About the author
I am a 77 years old retired health professional. I live in
the Sydney metropolitan region.
I am a beneficiary of
the superannuation component of Australia’s retirement income system.
But my children in their mid 40’s to mid 50’s will benefit minimally
or not at all.
The purpose of this post
I often read in news media someone claiming that Australia’s
superannuation scheme is a wonderful thing, a great success and a model for the
rest of the world.
I disagree very strongly with this for reasons which I will
give.
I believe that most
Australians would be better served by a scheme to properly fund the age pension
at a decent level, using a national retirement investment fund (like a larger
version of the existing Future Fund) which would be funded from a range of
revenue sources, not just a levy on income.
I am of the view that the federal government should have
done this in 1992 instead of setting up the present superannuation
scheme. In fact the government could
have begun the process of properly funding the aged pension a hundred years
ago.
The best thing
about Australia’s national retirement income system is that we have one. Many countries do not. That alone
is reason enough to give Australians a measure of satisfaction.
But our system is a long way from being the best we could
have. Any complacency we might feel about our present system is misplaced.
What are the main elements of our current retirement
income scheme ?
1. The aged pension.
2. The national compulsory tax concessional superannuation
scheme.
The purpose of a national retirement incomes scheme
I put the view that the purpose of a national retirement
income scheme is to ensure
* That people in retirement are able to have a good but not
extravagant quality of life and a decent
but not opulent living standard.
* This would involve the big three quality of life basics:
1. Sufficient reliable income to
meet reasonable cost of living expenses.
2. Security of decent quality housing.
3. Guaranteed access to high
quality health services.
A national retirement income scheme should not, I believe,
do any of the following things either by accident or design:
* Provide a vehicle for private capital gain
* Provide a vehicle for estate planning
* Operate as a tax minimisation strategy
* It should not provide a greater benefit to high income
earners who can manage well enough
without the benefit of a national scheme, than to low income earners who most need a
scheme which can ensure them a decent quality of life in retirement.
* It should not provide windfall gains for superannuation
scheme operators who set excessively high management fees.
Australia’s current retirement income scheme fails on all
counts.
It does not adequately do the things which it should do, yet
it does the things which it should not do.
Looking at each of these issues in more detail:
A majority of retired Australians rely on the aged pension
in part or whole. Our extremely expensive compulsory tax concessional superannuation
scheme does not substantially diminish the burden on taxpayers to provide
funding for the age pension.
In particular superannuation is of very little value for low
income earners and has no value at all for those who do not earn income even
though those people may make a valuable contribution to society, for instance
in a child caring or other caring role.
Our superannuation scheme works best for high income earners
(who need it least) and worst for low
income earners (who need it most).
There is nothing in our system of retirement incomes which
guarantees all citizens and residents access to decent quality housing.
People who cannot afford private health insurance are not
guaranteed access to high quality health services. We have a two tier health
system in which low income or no income earners and pensioners are relegated to
the bottom tier. They must join a queue which could be as long as two years for
treatments like elective surgery, which the privately insured can have done
next week.
The current superannuation scheme provides a vehicle for
private capital gain at public expense. This comes about because of the tax
concessions which are built into the scheme.
Funds are taxed at 15% going into a superannuation scheme.
Earnings in the accumulation phase are taxed at 15%.
Payments in pension phase if taken as an allocated pension are
not taxed at all and do not even have to be declared as income.
Residual funds in a superannuation account at death can be
directed to the beneficiaries of the estate and taxed. I have been informed by
my fund planner that the tax level is 15% although the explanation given in the
ATO information bulletin is so complicated I cannot understand it.
These tax concessions represent a huge benefit for high
income earners who would otherwise pay a higher tax rate, but hardly any for
low income earners and none for non income earners.
One analyst has estimated that as much as 60% of some
individuals’ supposedly self funded retirement is actually attributable to the
tax concessions provided by other taxpayers.
I believe this is the most egregious aspect of our current
superannuation scheme.
Three groups of people are disadvantaged by the present system.
In the first group are taxpayers who do not receive or only
benefit minimally from the tax concessions built into the superannuation
system.
Understand this: If one
group (in this case high income earners) is getting a tax benefit and a second
group (low income earners) is not getting that benefit and if the federal
government is to meet its obligations regarding program expenditures every year
then the second group is paying excess tax every year over that which they
would have to pay if the first group were not receiving the tax concession.
This means there is effectively a transfer of wealth every
year from low income earners to high income earners.
This is the exact opposite of the way a fair and just tax
system should operate.
Data from the Australian Bureau of Statistics for 2019 shows
that the top 20% of households by wealth increased their average net worth from
$1.9 million in 2004 to $3.2 million in 2018.
The lowest 20% had a net worth of $35,200 in 2018, less than
a thousand dollars more than they had in 2004.
ABS notes that the main drivers of this wealth are
superannuation accounts and the real estate market.
The second disadvantaged group includes those people who are
beneficiaries of federal government
programmes such as the aged and invalid pensions and programmes for the
disabled.
If the effect of superannuation tax concessions is to reduce
federal government revenues such that the government cannot meet its
obligations then the second cohort will be short changed and will suffer.
The third disadvantaged group are young adults in the early
years of their employment history. These people are trying to establish
themselves in housing and start a family.
But they are required to pay an extra 9.5% levy on top of
regular income tax at precisely the time in life when they can least afford to
do so.
If the amount spent each year on the aged pension could be
reduced by the amount spent on
superannuation tax concessions then there might be the basis of an argument for
those concessions.
The problem is that
a) to date the amount spent on the aged pension has not been
substantially reduced by the superannuation
tax concessions and
b) the benefit of those concessions is going to high income
earners who need them least.
Another major problem with the present superannuation scheme
is the vast sums of money directed each year to those who administer the funds.
In 2018 Australian contributors to superannuation in the
accumulation phase paid on average 1.23% of their account balance in fees for a
total of $32 billion, yes that is billion,
in account fees.
Superannuation fund managers have found themselves a lucrative
source of income, raking in excessive fees every year without providing
commensurate benefit to their contributors.
Compare this to the Future fund which manages a very good
return on investment with an annual cost of about 0.5% of funds under
management.
Superannuation funds do not compete with each other to
provide the best service at the lowest rate.
Brief historical background
When Australia became a nation in 1901 notions of “old age”
and “retirement” were not a major issue for many people.
The average life expectancy was 55 years (male) and 59 years
(female).
Many people would not live long enough to enter the realm of
old age or retirement.
By 2010 average life expectancy had increased to 79 years
(male) and 84 years (female).
In just a hundred years old age and retirement had become
a major public policy issue.
The new federal government introduced age and invalid
pensions in 1908, both funded from general revenue.
This historical detail is important because the age and
invalid pensions are still funded from general revenue despite multiple opportunities over the years
for the federal government to properly fund these major welfare payments by
specific programmes.
This is a major problem to which I will return later in this
discourse.
Workplace based superannuation schemes emerged from about
the middle of the 20th Century. But these were not transferable to
another workplace or employer and were of limited benefit to the majority of
Australian workers.
The Hawke government in the 1980s raised the profile of
superannuation with the prices and incomes accord and other measures.
However the basis for the current system of national
compulsory tax concessional superannuation was laid by the Keating government in
1992.
Since then successive governments have changed many details
as problems with the scheme have become increasingly evident,
but the basic elements remain in place.
In preparation for this post I trawled through many of the
numerous information sources online.
I looked for some form of answer to two questions:
Why was compulsory tax concessional superannuation
introduced ?
If there are or were in 1992 perceived problems with or
inadequacies of the age pension or with the way it is funded why were those
problems not identified and rectified before or instead of launching a new and
extremely complex and expensive compulsory tax concessional superannuation
scheme ?
I looked for some kind of coherent narrative by the
architects of the present superannuation scheme explaining why they thought
this was the best thing for Australians.
But here is the strange thing. The more I looked, the less I
found. Details aplenty, yes, lots of
those.
All about political battles and agreements with trade unions and
employers and percentages and accords and all manner of procedural intricacies.
But very little by way of answers to my two questions which
go to the fundamental philosophy and rationale of the present arrangements.
Mr John Dawkins, treasurer in the 36th Australian
parliament presented the Superannuation Guarantee (administration) bill on 2
April 1992.
In his second reading speech he made reference to several
issues by way of background to the bill.
The main ones appear to be:
* Prior to 1983 most people would look to the age pension as
their main source of retirement income.
* The reform of superannuation has been one of the great
achievements of the government.
* The increased self provision for retirement will permit a
higher standard of living in retirement than if we continued to rely on the age
pension alone.
* The increased self provision will also enable future
Commonwealth governments to improve the retirement conditions for those
Australians who were unable to fund adequately their own retirement incomes.
* Self provision will increase …..our national savings
overall reducing our reliance on…..foreigners to fund our development.
Some of those statements are contestable particularly in light
of the way the scheme has evolved, but
I am much more interested in what he did
not say.
He did not say what he thought was a problem with the age
pension, either for the aged or for the government.
Was the weekly amount inadequate ?
Was the source of revenue for the age pension thought to be
unsatisfactory in some way ?
Was it thought that without some “self funding” the treasury
would run out of funds ?
The problem I have is that there is little evidence of
discussion about these issues in the public record.
My proposed alternative retirement incomes scheme
The key elements of the proposed scheme are:
1. Properly fund a means tested age pension.
2. End the present compulsory tax concessional superannuation
scheme.
Funding the age pension
In the early years of the scheme funds for the age pension
would come from general revenue.
A percentage of revenue would be directed to a Commonwealth
Retirement Benefits Investment Fund each year. Over time this Investment Fund would grow and in due course the
annual income from the Fund’s investments could be used to supplement general
revenues as a source of funds for the
age pension.
Substantial taxation reform is required.
I write this in May 2020 when the need for stimulus to
Australia’s economic activity has never been higher.
I make no claim to being a tax expert but it seems to me
that there are basically three broad types of tax.
These are taxes on capital, taxes on income (personal and
business) and taxes on transactions.
Taxes on income and transactions tend to reduce economic
activity.
Taxes on capital may reduce the availability of funds for
investment but do not reduce economic
activity in the way that taxes on income and transactions do.
So it follows that a tax reform process should seek to
reduce taxes on income and transactions and increase and broaden taxes on
capital.
My suggestion is to reduce personal and business income tax,
hold the GST (a tax on transactions) unchanged and broaden capital taxes in two
ways.
These are
1. Taxing capital gains at the same rate as income. At
present only half the capital gain is taxed.
2. Introducing a progressive estate duty. This would have a threshold
and a could have a rate of 5%-25% depending on the value of the estate.
Staging
In stage 1, the government announces the new scheme and
closes all new entry into the current scheme.
Seniors in pension phase of the present scheme continue with
arrangements unchanged. Any residual
monies in the scheme at death are subject to estate duty.
Younger people in the accumulation phase of the present scheme
have the option to remain in the scheme or exit and withdraw any monies which
they have paid into the scheme minus the residual of any income tax which they
would have paid on those monies.
In stage 2, tax concessions for those remaining in the
current scheme are progressively reduced over a 20 year period.
In stage 3 all those in the current scheme will have died or
opted out.
People with discretionary funds can invest them at will.
This could include placing those funds in a voluntary, non tax concessional
retirement income scheme of the person’s choice.
Summary
I put the view that the present compulsory tax concessional national
superannuation scheme is a very bad deal for many Australians.
I present in outline an alternative proposal which I believe
will better meet the needs of most
Australians.
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