Mr Tony Shepherd, AO
The Shepherd Review
Menzies Research Centre
R G Menzies House
Cnr Blackall and Macquarie Streets BARTON ACT 2600
PO Box 6091
KINGSTON ACT 2604
Dear Mr Shepherd
Save Our Super submission on retirement income reform
We write on behalf of Save Our Super in response to the invitation in your Review Panel’s Statement of National Challenges of 27 March 2017:
The Review Panel now calls for submissions in response to the Statement of National challenges. Submissions will inform the drafting of the options papers which are due in June 2017. We seek submissions with a view to building consensus and agreement on the pivotal challenges. Submissions close on 12 May 2017. (p 1)
Our submission relates to your Panel’s forthcoming options papers 2 and 3, and the comment in the Statement of National Challenges that:
The 2015 Intergenerational Report showed even after 50 years of compulsory superannuation there is no significant reduction in the number of Australians drawing on a publicly funded pension. In 2050, some 80 per cent of Australians beyond retirement age will be entitled to the Aged Pension in full or in part. It represents almost no change to today’s call on the public pension system which costs Australia $44 billion in 2015-16. (p 11)
About Save Our Super
Save Our Super was formed in response to the Coalition Government’s superannuation tax increases and regulatory complications announced in the 2016 Budget. We have made extensive submissions on the Government’s regulatory package during its rushed consultation processes. Those submissions are available at the Save Our Super website, and the attachment to this letter draws on material from those submissions relevant to your Panel’s work.
Since the formation of SOS, the interaction of the restrictions in the 2015 Budget on the age pension asset test with the restrictions in the 2016 Budget on superannuation have become clear. Although intended to make retirement income policy less costly, the interaction will instead likely cause retirement income policy to become unsustainable. This will necessitate more policy changes which will have to be carefully designed to rebuild trust and confidence in both the age pension and superannuation.
A summary of our key points follow, with page references linking to the detailed explanation in the attachment.
- Australians expect to be able to enjoy rising living standards in retirement by building their life savings in a trustworthy and predictable system. Proposals to reduce the demographic challenges and budget costs from the retirement income system (both the age pension and the compulsory and tax-assisted superannuation system) should be designed to meet those expectations, or they will be unlikely to be politically acceptable. (p 1)
- The pension and superannuation systems modelled in the 2015 Intergenerational Report cited at p 11 of your Statement of National Challenges were essentially those implemented in 2007 as a result of the well-researched and carefully modelled Simplified Superannuation System, introduced after extensive public consultation. (p 3)
- The 2015 Budget changes in the age pension means test reversed a 2007 adjustment designed to reduce reliance on the full age pension and encourage saving that would lead to transition, over time, through partially self-funded retirement with some recourse to the part age pension to more fully self-funded retirement. (p 2)
- The 2016 Budget changes in superannuation were introduced without appropriate grandfathering provisions, without published modelling, and with extremely rushed consultation. They have consequently destroyed trust and confidence in superannuation as a uniquely long-lived, legislatively-restricted repository of lifetime savings to finance increasingly long life expectancies and periods of retirement. (p2)
- Saving in superannuation is therefore now more risky. The new rules are less credible and durable in the public eye than those they replace, and attempts to create innovative retirement income products for the distant future lack all credibility. (pp 2,3)
- The 2015 Budget’s restriction in the age pension asset test interacts, perhaps unintentionally and certainly without any official, published modelling, with the 2016 Budget’s restriction on superannuation. Jointly they create from 1 July 2017 a very wide ‘savings trap’ which significantly discourages additional saving over time for wholly self-funded retirement. The changes perversely encourage limiting superannuation savings and increasing persistent reliance on a part age pension. (pp 5,6)
- APRA data on voluntary saving in super suggest the discouragement to super contributions is already marked. (pp 10-11)
- The placement of that wide ‘savings trap’ is likely to be of great practical relevance to many mid-career superannuation savers and those nearing retirement: it falls right where many males’ super savings balances end up. (p 6)
- The prospect for wholly self-funded retirement and reduced reliance on the age pension is, therefore, now worse than in the 2015 Intergenerational Report and its modelling that you cite. Moreover the very healthy trend (not emphasised in your Statement of National Challenges) of an evolution over time from reliance on the full age pension to transitional reliance on a combination of declining part age pension with rising superannuation savings will likely halt. The new rules make it irrational to save over about $200,000 to $340,000 in superannuation, unless one can envisage saving over $1,000,000 — a vaulting ambition rendered much more difficult by the 2016 Budget’s restrictions on concessional and non-concessional contributions to superannuation. (p 8)
- There is published Treasury modelling using RIMGROUP of the long term effects of the 2007 Simplified Superannuation system showing likely trends to 2049. But there is no equivalent publicly available modelling of the net effect over time of the complex and perverse interactions of the 2015 Budget age pension means test restriction with the 2016 Budget superannuation restrictions. Future retirement income reform should require clear, publicly available modelling such as foreshadowed in the construction of Treasury’s new MARIA model. (p 5)
- The necessary urgent reforms of the misguided 2015 and 2016 Budget changes should rebuild trust and confidence in the retirement income system by using the grandfathering principles that served Australia well for the last 40 years. (p 12)
- Until trust is re-established by adopting appropriate grandfathering principles, it is futile for the Government to load new incentives on to superannuation – for example to develop deferred income products, or to encourage savings towards first home ownership. If savers cannot trust existing legislated incentives which they have lawfully followed to build their life savings but are instead abused as tax minimisers and estate planners, why should they respond to new incentives which are equally open to be altered in future with effective retrospectivity?
If you would find it useful, we are happy to meet with your Review Panel to discuss these issues further at your convenience.
Jack Hammond, QC Terrence O’Brien, B Econ (Hons), M Econ
 Save Our Super’s submissions to Treasury’s exposure drafts one, two and three of the legislation, and to the first of two inquiries by the Senate Economics Legislation Committee chronicle the absurdly rushed ‘consultation’ processes for all but the last of these five opportunities for comment.
 RIMGROUP is a cohort projection model of the Australian population, which starts with population and labour force models. The model tracks accumulation of superannuation, estimates non-superannuation savings and calculates pension payments and the generation of other retirement incomes (after taxes). Such modelling needs to be extended over decades to capture the lifetime impacts of changes in the super guarantee and changing super incentives and age pension rules.
Click here for the Save Our Super submission to the Shepherd Review dated 12 May 2017.