Set clear aims for super
Australian Financial Review 29 April 2015
After almost a quarter of century of superannuation, it is disappointing that the purpose of superannuation isn’t clear. It is our signature policy response to an ageing population.
Given the confusion, it is time to define the purpose of superannuation.
Clear objectives for the super system would build a broad understanding that superannuation is not for housing, estate planning or a honey pot for governments with short term fiscal problems.
The second day of the Australian Financial Review's Banking and Wealth Summit provides a platform for this debate.
David Murray put this issue on the table during his recent review of the financial system.
In bemoaning the lack of clear objectives, the inquiry stated: “The superannuation system does not have a consistent set of policies that work towards common objectives… clearly defining the objectives of the superannuation system is a prerequisite to achieving the objectives efficiently.”
Parliament should now seize the Murray recommendation to: “enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives over the long term.”
This elegant recommendation should result in legislating two primary objectives of the superannuation system.
Firstly, super must provide a higher standard of living to Australians in retirement than the age pension.
Secondly, the privately funded savings pool must significantly reduce public sector costs of an ageing population through lower social security outlays.
The first is reasonably straightforward and can be measured by how much Australians have to retire on in their super account compared to the age pension.
The second can only be measured on an intergenerational basis by considering contribution rates, system maturity, calibration of the super and social security systems and a range of public sector financial outcomes.
Although Australia moved ahead of most OECD nations to implement super in 1992, the contribution rate is not yet high enough to provide fully-funded retirement incomes. At 9.5 percent, the rate is lagging behind the 15% required over a working lifetime to get the majority of Australians to a privately funded retirement.
While super has begun to reduce age pension outlays by $5.7 billion in 2013-14, it can further reduce age pension costs through calibrated super and pension systems.
A dollar saved in super should be a reduced pension outlay.
Current settings have not made this clear.
Despite having super to maximise private savings, the social security system provides generous part pension carrots.
The unstated objectives of the super system are undermined by generosity elsewhere.
Similarly, super access age is too low at age 60. The gap between age pension eligibility (65 and increasing to 67) and access to superannuation (60) must close.
Two hundred billion dollars in savings would be achieved for each year the super access age increases.
But before we make major changes, we must define the objectives of the super system.
This should occur before any super tax changes are considered in Tax White Paper.
We should remember the bipartisan commitment to leave superannuation alone before the last election was a reaction to constant tinkering.
Both major parties recognised that we must maintain confidence if people are to save for retirement. We will need people to save more as our tax base shrinks and ageing costs increase.
As the Intergenerational Report showed, without reform, we will drift into permanent budget deficits of up to 122 per cent of GDP by 2055.
This structural deficit will only worsen if we reduce private savings and fail to address ageing costs. That is why we must define the purpose and objectives of superannuation, which can heavily reduce intergenerational fiscal pressures.