Aussie Super - too generous?

Mercer consulting released a report this week which concludes that:
...current tax concessions on superannuation in Australia are not generous when compared to retirement systems in eight other countries, considered to have the best pension systems in the world (Australia, Canada, Switzerland, Netherlands, Denmark,  Sweden, USA and UK).

The report may be downloaded here.

It shows:  

• after tax retirement benefits provided to Australians are lower than five of the eight countries for an individual on average earnings, with a 9% employer contribution over 40 years

• Australia is the only country that taxes employer and self-employed contributions, and it is also the only country where employees don't receive a tax deduction for contributions.  

• Australia is also one of only three countries that taxes income earned by pension and superannuation funds. The other two are Denmark and Sweden. Australia is, however, one of only two countries that does not tax retirement income.  You can read the Fairfax commentary on this here.   In Australia  contributions and earnings are reduced by taxes over a person's working life and  this has a direct impact on the final benefit received by retirees, and in many cases increases the likelihood of people receiving an age pension

• Recent changes to contribution caps leave Australia third last on this measure.

The main conclusion: whilst the Australian superannuation system benefits higher income earners the most, the design of the whole system is reliant upon all those people's taxes paid both during their working lives and on the income earned by their superannuation funds. Amendments to the system made in order to fill a budgetary hole may jeopardise the ability of the system to fund pension benefits into the future.

Super Election

Cartoon by Nicholson from "The Australian" newspaper: www.nicholsoncartoons.com.au

Be prepared for a lengthy debate about Superannuation in the lead up to September's federal election.  A government with falling revenues and big promises (Gonski education reforms, National Disability Insurance Scheme, an ever burgeoning health budget) needs to find the money to pay for the policies from somewhere. Already, we know the following:-

The ALP Government is considering proposals to make changes to the tax treatment of superannuation.

In Parliament on Monday 4 February 2013, Opposition Leader Tony Abbott called  on Prime Minister Julia Gillard to join him in ruling out any ''unexpected adverse changes'' to superannuation arrangements, ''now or in the next Parliament''.

Senator Nick Sherry (former Superannuation Minister from 2007-2009) was reported in the Australian Financial Review (6 February 2013) urging the government not to change the way it taxes super and consider other ways to raise revenue, including cuts to contributions to generous public service super.   He said the current tax treatment for super was “appropriate” though he did add that there were areas within the super system that require attention:

1. the current retirement access age for super of 60 should be raised to 67, which is what the pension access age will climb to over the next decade. (The retirement access age allows people to work part-time and draw down their super at the same time.) and
2. the government’s contribution to military super should be cut from about 28% and public sector super from 15.4% and said there was “no justification” for such a level of contribution “above the community standards”.

In response to that, Prime Minister Julia Gillard has said Labor would “never” introduce a new tax on super lump sums. Instead, the speculation now is that Cabinet's expenditure review committee is examining higher tax rates on super contributions and earnings instead, with a goal of identifying new revenue sources without targeting any one income class.  Unions have urged cabinet to target the top 10 per cent of income earners, arguing that those high earners receive one-third of the existing tax benefits. 

Commentary on the speculation abounds.  The Australian newspaper ran this editorial on 7 February:

The changes smacked of a tax grab on wealthy people motivated by the politics of envy, not considered amendments to shore up the system's long-term viability. The Henry review's recommendations on superannuation, at hand for more than three years, have been comprehensively ignored. Further curbs to superannuation tax concessions will not provide the torrents of revenue the government hopes. Savings from withdrawing tax concessions - routinely put at about $30 billion - are a mirage that assumes contributions continue even if the concessions are withdrawn. Discouraging further contributions to Australia's $1.4 trillion private savings pool will ultimately cost the government money - perhaps not the Gillard government but future governments and ultimately future taxpayers. Superannuation helps defray the long-term cost of the age pension, which at about $35bn a year is by far the largest burden on Australia's taxpayers.

On Friday 8 February the Association of Superannuation Funds of Australia warned:

decreasing incentives for individuals to put super at the forefront of their retirement planning risks creating bubbles in other sectors if investors turn to, for instance, property investments.

And further, Robert Gottliebsen wrote on Friday 8 February that the Treasury has made errors in their calculations of the actual subsidy represented in superannuation concessions which together with inflated projections of returns on investment (7%) have led the Commonwealth government to "muck up the sums", revealed by the Self Managed Superannuation Fund Owners Alliance.  Gottliebsen contends that the real concessions lie in property: "and they can't be touched".  Read it here.

What to do?

We don't yet know the specific policy nor its timing.  There is a question over whether any proposals could be legislated prior to the coming election.  

Investment managers will tell you that "governments in desperate need of revenue will always fiddle with superannuation tax concessions, irrespective of sensible calls by the industry for certainty and confidence" see the view from the Institute of Chartered Accountants.  See also our October 2012 blog post SMSFs - the less change the better.

For retirees - it's irrelevant.  For those nearing retirement it's an uncertainty.  For those aged 40 and younger it's a disincentive to participate in voluntary contributions into superannuation as participants can't have confidence in the system, its longevity and its relevance to the participant over the longer term.  However, we also know that the under 40s are not really the major contributors to superannuation because of the other life expenses such as houses, school fees and other children's expenses .  

We shall observe closely and provide updates as appropriate particularly with a view to SMSFs.