Retirement Income Review – what next for superannuation?
The Federal Government’s recent release of the Retirement Income Review is a welcome step forward in superannuation policy development. Unlike some other recent reviews, however, this one had no recommendations.
If I was to summarise the report’s findings for a 30-second version I would conclude that:
- lower income earners are still likely to be on the age pension;
- superannuation works well for middle-income Australian workers with consistent work patterns;
- high income earners enjoy significant tax concessions (while relieving the Government of future age pension payments);
- the current system does not work well for those workers with broken work patterns; and
- more needs to be done to address gender issues.
Having commissioned such a detailed report, the temptation is, as always, to rush to solution mode. My view is that there are still policy questions that flow from this analysis that are worth further debate and consideration.
As always in this debate, no one comes to the party with clean hands, so I should state for completeness prior to posing these questions that I am a supporter of both the compulsory nature and the preservation feature of our superannuation system.
Having said that, like any system, there is always room for improvement.
The first policy question is the relationship between increases in the compulsory element of superannuation and real wages. The Superannuation Guarantee (SG) component of superannuation is deferred wages – that is, deferring the receipt of income now for forced savings that will be accessible in the future. For some, an increase in SG may mean a decrease in real wages, unless an SG increase has been negotiated in addition to an overall salary. Interestingly though, the reverse is not necessarily true. That is, not increasing the SG does not necessarily mean real wages will go up (particularly in a low inflation environment).
The second policy question is how much of current wages should be saved now to enjoy an “adequate” income stream in retirement. The first obvious problem with attempting to answer this question is that there is not necessarily any agreement of what defines what is “adequate”. At various stages of the debate, figures of 12 percent and even 15 percent have been suggested. What the Review notes is the answer to these questions depends very much on whether the retiree owns their own home and/or what their work pattern has been, that is, whether they have had significant periods of breaks from the workforce.
The third policy question is what role should tax concessions play in a compulsory system. As the report notes, tax concessions apply at all three phases of the current system – contributions, accumulation and pension phase. When Australia moved to a taxable-taxable-exempt model, it effectively brought forward the taxing point to the accumulation phase, with benefits for over 60s largely tax-free. Because tax on earnings is levied on the superannuation fund, being the relevant taxpayer, the rate of tax is by its very nature a flat rate of tax (currently 15 percent).
While tax policy would suggest that a more equitable tax setting would apply a more progressive rate scale (being a marginal rate of tax), this type of system would require benefits to once again be subject to tax. Moving from a taxable-taxable-exempt system to a taxable-exempt-taxable system would provide numerous challenges, including a funding gap for the Government.
The final policy question (of which there are many more) relates to the tax treatment of residential property and how the current tax settings encourage residential property as an investment asset. Sometimes the temptation with superannuation, being the pot of gold that it is, is to think that the solution exists within. Negative gearing, the 50 percent CGT concession and the CGT exemption for the family home are all tax policy decisions that have a significant impact on the high cost of residential housing.
All this proves is that while the facts may speak for themselves, the policy questions and solutions require deeper thought before moving to solution mode.
This first appeared in KPMG Tax Now