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Superannuation Reform

For retirement planning advice please seek the advice of a registered professional financial adviser rather than relying on anything I write here.

All figure in this page are for 2019/2020. They will change over subsequent years.

Superannuation is an area rife for reform. It needs to be done in a comprehensive manner rather than just piecemeal plugging of holes in a system.

The original idea of the Australian superannuation system was for people to save money so they could fund their own retirements, therefore taking pressure off the aged pension system. However it seems to have morphed more and more into a tax minimisation and an inter-generational wealth transfer vehicle. It provides more favourable tax treatment for the rich than the poor - the antithesis of a progressive tax system. It allows government payments and subsidies to the moderately well off. It does not force people to use their own savings, both inside and outside superannuation system, to support themselves until their resources reduce, allowing the payment of partial government pensions even though there is still significant money in the superannuation fund or owned as other assets, or they have other significant income or savings.

Tax Discounts on Superannuation Contributions

Tax on payments into the superannuation fund and investment earnings of the fund are currently set at a flat rate of 15%. Consequently a person who earns over $180,000 pa gets a 30% discount on their tax payable compared to someone who earns $40,000 pa who only gets a 17.5% discount.

The rich that benefit more than the less well off due to these superannuation tax breaks. For example: - a person that earns $180K per annum over a 40 year career would have a contribution of about $684K in their super fund due to the "compulsory super guarantee" (taken as 9.5% for the purposes of this example). Their tax break on this money would amount to $205K. In comparison a person that earns $90K pa over a 40 year career would have a contribution of $342K in their super fund due to the guarantee and will have received a tax break of only $75K, only 37% of the high paid person. This difference will most likely be exacerbated over a person's career as the higher paid person is more likely to have the extra money to enter into "salary sacrifice" and "transition to retirement" arrangements and therefore get even greater tax breaks.

I agree with the idea of a tax discount to encourage savings and also a recognition that the money is locked up until retirement age and (for at least some level) the contribution compulsory, the discount should be similar for everyone. I suggest that the tax payable on investment and earnings in the superannuation fund should be, say, 22% less than the top marginal rate that the person pays. This means that super funds for people that earn less than $37,000 would pay no tax on monies contributed or earned. Between $37,000 and $90,000 the funds would pay 10.5% on monies contributed or earned. $90K to 180K - 15%. Over $180K - 23%. These are based on 2020 marginal tax rate figures. Still a worthwhile discount to encourage saving. This would mean that tax can only be taken from the fund once the yearly income is known. The majority of taxpayers will be better off under this arrangement. And it will be fairer.

Maximum that can be held in the Superannuation Fund

Determining the maximum that can be held in the tax advantaged superannuation fund depends on how much it is believed is necessary to fund a person's retirement. And whether this amount should be the bare minimum necessary for a "modest" lifestyle or a higher amount that will allow a more "comfortable" lifestyle.

A few figures first:
The Association of Superannuation Funds (ASF) provide two annual income figures:
(1) Modest Lifestyle (2019) - Single $27,913, Couple $40,194
(2) Comfortable Lifestyle (2019) - Single $43,789, Couple $61,786

Compare this to:
(1) the current maximum aged pension (2019) - Single - $22,169, Couple - $33,370.
(2) the current minimum wage for full-time work (2019) - $38,627.

The aged pension is lower than what the ASF considers necessary for a modest lifestyle. This means that an aged pensioner that relies solely on the government pension may struggle to have a reasonable lifestyle. In other words they should endeavour to have additional resources to help pay for their retirement - if that is at all possible. The government allows aged pensioners to earn an additional $174 per week for a single and $308 for a couple before this impacts on their pension. These additional amounts would bring the total income up to a level comparable to the ASF modest lifestyle income.

There is a basic question: what level of income should a government superannuation fund scheme, in which contributions and earnings are subject to reduced taxation, aim to provide? Too much and it is providing subsidies to those that don't need them and losing tax revenue that could be funding better services, too little and it will not be achieving its purpose.

The current maximum amount that can be saved into a person's taxed advantaged superannuation fund portfolio is $1.6 million. There is also another rule that says once the person reaches a retirement age of 67 they must take a minimum of 5% of the funds value annually. This percentage increases with age. The stated reason for this is so that the fund will be drawn down over its life rather than just accumulating wealth to be transferred to beneficiaries. The compulsory draw down percentages have been based on financial modelling of likely draw down and earnings in the fund. Of course the money withdrawn does not have to be spent - so it can just be accumulated outside of the fund instead of within it.

If a person has the maximum amount in the fund ($1.6M) at 67 then they would have to draw out $80,000. This is tax free and way above the ASF modest lifestyle income and above the comfortable lifestyle figure as well. Why is the Government offering subsides to help people achieve a superior lifestyle in retirement? The money forgone could be used to improve social support - perhaps to increase the aged pension to the "ASF modest lifestyle" level.

If we used the ASF modest lifestyle income for a single as the benchmark for what is desireable, that would suggest a maximum fund size between $800K million should be adequate. The $1.6 million maximum fund level should be halved for a single. It would be prudent to allow a higher maximum for a person that does not own their own home - so long as that does not introduce perverse outcomes - see the proposal for the Home Fund where an additional amount of $400K is proposed for accommodation security, making a total of $1.2 million in the tax subsidised environment. (This is still generous - perhaps overly so.)

Very few people would reach the $1.6 million - only the well off would achieve that level through their higher base income and salary sacrifice. Most people would not reach $800K in their super fund, so the decrease in the maximum fund level would only effect a few.

Transition to Retirement System

The superannuation system allows people who are getting to close to retirement age to access part of their superannuation to enable them to cut down on the number of hours that they work, and therefore their work based income, and to make up that loss of income by deriving an income from payments from their superannuation fund. This sounds quite laudable and it is laudable but they way it system is set up allows rorting. The rules governing superannuation means that many people, often the more well off, use it as a tax minimisation system.

The way that it works is that they get the income from the "transition to retirement" scheme from their superannuation fund. They then salary sacrifice a similar amount back into the super fund and consequently get the tax minimisation benefits of that contribution - the concessional tax rate of 15% on the funds going into the superannuation fund, instead of their normal marginal income tax rate. Again it is pure tax minimisation. Higher income earners get the most benefit and are the primary users of the scheme. It should stop. If a person sets up a transition to retirement income stream they should not then be allowed make additional concessional contributions back into the superannuation fund. Taking money out and then paying it back in purely to get tax minimisation is clearly a rort. Again it will primarily be accessed by the rich who get the greatest tax saving. The superannuation fund would still receive the compulsory super contributions from the employer - but that is all. Easy fix.

The Purpose of the Proposed Changes

The purpose of the proposed changes is not to stop the well off from having a superior lifestyle in their retirement if they want it and can afford it. They just have to save for part of it outside their superannuation fund and therefore not have their superior retirement lifestyle subsidised by the taxpayer. If they choose to spend and not save then they have to cop the lifestyle that their super fund affords them.

The purpose of the proposed changes is to make the system more evenly beneficial to all wage earners rather than significantly advantaging the rich as it does now.

An Alternative

An alternative to the private Superannuation fund for each person would for the Government - or more precisely a separate (quango) fund set up by the Government - to pay pensions to everyone over, say, 67, regardless of income or wealth. The way this would work would be that what was the superannuation guarantee payment - or a proportion of it - would be paid to the fund. The government may pay additional amounts to cover the people. The fund would then pay the pensions. It would be paid to everyone regardless of income or wealth because all taxpayers pay into the fund.

(I would still like to see the HomeFund idea implemented to iron out the inequities in the benefits of home ownership.)

The benefit over the current system is that there would be no accumulation of private wealth in a tax advantaged private superannuation fund, a proportion of which would transfer to will beneficiaries. It should be cheaper overall. The difficulty would be how to get from the current superannuation arrangement of many private funds to the new system. (Probably a voluntary opt in with transfer of private super funds or the option to stay with present system in some transition form.)

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