Hands up, who knows the point of super?
For the first time, the government wants to carve the “primary objective” of superannuation into legislation expected to go to parliament shortly.
It is likely you missed this in the Coalition’s recent torrid internal debate on superannuation reforms to wind back generous tax concessions.
According to the draft exposure legislation: “The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.”
David Murray of the financial systems inquiry came up with this definition in his report. The Coalition backed it in. Labor agrees with having an objective but is tiptoeing around enunciating its own objective thus far.
Superannuation associations and the finance industry are supportive of enshrining an objective in the bill but think it needs to acknowledge the aim is not just to supplement the pension but to provide an “adequate” level of retirement income.
But what is adequate to you might not be adequate to me. Therein lies the rub.
What’s the big deal?
This definition is being fought over because it will set the parameters for superannuation policy into the future.
The Coalition says it will provide stability to the system and measure whether policies are meeting the objective. But, in political terms, this yardstick can also be the blunt instrument with which to beat government.
With a broad objective, for example, opponents of any reform may argue that tax concessions are, variously, too generous or too stingy, depending on their point of view.
While the Coalition party room has agreed on the wider policy to put to parliament, the argument outside the building is about its scope as government considers an ageing population.
A recent Grattan Institute report outlined its importance in dollar terms.
“If the objective of super is to provide retirement income to substitute for or supplement the age pension, then the system should avoid supporting those whose wealth makes them unlikely to receive even a part age pension,” the authors wrote.
“Yet current superannuation tax breaks often go well beyond this purpose and their costs are unsustainable. The tax breaks reduce income tax collections by more than $25bn a year.
“More than half the benefits flow to the wealthiest 20% of households who already have enough resources to fund their own retirement, and whose savings choices aren’t affected much by tax rates. The current system is expensive and unfair.”
Dignity and comfort
Matt Linden of Industry Super Australia, which represents about 5.5m workers or about half Australia’s workforce, favours enshrining a reference to a living standard outcome into the objective.
For example, superannuation could be “to enable all Australians to live a dignified and comfortable retirement by providing income to supplement or substitute the pension”.
“The objective needs to be given some meaning and a stronger vision as to what the community expects the system to deliver,” Linden says.
“The system was established to deliver more than the age pension alone could provide and certainly sufficient income for older Australians to meet their living costs and enjoy some activities that keep them healthy, active and engaged with their families and communities.
“After a lifetime working this is not too much to expect and certainly something a country like ours should be able to deliver.
Super as a social goal
The Association of Superannuation Funds of Australia’s interim chief executive, Jim Minto, says while the current objective recognises the superannuation system must provide income to retirees in conjunction with the aged pension, it is silent on the social goal of super.
“Achieving a comfortable standard of living in retirement is the aspiration of all Australians and the objective should support that aspiration,” Minto said.
“We believe it must also articulate the social goal of the system to maximise the number of Australians living in comfort and dignity in retirement.
“These are the key elements currently missing and they are essential to ensure the superannuation system delivers on its promise to members.”
The SMSF Owners’ Alliance believes the objective should be tied to pre-retirement lifestyle. That is, that people should be given the opportunity to fund “an income in retirement that allows them to maintain to a reasonable degree their living standard after retirement”.
So whether the objective is to achieve a “dignified and comfortable” or a proportion of your working-life income, how much is enough? Is “dignified and comfortable” income just a tad above a pension rates? Or is “dignified and comfortable” living on a proportion of your former income, whether you are a banker or a bus driver?
A retirement standard for a standard retirement
As nebulous as it sounds, there are “accepted” industry standards measured by ASFA that benchmarks a budget for both a modest or a comfortable retirement lifestyle, assuming retirees own their own home outright and are relatively healthy.
“A modest retirement lifestyle is considered better than the age pension but still only able to afford fairly basic activities,” ASFA advises.
“A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment and domestic and occasionally international holiday travel.”
The ASFA website advices the budget needed for a healthy 65-year-old with a “modest” lifestyle is $23,767 for singles and $34,216 for couples. For those on a “comfortable” lifestyle, the budget required is $43,062 for singles and $59,160 for couples.
Is that adequate?
Superannuation moves on
All of these questions are currently before the government after a very short nine-day consultation period on the objective of superannuation. In the meantime, I received a comment on a superannuation story which had a common complaint.
“Income tax was introduced in this country on the promise that, if common people paid it, the government would look after them when their working life ended – a liveable pension,” the writer said.
“Now, this fundamental concept is being eroded away, so that by the time our kids retire they will have paid taxes all their lives and not get ONE PENNY back from a drastically shrunken government that is no longer of or even for the people.”
While it is still a deeply held view in older generations, some suggest it stemmed from the postwar period where a tax surcharge was hypothecated for the National Welfare Fund, designed to provide aged pensions, unemployment benefits and other payments. Eventually the fund was rolled into general government payments and the levy was absorbed into income tax rates. But the view remains.
The purpose of changing the superannuation objective is to change that view and rewrite the expectations to consider the aged pension a safety net rather than an entitlement. As benign as the objective sounds, it will frame superannuation policy into the future and that is why it is worth watching.
