Habitual policy tinkering, in place of systematic and holistic policy formation, is exacerbating the difficulties Australians face in planning for their retirement and is undermining public confidence in the system, writes Patricia Pascuzzo in arguing for a holistic approach.
Retirees already face significant difficulty making their super savings last as record low interest rates work against securing stable income streams. This is on top of uncertainty over equity markets and increasing longevity.
Irrespective of arguments for and against Labor’s proposal to scrap dividend imputation refunds, both sides of politics have been guilty over the years of piecemeal and destabilising changes that have dented public confidence in super.
Instead, what is needed is a comprehensive review to lock down the system in favour of the consumer, as called for by the Australian Financial Review in a recent editorial.
Building a stable and sustainable retirement income system requires we resolve once and for all the battle between those who support the purpose of super versus those who would rather see it dismantled with greater reliance placed on the age pension system. Continued struggles over this fundamental issue will only fuel instability and policy backflips.
Calls for a retirement system review came to a head in 2015 at the Committee for Sustainable Retirement Incomes (CSRI) Leadership Forum and subsequent National Reform Summit. The CSRI, a non-profit and non-aligned group, had come into being that year because of repeated government refusals to undertake a holistic review of the retirement income system.
In 2016, we convened a comprehensive review of retirement income adequacy and sustainability on behalf of those concerned that constant tinkering would continue to undermine sustainable outcomes for the community.
This review – spanning 12 months and involving 40 experts across industry, community and academia – arrived at 47 conclusions, including a package of reform measures built around these key themes:
- First, there is little justification for raising the super guarantee beyond the current 9.5% when people face higher cost-of-living pressures during their working lives that makes ‘survival first’ a household imperative. Instead of raising the rate, it makes more sense to extend the coverage of super to the ‘gig economy’ and the self-employed (an imperative highlighted by the recent Four Corners program).
- Second, the 2016 super tax package served to better target tax concessions and eliminated scope for the well-off to accrue disproportionate concessions relative to the rest of the population. While the system design is complex, the $1.6m transfer cap, coupled with rolling five-year superannuation contribution caps, broadly replicate the outcomes of an optimal tax structure over the lives of retirees. The problem now is not so much the level of concessions, but the timing of tax receipts. taxing super contributions and earnings, but not benefits, leaves future taxpayers to cover the baby boomer bulge.
- Third, the age pension assets test imposes a hefty penalty on middle income earners for putting money aside for super. Take two retirees – one with a $300,000 super balance; the other with $400,000. The latter’s lifetime retirement income will be only $35,000 higher than the former’s, despite a superior saving result.
- Fourth, the quarantining of the primary residence from the age pension means-test represents the next major hurdle for making the system more sustainable. While means-testing the family home would be politically courageous, the exemption will become increasingly difficult to justify as home ownership among retirees is projected to decline.
Missing the Point
Looking beyond the tax and transfer system, more work is needed to complete the development of superannuation from simply a savings accumulation vehicle into a system capable of providing income through all the years of retirement.
Those who see the post-retirement policy debate as being simply about selling product are missing the point. If the purpose of super is to offset an over-reliance on the age pension, we will need to build on the strengths of our fully-funded defined contribution system with outcomes similar to those of a defined benefit system.
With its holistic ethos, our review must serve as the starting point for a reform blueprint – not another political manoeuvre. By presenting a balanced package of measures, the CSRI has shown that support for fiscally sustainable reform can be made politically acceptable.
Patricia Pascuzzo is the Executive Director and Founder of the Committee for Sustainable Retirement Incomes. These issues will be considered at the CSRI Leadership Forum on 30-31 May 2018 in Canberra. (A version of this article appeared in The Australian Financial Review on March 27, 2018.)