motivation and engagement of people before they reach retirement so that they can make better and more informed decisions.

All this means that meeting the challenge of building a sustainable, equitable, efficient retirement income system that delivers adequate outcomes for all Australians through all the years of retirement is just beginning.

Patricia Pascuzzo is founder and executive director of the CSRI

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