It’s interesting to read notes and articles and research that shows Australia’s pensioners “sitting on a time bomb” or that there is a shortfall in retirement savings of hundreds of billions of dollars. For what it is worth, the bulk of these appear to be a beat-up. For the morosely disinterested or even the remotely interested, they appear to be pandering to the objectives of the funds management industry more than anything else.
How can this be, you ask? Surely these incredibly well qualified and experienced folk have access to greater levels of information and data than the lesser mortals inhabiting small financial planning businesses? Surely there is a need for more money to help ensure that all Australian’s have access to a comfortable level of retirement income? Aren’t we deep in the middle of a demographic time-bomb (even if not a retirement savings time bomb), as the aging population of baby boomers move to retirement?
Let’s start this discussion by assuming that all of the above is true.
The superannuation system in Australia has evolved considerably since the revolutionary changes of the Hawke/Keating era. There is mass coverage through industrial awards and an incredibly attractive retirement income taxation position for super benefits. However, there remain issues that could be addressed to make the system even better. Some of these have been raised in the various government reviews into super and some are waiting to be enacted.
But let’s start with a simple change. There is a huge push to increase the legislated superannuation employer contribution from its current 9% to 12%. This is theoretically going to be funded by an increased tax on the mining industry. The end result will be more money going into super and higher retirement benefits for those employees. Let’s just skip over the point that this ongoing and material additional cost of labour is going to be funded from an additional tax on a temporary balance of payments spike in commodity prices (feel free to argue stronger-for-longer, commodity supply/demand imbalances etc, etc, etc – you’ve still got to show how an additional labour cost that will be indexed to inflation on a ‘forever’ basis can be permanently funded once the balance-of-payments situation reverts to its historical position). The argument raised by some is that this will benefit those on low incomes and women (who have a materially lower superannuation accumulation on average). How much does it really benefit those people, and is it really the ‘best’ option to pursue as a priority over the alternatives?
Let’s assume you are on an income of $30,000. Your super contribution by your employer will rise by $300 per year. However, at the moment there is a 15% contribution tax that is levied indescriminately, whether you earn $10,000 a year or $500,000 a year. There is a move afoot to implement a rebate of that contributions tax for all those earning less than $37,000 a year. For our example above, that rebate would provide them with $405 a year (if you want the maths, it’s $30,000 salary x 9% employer contribution x 15% contributions tax). If you want to preserve the value of such a change, simply rebate the 15% contributions tax back into the individual’s superannuation fund. There is already a system for doing this with personal contributions, so it shouldn’t be overly oppressive for the ATO and super funds to monitor and implement. Voila, we have supported the disadvantaged (women and low income workers) and minimised the cost to the employers who make hiring decisions. Admittedly this is not such a big deal in times of low unemployment such as we enjoy today but it would be an historically ignorant person who suggested that low unemployment will be an ongoing luxury.
If you want to talk on a Jeremy Bentham utilitarian approach then this would seem to be the greatest good achieved at the lowest cost, in that it provides a material benefit to those who are actually working but earning at a lower rate than the average for the country as a whole.
Why am i harping on about this point? It’s because the 3% increase in employer super obligations is a huge ask for employers. It is also likely to be traded off against pay rises over coming years (as it was in its original guise), which means that there is less room for those on low incomes to benefit from cash in hand from pay rises. This would be quite important to those on low incomes in times of rising costs (forget increases in CPI – i’m talking the basics of food, power, transport). So, it would make more sense to pursue the low cost/high return for disadvantaged option over the high cost option which has greater benefits for those on higher incomes.
It seems that our politicians, lobbyists and power-brokers often forget that Australian’s on average are amongst the wealthiest people in the world. Taking care of those less well off before padding that wealth would be a reasonable approach in good times – wouldn’t it?
Using the University of Melbourne’s Poverty Lines material, we can see that one measure of poverty suggests that a person earning a salary of $30,000 would be close to the poverty line. Australia’s tax system works to allow a person earning up to (about) $15,000 to pay no tax (because of the low income tax offset – Disclaimer: i am not an Accountant and this is not taxation advice… it’s simply a reading of the ATO website… feel free to view it or google ‘low income tax offset Australia’ of check the Taxpayer Association website). However, a person earning $10,000 who receives a payment of $900 as an employer super contribution will pay tax at 15% when the super fund does its return, costing that member $135 from their account. In other words, additional money into super for the low income currently results in more tax and a worse net result for the individual.
Of course, that is exactly the kind of information and discussion that you will NOT read in mainstream papers or online reports.