‘Comfortable’ Super Threatens Adequate Outcomes

By Patricia PascuzzoMoney Is Tight

Industry insistence on the inclusion in proposed legislation of a “comfortable” income target for superannuation is putting at risk the need to establish clarity about the goal for super and could lower the living standards of working families.

Acting on the recommendations of the Murray inquiry into the financial system, the federal government has prepared draft legislation to enshrine the purpose of super as ‘to provide income in retirement to substitute or supplement the Age Pension’.

However, the Opposition plans to push for the postponement of the bill as the super industry seeks to include in the definition a ‘comfortable’ income target, as defined by the industry published standards for retirement adequacy.

By doing so, the industry is in effect asking the government to continue to underpin its growth and impose ongoing pressure on the federal budget by increasing the superannuation contribution rate (currently at 9.5%) to meet this target.

However, there is strong evidence that increasing the contribution rate, say to 15% as some are calling for, in order to meet a comfortable income target for most people in retirement would not be in the best interest of most super members or the broader public.

Firstly, research reveals that even for those on relatively high incomes (2.5 times average earnings), the mandated savings as currently legislated are insufficient to achieve industry’s ‘comfortable’ living standard of $43,000 per annum for a single retiree and $59,000 for a couple.

Secondly, a “comfortable” living standard target for everyone would require many people to sacrifice current consumption. Low-income people with dependent children and with more pressing immediate needs would face an intolerable burden.

More realistically, compulsory super should support retirement income for the majority of people at a level higher than the age pension but less than pre-retirement income, recognising that expenses are also likely to be lower in retirement.

In fact, research suggests a 12% contribution rate would be adequate for a large proportion of those on below-median earnings to achieve an income of 65% of pre-retirement income (a commonly used benchmark internationally).

Based on this benchmark, people on disposable incomes of less than $44,000 (the majority) could realistically aim for retirement income of about $29,000. That is above the age pension and broadly in line with industry standard “modest lifestyle” standards ($24K for singles and $34K for couples).

The superannuation guarantee, introduced in 1992, increased to 9.5% of the ordinary time earnings of employees from 2014/15. The government currently plans to increase it by 0.5% each year from July 1, 2018 to July 1, 2022, at which time it would be 12%.

Increasing the mandated rate when employment is weak and incomes are growing only slowly would reduce disposable incomes and increase costs to the budget indirectly via the tax advantages involved.  Historically, super increases came from wage increases and played an important role in addressing inflation growth.

Any further increases need to be graduated, subject to contributors’ net income still growing in real terms and also to total labour costs (including both wages and super contributions) growing no faster in real terms than national productivity increases.

So the government is right to resist locking itself into mandating higher contributions by including reference to the comfortable retirement income standard in the objective for super.  Instead, an appropriate benchmark for adequacy should be determined after consultation with industry, community and consumer groups before being prescribed as a subsidiary objective in regulation.

While the industry is justified in setting aspirational objectives for itself and its members, the legislation setting an objective for super is not the place for audacious goals that lock governments into putting retirement income provision ahead of other important policy aims.

Enshrining super’s purpose will guide policy development by requiring future bills to be compatible with the stated objective.  Such bills need to take into account a complex web of factors relevant to public policy. These include macroeconomic consequences and equity implications.

Rather than increasing compulsory contributions, our policy focus should be on making the most efficient use of existing and new superannuation savings at currently legislated contribution rates.

This includes the more effective translation of super balances into sustainable incomes throughout retirement and the interaction with policy settings around housing and aged care to improve retirement income adequacy.

Patricia Pascuzzo is the Executive Director and Founder of the Committee for Sustainable Retirement Incomes. A version of this article was published in the Australian Financial Review on 22 November 2016.

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