Retirement Income Policy Division
Parkes ACT 2600
Save Our Super submission:
Consumer Advocacy Body for Superannuation
Save Our Super
has recently prepared an extensive Submission to the Retirement Income Review
dealing in part with the many ‘consumer’ issues triggered by the structure of
retirement income policy and the frequent and complex legislative change to
That Submission was lodged with the Review’s Treasury Secretariat on 10 January 2020 and a copy is attached to the e-mail forwarding this letter. It serves as an example of the analysis of super and retirement policy and of the advocacy that superannuation fund members, both savers and retirees, can contribute. Its four authors’ backgrounds show the wide range of experience that can be useful in the consumer advocacy role.
We note both the
policy and the advocacy consultations are running simultaneously, exemplifying
the pressures Government legislative activity places on meaningful consumer
input. Consumer representation is
necessarily more reliant on volunteer and part-time contributions than the work
of industry and union lobbyists and the juggernaut of government legislative
and administrative initiatives.
breadth, complexity and fundamentally important nature of the issues raised for
the Retirement Income Review by its Consultation Paper, we have prioritised our
submission to that Review over the issues raised by the idea of a Consumer
Advocacy Body. This letter serves as a
brief submission and as a ‘place holder’ for Save Our Super’s interest in the
consumer advocacy issues.
The idea of a
consumer advocacy body is worthwhile in trying to improve member information,
engagement and voice in superannuation and in the formation of better, more
stable and more trustworthy retirement income policy. It should help
government to understand the perspectives of superannuation members.
“Functions and outcomes: What core
functions and outcomes do you consider could be delivered by the advocacy body?
What additional functions and outcomes could also be considered? What functions
would the advocacy body provide that are not currently available?”
Consult with superannuation fund members on their concerns, including issues of legal and regulatory complexity, frequent legislative change and legislative risk which has become destructive of trust in superannuation and its rule-making.
Commission or perform research arising from consultations and reporting of member concerns.
Tap perspectives of all superannuation users, whether young, mid-career, or near-retirement savers, as well as of part- or fully self-funded retirees.
Publish reporting of savers’ concerns to Government, at least twice-yearly and in advance of annual budget cycles.
Contribute an impact statement – as envisaged in the lapsed Superannuation (Objectives) Bill – of the effects of changes to any legislation (not just super legislation) on retirement income (interpreted broadly to include the assets, net income and general well-being of retirees, now and in the future).
The advocacy body should:
take a long-term view, and could be made the authority to administer, review or critique the essential modelling referred to in Save Our Super’s submission to the Retirement Income Review. Ideally, the Consumer Advocacy Body should have the freedom to commission Treasury to conduct such modelling, and/or to use any other capable body.
give appropriate representation and support to SMSFs, and be prepared to advocate for them against the interests of large APRA-regulated funds when necessary.
advocate specifically for the very large number of people with quite small superannuation accounts, when their interests are different from those of people with relatively large balances.
The biggest risk to the advocacy body in our view is
that it would over time be hijacked by special interest groups, or hobbled by
its terms of reference. Careful thought
in its establishment, key staffing choices and strong political support would
be helpful to protect against these risks.
Membership of the Body should be part-time, funded essentially per diem and with cost reimbursement only for participation in the information gathering and consumer advocacy processes. A small part-time secretariat could be provided from resources in, say, PM&C or Treasury.
Membership opportunities should be advertised.
Membership of the Body should be strictly limited to individuals or entities that exist purely to advocate for the interests of superannuation fund members. (This would include any cooperative representation of Self-Managed Superannuation Funds.) We would counsel against allowing membership to industry entities which might purport to advocate on behalf of their superannuation fund members, but might also inject perspectives that favour their own commercial interests.
Membership should include individuals with membership in (on the one hand) commercial or industry super funds and (on the other hand) Self-Managed Superannuation Funds. We see no need to ensure equal representation of commercial and industry funds, though we would be wary if representation was only of those in industry funds or only commercial funds.
We offer no view at this stage on whether the Superannuation Consumers Centre would be a useful anchor for a new role, but we would suggest avoiding duplication.
Functions not currently available
asks what functions the Consumer Advocacy Body for Superannuation could perform
that are not presently being performed. SOS’s
submission to the Retirement Income Review and earlier submissions on the
changes to retirement income policy that took effect in 2017 shows the range of
superannuation members’ advocacy concerns that are not at present being met.
to establish consultation arrangements for superannuation members appear to us
to have focussed mostly on the disengagement and limited financial literacy of
some superannuation fund members.
Correctives to those concerns have heretofore looked to financial
literacy education and better access to higher quality financial advice.
Clearly such measures have their place.
But in the view
of Save Our Super, these problems arise in larger part from the complexity and
rapid change of superannuation and Age Pension laws, and in the nature of the
Superannuation Guarantee Charge. Nothing predicts disengagement by customers
and underperformance and overcharging by suppliers more assuredly than
government compulsion to consume a product that would not otherwise be bought
because it is too complex to understand, too often changed and widely
There needs to
be more consumer policy advocacy aimed at getting the policies right, simple,
clear and stable, as was attempted in the 2006 – 2007 Simplified Super reforms.
In the time
available, we offer no views on questions 2,3 and 4, which are more for
The Review’s Terms of Reference seek a fact base on
how the retirement income system is working.
This is a vital quest. Such
information, founded on publication of long-term modelling extending over the
decades over which policy has its cumulative effect, has disappeared over the
Not coincidentally, retirement income policy has suffered from recent failures to set clear objectives in a long-term framework of rising personal incomes, demographic ageing, lengthening life expectancy at retirement age, weak overall national saving, low household and company saving and a persistent tendency to government dissaving.
A new statement of retirement income policy objectives should be:
to facilitate rising real retirement incomes for all;
to encourage higher savings in superannuation so progressively more of the age-qualified can self-fund retirement at higher living standards than provided by the Age Pension;
to thus reduce the proportion of the age-qualified receiving the Age Pension, improving its sustainability as a safety net and reducing its tax burden on the diminishing proportion of the population of working age; and
to contribute in net terms to raising national saving, as lifetime saving for self-funded retirement progressively displaces tax-funded recurrent expenditures on the Age Pension.
With the actuarial value of the Age Pension to a homeowning couple now well over $1 million, self-funding a higher retirement living standard than the Age Pension will require large saving balances at retirement. It is unclear that political parties accept this. It seems to Save Our Super that politicians champion the objective of more self-funded retirees and fewer dependent on the Age Pension but seem dubious about allowing the means to that objective.
Save Our Super highlights fragmentary evidence from the private sector suggesting retirement income policies to 2017 were generating a surprisingly strong growth in self-funded retirement, reducing spending on the Age Pension as a share of GDP, and (prima facie) raising living standards in retirement (Table 1). (Anyone who becomes a self-funded retiree can be assumed to be better off than if they had rearranged their affairs to receive the Age Pension.) Sustainability of the retirement system for both retirees and working age taxpayers funding the Age Pension seemed to be strengthening. These apparent trends are little known, have not been officially explained, and deserve the Review’s close attention in establishing a fact base.
Retirement policy should be evaluated in a social cost-benefit framework, in which the benefits include any contraction over time in the proportion of the age-eligible receiving the Age Pension, any corresponding rise in the proportion enjoying a higher self-funded retirement living standard of their choice, and any rise in net national savings; while the costs include a realistic estimate of any superannuation ‘tax expenditures’ (this often used term is placed in quotes because it is generally misleading – see subsequent discussion) that reduce the direct expenditures on the Age Pension. Such a framework was developed and applied in the 1990s but has since fallen into disuse.
Policy changes that took effect in 2017 have suffered from a lack of enumeration of the long-term net economic and fiscal impacts on retirement income trends. They also damaged confidence in the retirement rules, and the rules for changing those rules. Extraordinarily, many people trying to manage their retirement have found legislative risk in recent years to be a greater problem than investment risk. Save Our Super believes the Government should re-commit to the grandfathering practices of the preceding quarter century to rebuild the confidence essential for long-term saving under the restrictions of the superannuation system.
Views on whether retirement policy is fair and sustainable differ widely, in large part because the only official analysis that has been sustained is so-called ‘tax expenditure’ estimates using a subjective hypothetical ‘comprehensive income tax’ benchmark that has never had democratic support.
This prevailing ‘tax expenditure’ measure is unfit for purpose. It is conceptually indefensible; it produces wildly unrealistic estimates of hypothetical revenue forgone from superannuation (now said to be $37 billion for 2018-19 and rising); and it presents an imaginary gross cost outside the sensible cost-benefit framework used in the past. It also presents (including, regrettably, in the Review’s Consultation Paper) an imaginary one-off effect as though it could be a recurrent flow similar to the actual recurrent expenditures on the Age Pension.
An alternative Treasury superannuation ‘tax expenditure’ estimate, more defensible because it has the desirable characteristic of not discriminating against saving or supressing work effort, is based on an expenditure tax benchmark. It estimates annual revenue forgone of $7 billion, steady over time, not $37 billion rising strongly.
Additional to the four evaluative criteria proposed in the Consultation Paper, Save Our Super recommends a fifth: personal choice and accountability. Over the 70-year horizon of individuals’ commitments to retirement saving, personal circumstances differ widely. As saving rates rise, encouraging substantial individual choice of saving profiles to achieve preferred retirement living standards is desirable.
We also restate a core proposition perhaps unusual to the modern ear: personal saving is good. The consumption that is forgone in order to save is not just money; it is real resources that are made available to others with higher immediate demands for consumption or investment. Saving and the investment it finances are the foundation for rising living standards. Those concerned at the possibility of inequality arising from more saving should address the issue directly by presenting arguments for more redistribution, not by hobbling saving.
While retirement income ‘adequacy’ is a sensible criterion for considering the Age Pension, ‘adequacy’ makes no sense as a policy guide to either compulsory or voluntary superannuation contributions towards self-funded retirement. Adequacy of self-funded retirement income is properly a matter for individuals’ preferences and saving choices.
The task for superannuation policy in the broader retirement income structure is not to achieve some centrally-approved ‘adequate’ self-funded retirement income, however prescribed. It is to roughly offset the government’s systemic disincentives to saving from welfare spending and income taxing. Once government has struck a reasonable, stable and sustainable tax structure from that perspective, citizens should be entitled to save what they like, at any stage of life.
The Super Guarantee Charge’s optimum future level is a matter for practical marginal analysis rather than ideology. Would raising it by a percentage point add more to benefits (higher savings balances at retirement for self-funded retirees) than to costs (e.g. reduced incomes over a working lifetime, more burden on young workers, or on poor workers who may not save enough to retire on more than the Age Pension)?
The coherence of the Age Pension and superannuation arrangements is less than ideal. Very high effective marginal tax rates on saving arise from the increased Age Pension assets test taper rate, with the result that many retirees are trapped in a retirement strategy built on a substantial part Age Pension. Save Our Super also identifies six problem areas where inconsistent indexation practices of superannuation and Age Pension parameters compound through time to reduce super savings and retirement benefits relative to average earnings. These problems reduce confidence in the stability of the system and should be fixed.
Our analysis points to policy choices that would give more Australians ‘skin in the game’ of patient saving and long term investing for a well performing Australian economy. Those policies would yield rising living standards for all, both those of working age and retirees. Such policies would give more personal choice over the lifetime profile of saving and retirement living standards; fewer cases where compulsory savings violate individual needs, and more engaged personal oversight of a more competitive and efficient superannuation industry.
Terrence O’Brien is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His senior positions have also included several years in the Office of National Assessments, as resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and as First Assistant Commissioner at the Productivity Commission.
Jack Hammond LLB (Hons), QCis Save Our Super’s founder. He was a Victorian barrister for more than three decades. He is now retired from the Victorian Bar. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne.
Jim Bonham (BSc (Sydney), PhD (Qld), Dip Corp Mgt, FRACI) is a retired scientist (physical chemistry). His career spanned 7 years as an academic followed by 25 years in the pulp and paper industry, where he managed scientific research and the development of new products and processes. He has been retired for 14 years has run an SMSF for 17 years.
Sean Corbett has over 25 years’ experience in the superannuation industry, with a particular specialisation in retirement income products. He has been employed as overall product manager at Connelly Temple (the second provider of allocated pensions in Australia) as well as product manager for annuities at both Colonial Life and Challenger Life. He has a commerce degree from the University of Queensland and an honours degree and a master’s degree in economics from Cambridge University.
The complexity of superannuation and the age pension conceals at least 6 time-bombs – slowly evolving automatic changes to the detriment of retirees – caused by inconsistent indexation: Division 293 tax, currently only for high income earners, will become mainstream.Shrinking of the transfer balance cap relative to the average wage (which is a measure of community living standards) will reduce the relative value of allocated pensions.Shrinking of the transfer balance cap, relative to wages, will increase taxation on superannuation in retirement. Prohibiting non-concessional contributions when the total superannuation balance exceeds the transfer balance cap will constrict superannuation balances more over time.The age pension will become less accessible, as the upper asset threshold shrinks relative to wages.Part age pensions, for a given value of assets relative to wages, will reduce.
The Terms of Reference of the Review of the Retirement Income System require it to establish a fact base of the current retirement income system that will improve understanding of its operations and outcomes.
Important goals are to achieve adequate
retirement incomes, fiscal sustainability and appropriate incentive for
self-provision. The Retirement Income System Review will identify:
“how the retirement income system
supports Australians in retirement;”
“the role of each pillar [the
means-tested age pension, compulsory superannuation and voluntary savings,
including home ownership] in supporting Australians through retirement;”
“distributional impacts across the
population over time; and”
“the impact of current policy
settings on public finances.”
“Only long-term modelling can show which measures are
likely to have the best payoffs in greatest retirement income improvements at
least budget cost. Choice of which measures to develop further are matters for
judgement, balancing the possible downside that extensive policy change outside
a superannuation charter may only further damage trust in retirement income
policy setting and in Government credibility. “
expands on that point, by presenting the results of straightforward but
informative modelling which shows how the age pension, superannuation and
voluntary savings (including home ownership) operate and interact –
particularly over extended time periods.
medium to long term, this inappropriate indexation will result in higher
taxation, reduced age pension and superannuation for many people and a
generally worse retirement outcome. If
this is the deliberate intent of the government, it should be declared. Otherwise the problem should be corrected.
indexation issues are the retiree time-bombs. The Review must come to grips with them, whether
or not they are intentional, and they are the focus of this paper.
3 The importance of the average wage
of superannuation on an individual typically extends from the first job,
through retirement to death; or perhaps even further until the death of a
partner or another dependent. For many,
the age pension provides critical income through all or part of their
formal analysis of retirement funding often must extend over many decades,
making suitable indexation an extremely important matter.
age pension is indexed to the Consumer Price Index (CPI) or the Pensioner and
Beneficiary Living Cost Index, or to Male Total Average Weekly Earnings (MTAWE)
if that is higher, which it usually is.
In May 2019 MTAWE was $1,475.60 per week or approximately $76,730 per
of indexing is intended to allow retirees receiving a full age pension to
maintain their living standard relative to that of the general community –
MTAWE being taken as an indicator of that standard – and it is critical to the
design of the full age pension.
This is a modelling exercise, not a prediction, so the precise value of
wages growth assumed in this paper is not particularly important – use of a
somewhat different figure would only change details, not the big picture – but
the distinction between CPI growth and wages growth is important, the latter
usually being higher.
293 tax has the effect of increasing the superannuation contributions tax for
high income earners. The details don’t
matter here, as we are only concerned with the threshold: $300,000 when the tax
was introduced in 2012, subsequently reduced to $250,000 in 2017.
period the average wage has been rising steadily, which means the reach of this
tax is extending further and further down the income distribution. Eventually, if the threshold is not
increased, it must reach the average wage, by which time Division 293 will have
become a mainstream tax.
Fig 1 shows
the actual and projected values (in nominal dollars) of the tax threshold and
of the average wage. The two are
projected to be roughly equal within about 30 years.
If Labor had been successful in the 2019 election, the Division 293 threshold would have been further reduced to $200,000 so that, barring further changes, it would have been equal to the average wage in about 25 years.
Fig 2 shows the same data replotted by dividing the Division 293 threshold for each year by the average wage for that year and expressing the result as a percentage. Expressing data relative to the average wage in each year, as in Fig 2, is often an informative way to show long term trends.
If the Division
293 threshold remains unchanged in nominal dollars, it will continue to
decrease relative to the average wage, and so a greater percentage of taxpayers
will be caught each year. They will find
their after-tax superannuation contributions, and hence their balance at
retirement, will decrease as will their subsequent retirement income from
reduce the effectiveness of superannuation as a long-term savings
mechanism. People’s confidence in
superannuation will be eroded, as it thus becomes less effective.
index the Division 293 threshold to wages growth (which would confine its effect
to the same small percentage of high wage earners in future years) is taxation
by stealth and makes it the 1st time-bomb.
simple solution is for the government to commit to indexing the Division 293
threshold in line with wages growth.
5 The transfer balance cap
5.1 The value of allocated pensions
transfer balance cap, currently $1.6 million, is the maximum amount with which
one can start a tax-free allocated pension in retirement. Any additional superannuation money must either
be withdrawn or left in an accumulation account where taxable income is taxed
Division 293 threshold the transfer balance cap is indexed, but it is indexed to
CPI inflation (assumed to be 2% in this paper) rather than to wages (3.2%), and
adjustments are only made in $100,000 increments.
the transfer balance cap to CPI means that over time the starting value of an
allocated pension account will become lower relative to the average wage,
because the latter rises faster.
illustrated in Fig 3, where projected values of MTAWE are shown in orange; and
the minimum (5%) allocated pension drawn by someone starting retirement at age
65-74, with an allocated pension account balance equal to the transfer balance
cap, is shown in blue.
Despite the fact that the minimum allocated pension payment amount
increases every couple of years, the average wage increases faster.
following table shows some of the data behind Fig 3, for someone age 65 to 74
retiring in 2019, compared to retirement in 2050:
Transfer Balance Cap
Allocated Pension (AP)
This is a
big drop in relative living standard for superannuants: 104% of MTAWE in 2019 down
to 71% in 2050.
This degradation, relative to community living standards, of the allocated pension provided by the transfer balance cap is the 2nd time-bomb for the transfer balance cap.
5.2 Taxing super in retirement
Because the transfer balance cap will grow more slowly than wages, one expects that in the future an increasing proportion of a retiree’s superannuation will be held in taxable accumulation accounts rather than in tax-free allocated pension accounts.
This is another instance of taxation by stealth. It is the 3rd time-bomb.
5.3 Non-concessional contributions
contributions (from post-income-tax money) are currently limited to $100,000
per annum. That limit is indexed to
wages growth, like the $25,000 limit on concessional (pre-tax) contributions.
non-concessional contributions are only permitted when the total superannuation
balance is less than the transfer balance cap which, as we have seen, is
indexed to CPI. The effect of this
indexation mismatch is that the ability to make non-concessional contributions
will automatically shrink, relative to wages and living standards, in the
future. Those who rely on substantial
non-concessional contributions late in their working life will be particularly
This is the
6 The age pension
6.1 Basic structure
pension is indisputably complicated, and a brief review may be helpful.
pension for a member of a couple is lower than for a single person.
pension is reduced by the application of tests on assets and incomes –
whichever test gives the greater reduction is the one that applies.
reduce the age pension by $78 per annum per thousand dollars’ worth of assets
(often expressed as $3 per fortnight per $1,000) above a threshold.
frequent claims to the contrary, including on the Human Services website quoted
above, the retiree’s home is assessed by the asset test.
is achieved by applying an asset test threshold which is lower for homeowners
than for renters (currently by $210,500 for singles), but the effect is exactly
the same as using the renter threshold and treating the home as a non-financial
asset worth $210,500 – indexed to CPI.
of how the process is defined mathematically, claiming that the home is not
assessed is simply false.
reduces the age pension by 50 cents per dollar of income earned above a
threshold, except that
The first $7,800 per annum of
employment income is not counted
Income from financial assets (bank
accounts, shares, superannuation accounts etc) is deemed to be 1%, for asset
value below a threshold, and 3% above that; then the deemed income is used in
the income test.
age pension, for singles or members of a couple, is usually indexed to MTAWE as
discussed previously. Every other
relevant figure (the income test deeming threshold, the asset test threshold,
the assumed value of the home – or, equivalently, the homeowner’s asset
threshold) is indexed to CPI.
Apart from the home, the most significant asset which pensioners own is likely to be their financial assets, so a convenient way to describe the age pension graphically is to plot the value of the pension against the value of financial assets – as shown in Fig 4 for a single renter and for a homeowner, with no significant assets or income other than the financial assets.
Additional non-financial assets would shift the asset-test-controlled region further to the left. Additional income lowers the income-test-controlled part of the curve. For example, in Fig 5, each person is assumed to earn $20,000 per year.
as Fig 4 allow visualisation of the complex behaviour of the age pension, which
can otherwise be very confusing. For
example, a quick glance at Fig 4 shows that for the case considered, owning a
home will reduce the age pension by nearly $20,000 per year for a single age
pensioner with around $600,000 worth of financial assets but the effect is far
less with $400,000 worth of assets.
also show the steep asset-test-controlled region, where the age pension
decreases at a rate of 7.8% ($78 per annum per $1,000 of assets), which tends
to overwhelm the increase in actual earnings from the assets. Although it is a major problem in itself it
will not be discussed in detail here, in the interest of brevity.
6.2 The age pension time bombs
Figs 4 and
5 give snapshots at a particular point in time.
To examine the behaviour of the age pension over extended periods, however,
it is best to relate asset values and income to the average wage.
done in Fig 6 which shows the projected curves over the next 4 decades for a
single renter, with no other assets, and in Fig 7 for a member of a homeowner
couple. Note that each curve is
calculated using the projected average wage for that year.
Except for part of the full age pension area of the curves, where they all overlap because the age pension is indexed to wages growth, the curves show a steady trend towards lower age pension for a given financial asset base.
Because only the full pension is indexed to wages growth and other parameters are indexed to CPI, it is mathematically inevitable that the structure of the system will automatically change slowly over time. Relative to living standards, as indicated by the average wage:
Part age pensions will become harder
to get, as the upper asset threshold shrinks.
Part age pensions for a given value
of financial assets will reduce.
the 5th and 6th time-bombs.
What we are
seeing here is universal: if different components of the system are indexed in
different ways, the structure of the system will automatically change over time
– even if the age pension is radically restructured.
6.3 A case study: effects of indexation on the individual retiree.
obvious in Figs 6 and 7 that someone beginning retirement in future years will
receive less age pension for a given value of assets, when both are expressed
relative to the average wage. i.e. to community living standards.
Fig 7 shows
how the 5th and 6th time-bombs work for a
specific case: a single homeowner who retires at age 67 with 8 times MTAWE
($614,000 in 2019) in an allocated pension account, from which only the
age-based minimum is withdrawn, and who has no other income or assets.
are shown, for retirement in 2019, 2030, 2040 or 2050.
The allocated pension is assumed to be invested in a “balanced” fund returning 4.8% nominal, less 0.5% investment fees (these values are taken from the ASIC Money Smart superannuation calculator, neglecting the small administration fee).
is assumed that the retiree in each case starts with 8 times MTAWE in the
allocated pension account, both the account balance and the minimum withdrawal,
as a percentage of MTAWE only depend on age.
Thus, there is only one line for allocated pension income in Fig 8. It falls fairly steadily as capital is
depleted in the account.
asset value falls, the retiree eventually becomes entitled to a part age
pension. Starting in 2019, this retiree
would begin getting a part age pension within a couple of years. The retiree starting in 2050 would have to
wait a few years longer.
Thereafter, the later retiree always gets a lower age pension, relative to MTAWE. The full age pension – which each of these retirees approaches in their early 90s – is, however, constant as a percentage of MTAWE as already discussed.
for the different treatment of full and part age pensioners is that the full
pension is indexed to wages growth, while most of the factors controlling the
part age pension are indexed to CPI. If
Fig 8 is reworked for a different set of assumptions (for initial balance,
investment returns and withdrawal rate), the detailed shapes of the curve will
alter, but the general conclusions will be unaffected.
solution is to index all parameters to wages growth, and then all the curves
for part age pensions in Fig 8 will be the same and the system will be stable
stands, the part age pension is designed to slowly become harder to get, and
less generous (for a given asset value relative to living standards) – another
demonstration of the 5th and 6th time-bombs.
based on relatively straightforward spreadsheet modelling, has exposed a number
of time-bombs in the structure of superannuation and age pension. These time-bombs are not particularly
obvious, but they have the effect of surreptitiously increasing taxation,
decreasing superannuation pensions and making the age pension harder to get and
less generous. This will reduce the
prosperity of retirees and hence of the country as a whole.
all have their origin in failing to index all parameters in the same way. The natural choice for an index is wages
growth, because that is directly related to living standards, but if some other
index is used it is still important that it be used consistently throughout the
system to maintain stability.
Even if the
superannuation and age pension schemes are radically altered, it remains
important to index all relevant parameters in the same way. Otherwise these time-bombs will be
8 Disarming the time-bombs
of the Retirement Income System panel is scheduled to produce a
consultation paper in November 2019.
time-bombs discussed in this paper merit consideration because they touch
directly on so many of the issues flagged in the Terms of Reference: “adequate
retirement incomes”, “appropriate incentives for self-provision”, “improve
understanding”, “outcomes”, “the role of each pillar”, “distributional impact …
over time” and, most importantly, “establish a fact base”.
Identification of these time bombs is a contribution to the establishment of a fact base on retirement incomes. Fortunately, the time bombs can be disarmed by regularising indexation throughout the superannuation and age pension systems.
BY TERRENCE O’BRIEN AND JACK HAMMOND on behalf of themselves and Save Our Super
28 June 2019
When more individuals save for self-funded retirement above Age Pension levels, their savings contribute funds and real resources for reallocation through the financial sector to fund investments. Such an economy will be more dynamic and efficient than one which relies more on incentive-deadening taxes for redistribution through the Age Pension.
Save Our Super suggestions for Review of Retirement Income System
Save Our Super offers the following preliminary ideas for the Review of the Retirement Income System. We regard such a review as highly desirable and potentially path-breaking if well directed, but fraught with dangers for the Government and threatened with futility if not properly handled.
1. Embed a clear statement of Government retirement income objectives in the Review’s Terms of Reference
The Superannuation (Objective ) Bill 2016 attempted to legislate an objective for superannuation, as if that would somehow guide future governments’ detailed regulatory and tax decisions for superannuation. It did not identify the objective for the Age Pension, nor explain how the two elements ought to interact in the overall retirement income system.
The effort to define objectives is much better set in the broader retirement income framework now envisaged.
Saving is a contested issue of philosophical vision.
To most Australians, saving is the process by which those prepared to delay gratification and consumption make real resources available to those with an immediate need for them. Savings are not just a pile of money that Scrooges sit over and count. From the dawn of history, when families saved some of autumn’s grain to provide seed for next spring’s planting, saving in every culture has been the means by which living standards have grown and the next generation has been given more opportunities than their parents.
Saving funds investment. In the modern economy, it provides both the finance and, indirectly, the real resources that are allocated through capital markets to the businesses or loans that produce the biggest increase in the community’s living standards. If Australian investment cannot be financed by Australian saving (either by households, companies or governments running budget surpluses), it has to be financed by borrowing from foreigners or accepting direct foreign investment in Australian projects.
Viewed against that backdrop, household saving is good. Raising household savings, just like eliminating government budget deficits (ie stopping government dis-saving), reduces Australian reliance on selling off assets to foreigners or contracting foreign borrowing. People should be able to save as much as they wish, ideally in a stable government spending, taxation and regulatory structure that does not penalise savings or distort choice among forms of saving.In such an ideal framework, they should be allowed to save for retirement, for gifts, for endowments, for bequests or for any purpose for which they choose to forgo consumption.
Specific tax treatment of long term saving (such as capital gains tax, and tax treatment of the home and superannuation) is necessary to reduce the discouragement to saving from government social expenditures and from levying income tax at rising marginal rates on the nominal returns on saving. But critics regard such specific treatment as ‘concessions’ to be reduced or eliminated. They want to limit what saving can occur, and tax what does occur. Critics think of private saving not as the foundation of investment, but as the wellspring of privilege and intergenerational inequity.
We suggest the Terms of Reference for the Review should in its preamble set the Government’s practical and philosophical aspirations for household saving and the retirement income system. We suggest the preamble to the Terms of Reference should highlight:
The retirement income system as a whole should aim to ensure that as the community gets richer, retirees should through their own saving efforts over a working lifetime, both contribute to and share in those rising community living standards.
The Age Pension should be focussed as a safety net for those unable to provide for themselves in retirement because of inadequate periods in the workforce or otherwise limited earnings and saving opportunities.
As the population ages, superannuation saving for retirement is likely to be a growing part of the national savings effort. Buoyant growth in superannuation finances investment and lending, and helps support rising living standards. (Conversely, a rising dependence on the Age Pension would spell only a higher tax burden).
The design of the retirement income system must be:
set on the basis of published, contestable modelling; and
evaluated for the long term, namely, the 40 or so years over which lifetime savings build, and the 30 or so years in which retirees can aspire to enjoy whatever living standards they have saved for.
The Age Pension and superannuation systems and the stock of retirement savings should be protected as far as practicable by grandfathering assurances against capricious adverse changes in future policy. Such changes create uncertainty and destroy trust in saving and self-provision for retirement.
2. Avoid policy prescription of savings targets or permissible retirement income standards
Some commentators have proposed the idea of a ‘soft ceiling’ on levels of retirement income saving acceptable to policy. That approach derives a level of acceptable retirement income by working backwards from the observed historical pattern of retirees’ spending, which declines with age, especially after age 80. According to those views, the fact that some retirees continue to save even after retirement is regarded as a sign of policy failure and excessively generous tax treatment (rather than of recently rising asset values). Saving is treated, in effect, as allowable to those of working age, but to be discouraged beyond a certain point, and prevented for retirees. According to this analysis, we already have “more than enough” money in retirement.
The Grattan Institute suggests a savings target such that all but the top 20 per cent of workers in the earnings distribution achieve a retirement income of 70 per cent of their pre-retirement income over the last five years of their working lives. For those in the top 10 per cent of the earnings distribution, a replacement rate of 50-60 per cent of pre-retirement earnings is “deemed appropriate”. (Approved retirement income for the second decile is not specified.)
The Terms of Reference should make it clear that the Government does not support such ideas. It should emphasise it regards saving for retirement as beneficial to the community, and does not wish to limit it by arbitrary targets.
3. Prevent another ‘Mediscare’
Possible changes to the Age Pension, its means tests, compulsory superannuation contributions, superannuation taxation or regulation will be inevitably contested.
There is now zero public trust in the stability and predictability of retirement income policy. That results from the reversal, in 2017, of Age Pension and superannuation policies which, after extensive research and consultation, were introduced as recently as 2007. In addition, public trust has been eroded by the 2019 Labor election platform to make wide-ranging increases in taxes on long-term savings (that is, the Capital Gains Tax, franking credit and negative gearing proposals).
No other area of policy has more complex interactions and regulations from policy changes than the retirement income field. Complexity is such that legions of financial planners specialise in advice on the interaction of income tax, superannuation, the Age Pension and aged care arrangements.
No other area of policy takes longer lead times (40-plus years) to produce the full effect of policy change, and has the capacity to impose irrecoverable losses in living standards on vulnerable people that they can do nothing to manage or avoid. People, late in their working career or those already retired, are rightly extremely cautious about policy-induced reductions in retirement living standards they have long saved towards. It is easy for political opportunists to exploit that caution.
No review of policy will get to first base if it can be misrepresented by political opponents as creating uncertainty, destroying lifetime saving plans or retirement living standards. Given recent experience, many voters are understandably receptive to a fear campaign of misrepresentation, including those forced to make compulsory savings throughout their working life; those dependent on the full or part Age Pension; wholly or partially self-funded retirees; and indeed all those presently retired, close to retirement, or those who have responded lawfully to legislated incentives to save as previous governments intended. If aroused to uncertainty, these groups can destroy a government.
Many of the changes that would usefully be addressed by a review of retirement income policy are potentially political third rail issues if poorly handled. To take just one example, consider how the family home is treated under the Age Pension asset test and in the structure of Age Pension payments. Think tanks of the left and right alike have recommended that treatment be changed to take more account of wealth in the family home. Without insurance against ‘Mediscare’-type attacks, a potentially important avenue of reform would instantly be used as a scare. Government would have to either instantly rule out any change (compromising the review) or watch the reform exercise die while still suffering the political fallout as ‘the party that wants to tax your home’.
So even sensible proposed changes in policy would be discounted as untrustworthy, disruptive and unlikely to endure without careful protections. No assurance by any political party that “it is not intending to make any change” will be believed for a minute. However, these problems are avoidable with the good management sketched below.
4. Disarm scaremongering by an absolute, up-front guarantee of grandfathering
The simple, tried and proven way to disarm the ‘Mediscare’ tactic and ensure an open, constructive and intelligent Review is to make an upfront, unconditional guarantee: the Review of retirement income will be instructed to avoid any recommendations which would significantly adversely affect anybody who has made lawful savings for retirement, and who is presently retired, or too close to retirement to make offsetting changes to their life savings plans.
That grandfathering guarantee should be absolute and unconditional, referring to the use of similar practices in Australia’s history of superannuation changes from the Asprey report in 1975 through to 2010. The force of any guarantee would be increased if the Government now grandfathered some or all of the 2017 measures initially introduced without grandfathering, in the manner discussed below.
Such unconditional grandfathering would not destroy the retirement income, economic or fiscal benefits of undertaking reform. The very reason that retirement income policy changes take a long time to have their full effect is a good reason for starting policy change early, grandfathering those who made their retirement income savings under earlier rules to ensure implementation of the reforms, and letting the benefits of reform build slowly over time.
5. Propose means to rebuild and preserve confidence and trust in future consideration of retirement income policy changes
Recent policy design efforts have tried to encourage new superannuation products, such as those to address longevity risk. But such effort, necessarily focussed on the distant future of individuals’ retirements, is futile if no one trusts superannuation and Age Pension rule-making any more. If savers cannot trust the Government from 2007 to 2017, or even from February 2016 to May 2016, why should they trust the taxation or regulation of products affecting their retirement living standards 40 years in the future?
To restore the credibility of any changes emerging from the Review, the terms of reference should encourage renewed examination of ideas such as the superannuation charter recommended by the Jeremy Cooper Charter Group, or possible constitutional protection of long term savings and key parameters of the retirement income system.
6. Rebuild credible public, contestable, long-term modelling of the effects of change on retirement incomes
Retirement incomes are the result of complex and slowly developing interrelationships between demographic change, growing community incomes, rising savings, government budget developments, and Age Pension and superannuation policies. Formal, published, long-term modelling of these relationships is an essential tool to understand the impact of demographic change and of policy settings. Formal modelling facilitates public understanding and meaningful consultation, and helps build support for future retirement income reform. Such public modelling was integral to the development of the Simplified Superannuation package in 2006, implemented from 1 July 2007, but was lacking from the 2017 reversal of those reforms.
In about 2012, the Commonwealth Treasury stopped publishing long-term modelling in this field with the last of its published forecasts using the RIMGROUP cohort model. The then-projected impacts on the Age Pension through to 2049 from the Super Guarantee measures of 1992 and the Simplified Superannuation reforms of 2007 were for a large decline in uptake of the full Age Pension accelerating from about 2010, but an increase in the uptake of part Age Pensions. There was projected to be only a small rise in the proportion of those age-eligible for the Age Pension who were fully self-funded retirees (Chart One).
The reason that the projected growth in self-funded retirement was slow is instructive: people who would, on pre-2007 policies, have been eligible for a full Age Pension could only slowly build their superannuation savings in response to the 2007 changes. Some of the first cohorts reaching retirement age would have sufficiently larger superannuation savings to be ineligible for the full Age Pension, but would still be eligible for a part Age Pension. Moreover, as they aged and exhausted modest superannuation savings, they would become eligible for a full Age Pension in later life.
Chart One: Treasury’s 2012 projected changes in pension-assisted and self-financed retirement, 2007-2049
The 2017 reversals of the 2007 reforms have never been properly justified. There was no published modelling to suggest costs to the budget were higher than projected, or transition to higher self-funded retirement incomes was slower than projected. As Save Our Super warned at the time, the 1 January 2017 increased taper on the Age Pension asset test created a ‘death zone’ for retirement savings between about $400,000 and $1,050,000 for a couple who owned their home. For every extra dollar saved in that range, an effective marginal tax rate of up to 150 per cent sent the couple backward. (Similar death zones arise for other household types and single persons.)
Superannuation balances at retirement for males of $400,000 or more are common, so the practical burden of the 1 January 2017 perverse de facto tax increase could only be mitigated if a saver could quickly traverse the death zone through utilising high concessional and non-concessional contributions to accelerate late-career super savings. But then the 1 July 2017 reductions in superannuation contribution limits scotched that hope, and compounded the damage of the 1 January 2017 change.
The longer those perverse 2017 incentives are left to operate, the stronger the incentives to build a retirement strategy around limiting superannuation savings and maximising access to a (substantial) part Age Pension. That will negate the objective of the Howard/Costello reforms to defeat adverse demographic budgetary impacts by encouraging rising self-funded retirement, growth in retirement living standards and reduced use of the Age Pension.
7. Highlight accelerated success in retirement income policy
As a result of the policies that applied up to 2017, we were witnessing a remarkable evolution of Australian retirement income outcomes that is passing unnoticed, because it is poorly explained and reported, and its end-point is still decades in the future. The combined effects of the 1992 Superannuation Guarantee process and 2007’s Simplified Superannuation are beginning to strongly reduce expenditures on the Age Pension much faster than was earlier projected.
The most recent projections of retirement developments, though only for 20 years out to 2038, were published in 2018 by Michael Rice for Rice Warner actuaries: The Age Pension in the 21st Century. (Treasury had a team leader on secondment to Rice Warner’s team of actuaries for the exercise.) The current trends are remarkable in themselves, but more remarkable in contrast to previous projections of how growing superannuation savings were changing the take-up of the Age Pension only slowly.
The proportion of those age-eligible for the Age Pension who draw a part Age Pension is still rising. (That growth comes from those previously eligible for a full age pension but now partly self-financing their retirement. So there is a net saving to the budget from this trend). But the rise in the take up of the part Age Pension is not as much as earlier projected (Table 1, Panel 5).
What was originally projected to be only a very slight decline in the proportion of the age-eligible receiving any Age Pension (from 81 per cent in 2018 to 80 per cent by 2038), now looks likely to be a very large decline, to about 57 per cent (Table One, Panel 3, and Chart Two).
Table One: Rapid decline in Age Pension uptake projected to 2038
Put the other way around, the proportion of those age-eligible for the Age Pension who are instead totally self-funded retirees will have risen from some 31 per cent in 2018 to about 43 percent in 2038. This is a 12 percentage point rise in those totally self-funding, instead of the earlier projected 1 percentage point rise.
Reflecting this continuing gradual maturation of the system as it stood up to the 2017 policy reversals, spending on the Age Pension has already commenced declining as a share of GDP, instead of rising significantly as had been projected in early Intergenerational Reports. By 2038, spending on the Age Pension will be almost 2 percentage points of GDP lower than originally projected in the first Intergenerational Report in 2002.
Projections will doubtless evolve further. But the remarkable trends noted here are already surprising those working with current expenditure data. The December 2018-19 Mid-Year Economic and Fiscal Outlook noted spending on the Age Pension had been overestimated by $900 million for reasons yet to be fully understood. The shortfall seems likely to involve the trends noted here, among other factors.
Chart Two: 2018 Projected proportions of the eligible population receiving the Age Pension, by rate of Age Pension
To most, the evidence of rising living standards in retirement, more self-funding through lifetime savings, less reliance on the Age Pension, a falling share of Age Pension spending in GDP and the disarming of the demographic and fiscal time bombs identified in earlier Intergenerational Reports would look like a policy triumph.
Further to this private sector modelling, in December 2018, an FOI request led to the first fragmentary public evidence of the initial uses of a new Treasury microsimulation model, MARIA , a “Model of Australian Retirement Incomes and Assets”. The model uses advances in data and computing power since Treasury’s 1990s RIMGROUP model was built to move from cohort modelling of age and income groups to microsimulation modelling of the population. This first report indicated Age Pension dependency falling markedly. Subsequent reporting of FOI information in March 2019 adds to public information that spending on the Age Pension is now falling towards 2.5% of GDP by 2038, a remarkable 1.6 per cent of GDP lower than was projected in the Intergenerational Report of 2007, the year the Costello Simplified Super reforms were enacted.
To give a sense of scale, 1.6 per cent of 2018 GDP is about $29 billion dollars. Even if GDP grew by 1% a year to 2038 (which would be a lamentable shrinkage in per capita GDP), spending on the Age Pension would be by then about $36 billion a year lower than previously projected, apparently wholly as a result of more people saving more in superannuation than was projected in the Intergenerational Report of 2007.
On 24 June 2019, more evidence of superannuation policy success became available. Analysis by Challenger, Super is delivering for those about to retire, noted that the average newly retired Australian is not accessing the Age Pension at all. Only 45% of 66-year-olds were accessing the Age Pension at December 2018 and only 25% of them were drawing a full Age Pension. Of course, many of those might fall back on the Age Pension in later life when they exhaust their superannuation capital. Thus, if retirees are to remain wholly self-funded during their whole retirement, superannuation balances at retirement will need to keep rising. Other things being equal, 2017’s imposition of a $1.6 million cap and tax at 15% on amounts above that balance reduce the time that retirees can remain independent of the Age Pension.
Every additional person who wholly self-funds their retirement is, prima facie, achieving a better retirement living standard than they could have enjoyed by arranging their affairs to access only the Age Pension and to send the bill to working age taxpayers. This is not merely a budget success. An economy in which individuals save for retirement, contributing funds and real resources for reallocation through the financial sector to fund investments will be much more dynamic and efficient than one more dependent on the Age Pension, in which people pay incentive-deadening taxes for redistribution through the welfare system.
It is bewildering to us that the accelerated success of superannuation policy, which has helped people save for their desired retirement standard of living, is not being trumpeted from the rooftops. Instead, the facts are dribbling out without explanation and context from FOI applications. Those facts are lost against the backdrop of incessant criticism from some commentators ofMore than enough saving and excessive revenue forgone from the tax treatment of superannuation.
It is vital for protecting the Government from a repeat of the backward steps on retirement income policy in 2017, for restoring the legacy of the Howard-Costello reforms and for timely identification of sustainable future reforms, to re-establish regular published, contestable and peer reviewed modelling of how retirement income policy is working.
8. Commission initial modelling of three scenarios
We suggest Treasury should use MARIA to model three scenarios over a long-term time frame such as 2000 to 2060 to clarify the starting point for the Review of Retirement Income Policy.
Rather than study retirement income policy solely as a Commonwealth budget issue of the revenue hypothetically forgone in tax incentives for superannuation and the expenditure on the Age Pension, the modelling needs to be set in the fuller context of the Howard Government’s 2006-2007 analysis of Simplified Superannuation. Its output ought to include impacts on retirement incomes, the ‘RI’ in MARIA, not just on the budget.
As noted above, the overarching objective of policy ought be to enable higher lifetime saving and rising living standards in retirement for those in a position to save for self-funded retirement, while preserving the Age Pension as a safety net for those unable to save for a better retirement living standard. Modelling should project implications for average self-financed and Age Pension retirement incomes under each scenario, as well as for government revenues and expenditures.
a) A baseline scenario
We suggest the first scenario for long-term modelling should be the projected effects by 2060 of the continuation of Age Pension and superannuation policies as at end 2016. That would be comparable against the earlier 2012 Treasury modelling, and would show the impact of another 6 to 7 years’ data on the maturation of the Super Guarantee (including scheduled future increases) and the Simplified Superannuation reforms of 2007.
b) A current policy scenario
We suggest a second useful scenario would be to model the current policies. When the current policy scenario is compared to the baseline scenario, that would give an indication of the effect of the change in the taper rate of the Age Pension asset test, the imposition in the retirement phase of a 15% tax on earnings on superannuation balances above $1.6 million, and tighter restrictions on concessional and non-concessional contributions. Effects on individual retirement incomes, as well as comparisons of effectson government revenue and expenditure over time, should be made between the two models.
It might be objected that the behavioural responses to the 2017 changes are too recent to have shown up in data and thus too difficult to model. But to assert that we can have no estimate of the likely effect of those policy changes on retirement incomes would be in effect to concede that they should never have been proposed or implemented.
c) Future policy change scenarios
A third useful scenario could involve empirically testing policy changes the Government wanted to explore, including grandfathering the changes introduced in 2017 and summarised in Table Two.
Any mix of measures selected should cohere around the Government’s retirement income strategy, to allow those who can save to raise their retirement living standards, to protect the efficacy and affordability of the Age Pension as a safety net for those who cannot, and to ensure as many as possible are in the first group. The selection of measures must rest on the evidence of public, contestable, long-term modelling of outcomes on both retirement living standards and the government budget.
Because of these strategic and empirical imperatives, Save Our Super advocates that the grandfathering of all the measures of Table Two be enumerated and modelled, as well as the 2017 change to the means testing of the Age Pension and the impact of Superannuation Guarantee changes.
Table Two: Options for grandfathering 2017 superannuation changes
We illustrate one possible, strategically coherent path forward but without any implied prioritisation. Some potentially useful measures might:
Reduce the burden of the Superannuation Guarantee on the youngest (who have longest to fund their own preferred retirement living standards and face the highest competing demands on their early-career budgets) and the poorest (who will in any event accumulate insufficient savings over their working lifetimes to become ineligible for the Age Pension). This could involve either raising the cut-in point for the Superannuation Guarantee, halting its programmed rate increases, or both.
Against the merits of the Superannuation Guarantee must be set the cost that it forces a constant rate of saving for employees by their employers over the employees’ working lifetimes. In any event (but especially if the Government raises the Superannuation Guarantee rate), this is a particular burden on the young, those in tertiary study, those seeking to buy their first home, those establishing a family and those with low or punctuated career earnings.
One curious and little noted feature of the Superannuation Guarantee is that (broadly speaking) it applies to any employee over 18 who earns $450 gross or more a month. This extraordinarily low threshold has not been altered since the Super Guarantee was introduced at 3 per cent in 1992 – over a quarter of a century ago. At that time, the monthly $450 trigger corresponded to the then annual tax-free threshold in the income tax of $5,400. With the Superannuation Guarantee now at 9.5 per cent and scheduled to increase to 12 per cent, it is now a significant impost that falls as forgone wages on young and/or poor workers, when they have priorities of education, housing and family expenses much more pressing than commencing saving for retirement more than 40 years in the future. If the Superannuation Guarantee cut in at the monthly gross earnings equivalent to the current tax-free threshold, the trigger would now be $1517 a month, not $450 a month.
Remove the discouragement of saving from effective marginal tax rates of over 100%, encouraging saving by those who can save to escape reliance on the full Age Pension. This would require reversing the increased taper on the Age Pension asset test imposed on 1 January 2017 and reinstating the Costello reform of 2007.
Allow those who are able to save for their desired retirement standard of living, in the latter parts of their career, access to higher concessional and non-concessional superannuation contributionlimits, as shown in Table Two.
d) Strategic direction of future policy change scenario
These four classes of change have clear strategic directions: they are pro-choice, pro-personal responsibility and support rising living standards in retirement. They reduce emphasis on forced savings at a high and constant rate over the whole of working life from the earliest age and the lowest of incomes. They increase emphasis on saving at the rate chosen by individuals over their working careers in the light of their circumstances. The shift would likely result in faster late career savings after educational, family formation and mortgage commitments have been met. The shift would be pro-equity, in that it would avoid reducing the living standards of the youngest and poorest in the workforce, without ever helping many of them achieve retirement income living standards above the Age Pension. And it would reduce the constituency of voters denied growth in their own disposable incomes and supportive instead of increased government transfers to them for their early-career expenditures (such as childcare and other family benefits).
e) Budget effects of future policy change scenario
Of these four classes of change, the Superannuation Guarantee changes would raise significant revenue for the government budget, since higher incomes paid as wages would be taxed under normal income tax provisions, rather than at the lower rate for superannuation contributions. The other three measures would have a gross cost to budget revenue relative to the current measures, but would continue and likely accelerate the recent and faster-than-projected exit of retirees from dependence on the full Age Pension. That will save some future budget outlays, and it is unclear until public, contestable long-term modelling is published what the net effect on the budget would be, and its time frame.
Recall, however, that the origins of this debate were the demographic time-bomb facing Australia, and the intrinsically long-term challenge of building life-time savings for long-lived retirement. A measure that ‘breaks into the black’ even decades hence might be counted a success.
f) Retirement income effects of future policy change scenario
Whatever the net budget effects and their timing, it is clear a package such as sketched in scenario 3 will raise Australian’s retirement incomes and protect the sustainability of the Age Pension
9. Let the modelling speak
Only long-term modelling can show which measures are likely to have the best pay-offs in greatest retirement income improvements at least budget cost. Choice of which measures to develop further are matters for judgement, balancing the possible downside that extensive policy change outside a superannuation charter may only further damage trust in retirement income policy setting and in Government credibility.
Save Our Super believes that major changes to the existing rules of the Australian superannuation system should not be made unless, at the same time, appropriate grandfathering provisions are included in the legislation.
“Grandfathering provisions” are qualifying clauses within legislation which exempt those people already involved in the activity with which the legislation deals.
“Important changes to the tax rules were made in 1983, 1988, 1992, and 1996, which generally reduced the tax benefits to superannuation, although the treatment remained concessional. … Changes were generally grandfathered at each stage, so that retirees would receive benefits taxed under a variety of rules depending on when contributions were made.” (p 9); and
“Australia’s superannuation system has been subject to regular policy change since its inception (chapter 1), and those people significantly affected by major rule changes have generally been afforded grandfathering provisions that maintain their previous entitlements.” (p 101).
The historic use of appropriate grandfathering provisions to protect those who were significantly affected by major superannuation rule changes, justifies their use in the Coalition’s Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016) and Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016).
However, none of Save Our Super’s appropriate grandfathering provisions are included in those two Acts.
Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official
Any government must retain the right to change policies as circumstances change over time. Policy change always poses two questions: Is the change an improvement? And is it properly implemented? This article focusses on implementation issues, which are particularly important when changing super laws. (In an article to appear in the June 2017 edition of the SuperGuide newsletter, Jack and Terry will evaluate whether the July 2017 changes constitute an improvement.)
Since the income tax law first specified taxation of superannuation in 1915, it has always legislated taxation treatment over the contribution, accumulation and drawdown phases of this uniquely long-lived financial product. Unless the law included specification of how superannuation will be taxed on withdrawal, no one would accept the restrictions and uncertainties from long-term saving in super, even if contributions and accumulation were favourably treated.
The legally specified tax treatment affects three generations:
young workers seldom contributing more than the Super Guarantee minimum
mid-career savers maximising super contributions after managing the expenses of family formation, housing and education
retirees expecting the living standards they saved for.
Young workers are compelled through the Super Guarantee to contribute to super as soon as they first earn $450 (gross) in a month – a trigger that has never been increased since its introduction in 1992 and is now lower than the dole. Drawdown of funds is prohibited (save in limited circumstances) over a working life which can exceed 40 years, and then superannuation savings have to last a retirement which may be a further 30 years or more.
These extremely long commitments by savers make superannuation policy change particularly sensitive.
What is grandfathering, and why is it so important for retirement planning?
‘Grandfathering’ means that transitional provisions continue to apply an old rule to certain existing scenarios, or certain individuals. ‘Grandfathering’ provisions continue to apply an old rule to some existing situations while a new rule will apply to all future cases. Frequently, the grandfathering exemption is limited; it may extend for a set time, or it may be lost under certain circumstances.
A retired Treasury officer, Terrence O’Brien, had written to The Australian newspaper on 11 May 2016 about the 2016 Budget’s superannuation measures. He said:
Past increases in superannuation taxation used to be grandfathered, so as not to disadvantage those who had responded in good faith to previous incentives to save for their retirement income. Grandfathering reflected the commitments that governments encouraged or compelled workers to undertake when locking their savings away for 40 or 50 years. …
Jack contacted Terry to seek elaboration of those claims. The conversations gave rise to an article for the Centre for Independent Studies titled ‘Grandfathering super tax increases’, and a series of submissions by Save Our Super to Treasury on exposure drafts of the legislation, and to Ministers, backbenchers, and the Senate committee that examined the Bills that have now become law.
Grandfathering has been used frequently, often for the purely pragmatic reason of gaining democratic support for a change that might otherwise be defeated.
In applications such as superannuation law, grandfathering gains an important moral dimension, and a further practical dimension. Morally, it honours legal commitments governments have made to citizens and on which citizens have lawfully based their affairs, while applying the new rules prospectively to citizens who have the flexibility to adapt to them. Practically, it is ideal for addressing fiscal or demographic challenges that are developing slowly. It can permit early action to prevent a problem worsening, without reducing the living standards of current retirees.
Save Our Super submissions noted that people had lawfully saved, planned and retired on the basis of legislated super rules introduced only a decade earlier, in the Costello Simplified Superannuation System reforms of 2007. They had been encouraged into depositing funds into super under the legislation of one set of rules, only to have those rules changed to their disadvantage after placing their funds irrevocably into the super system, and indeed after retirement in many cases.
Justice Asprey on grandfathering superannuation law changes
Although contemporary politicians seem to have forgotten, grandfathering significantly adverse changes in superannuation law has a valuable 40-year history in Australia. Prime Minister Whitlam commissioned Justice Kenneth Asprey to propose tax reform through a Taxation Review Committee that reported in 1975. One important focus of Justice Asprey was exploring how to make superannuation serve retirement income objectives more effectively, with minimum disruption to life savings plans. He offered five timeless insights in Chapter 21 of the Asprey Report, officially titled the Taxation Review Committee Full Report (released on 31 January 1975):
21.9. Finally, and most importantly, it must be borne in mind that the matters with which the Committee is here dealing involve long-term commitments entered into by taxpayers on the basis of the existing taxation structure. It would be unfair to such persons if a significantly different taxation structure were to be introduced without adequate and reasonable transitional arrangements. . . .
21.61. . . . Many people, particularly those nearing retirement, have made their plans for the future on the assumption that the amounts they receive on retirement would continue to be taxed on the present basis. The legitimate expectations of such people deserve the utmost consideration. To change suddenly to a harsher basis of taxing such receipts would generate justifiable complaints that the legislation was retrospective in nature, since the amounts concerned would normally have accrued over a considerable period—possibly over the entire working life of the person concerned. . . .
21.64. There is nonetheless a limit to the extent to which concern over such retrospectivity can be allowed to influence recommendations for a fundamental change in the tax structure. Pushed to its extreme such an argument leads to a legislative straitjacket where it is impossible to make changes to any revenue law for fear of disadvantaging those who have made their plans on the basis of the existing legislation. . . .
21.81. . . . [I]t is necessary to distinguish legitimate expectations from mere hopes. A person who is one day from retirement obviously has a legitimate expectation that his retiring allowance or superannuation benefit which may have accrued over forty years or more will be accorded the present treatment. On the other hand, it is unrealistic and unnecessary to give much weight to the expectations of the twenty-year-old as to the tax treatment of his ultimate retirement benefits.
21.82. In theory the approach might be that only amounts which can be regarded as accruing after the date of the legislation should be subject to the new treatment. This would prevent radically different treatment of the man who retires one day after that date and the man who retires one day before. It would also largely remove any complaints about retroactivity in the new legislation. . . .
While there was little immediate application of the recommendations from the Asprey Report, it subsequently steered Australian tax reform for some 30 years in several key areas. When Treasurer Keating radically increased the tax on superannuation lump sum payments in 1983, he succeeded by applying the Asprey principles exactly: he ensured the ten-fold increase in tax on a lump sum benefit applied only to those dollars of the lump sum saved after the change; any savings pre-dating the change and the earnings on them continued to be taxed under the more concessional rules applying when they were saved. There have since been many other examples of the use of the Asprey grandfathering principles to adverse changes in both superannuation and the Age Pension (for details of these examples, see Terry O’Brien’s article, Grandfathering super tax increases https://www.cis.org.au/app/uploads/2016/08/32-3-obrien-terrence.pdf .
The frequent recourse to grandfathering significantly adverse policy changes, over more than 40 years, has set the reasonable expectations of citizens for how any necessary changes should be made. It is the violation of those expectations that helps explain the vociferous opposition many super savers have expressed to the Coalition Government, and to Save Our Super.
Certain July 2017 super changes are retrospective
As recently as February 2016, Treasurer Morrison seemed to understand the importance of grandfathering and the detrimental effect of retrospective changes. In his speech to the SMSF Association 2016 National Conference in February 2016, he said:
One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.
In Save Our Super’s view, the five Asprey principles remain the best practical guide to how to introduce any necessary adverse changes in superannuation law while avoiding ‘effective retrospectivity’. They should have been used for the adverse measures in the 2016 Budget (with those changes taking effect from 1 July 2017), as Save Our Super submitted at the time. Even now, they should be applied to mitigate the destruction of trust and confidence in superannuation arising from those measures.
Jack Hammond, QC, founder of Save Our Super
Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official
About the authors:
Jack Hammond: Save Our Super’s founder is Jack Hammond QC, a Victorian barrister for more than three decades. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne. During his time at the Victorian Bar, Jack became the inaugural President of the Melbourne community town planning group Save Our Suburbs.
Terrence O’Brien: Terrence O’Brien is a retired senior Commonwealth public servant. He is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His most senior positions have also included several years in the Office of National Assessments, as senior resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and at the Productivity Commission.”
For more information…
For more information about the July 2017 super changes, see the following SuperGuide articles: