Submission by Save Our Super in response to Retirement Income Review Consultation Paper – November 2019
by Terrence O’Brien, Jack Hammond, Jim Bonham and Sean Corbett
10 January 2020
- 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 last decade.
- 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), QC is 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.