For as long as it’s been around, superannuation has been viewed as a golden fiscal nest egg and targeted by governments past and present. With super’s objective on the verge of being enshrined in law, this debate could present the chance to finally break its ties to the federal budget and short-term fiscal policies. Krystine Lumanta reports.
Before every budget rolls around, there’s a high expectation from both the financial services industry and the Australian public the government will fiddle with superannuation policy. This has created a cloud of uncertainty over the national pool of savings in super, which has surpassed the $2 trillion mark. Further, the short-termism it has created means super policy and tax settings have not been regarded with the same long-term view approach that it essentially necessitates.
One of the greatest threats to superannuation is the constant tinkering and change, which undermines the Australian public’s confidence in the system and its policies.
Prior to the federal budget, Treasurer Scott Morrison flagged changes to super in the form of tax concession amendments.
This raises the question whether setting an objective for super will take the politics out of it.
Monash University finance professor Deborah Ralston explains if superannuation’s objectives are defined clearly, then all parties will know what the system is targeting.
“If you define those objectives well, then you know what your KPIs (key performance indicators) are and your ability to have a good impact is greatly enhanced,” Ralston said during a panel session on super at the SMSF Association 2016 National Conference in Adelaide in February.
“Then the population understands what you’re [aiming] for, so you can rebuild trust because it’s more transparent.”
The experts agree superannuation needs to be its own lever.
Linking super to the IGR
SMSF Association head of policy Jordan George recommends an appropriate way to make super policy decisions may be to link it to something like the Intergenerational Report (IGR), which is published every five years.
“So every five years you can have a stocktake: stop and have a look at how the system’s been performing, [and ask] do we need to tweak it and does it need adjusting? Yes? Okay, let’s do that now,” George proposed at the conference.
“It’s not used for revenue. It’s not used to fill holes in the budget.
“Super is a tax construct, let’s be honest, so it’s always going to be tweaked.”
He says super is always going to be of interest to the government, but taking it out of the budget cycle is crucial to the future of the system.
“It could really achieve some stability, and people can have a lot more certainty and confidence in their retirement planning,” he says.
Commenting on the idea of linking super to the IGR, Board of Taxation chair Michael Andrew says “You’ve put me in a difficult position because I know what they’re going to do.
“But what I will say is that we do have to look at this as part of a comprehensive retirement incomes policy and it’s not just super changes, there are other changes to personal income tax which also would impact the situation.
“You’ll find out in due time and I think you’ll find there’s quite a bit in there as it’s one area where they’ve done a lot of work. But we need to find a better model by which we can actually determine where we’re going and how we get there at the end of the day.”
However, Argyle Lawyers managing principal Peter Bobbin recommends holding the line before completely severing super from politics.
“The truth is that the visionary design of our current super industry depended on ‘selling out the old of today in favour of providing for the future’,” Bobbin explains.
“This future matures in 2032 when the first people begin to retire having ‘enjoyed’ compulsory super throughout their working career.”
That maturity is only 15 years away, he says.
“Are we brave enough to take super off the political agenda for the future of Australians?” he says.
“Linking super policy to something like the IGR is a fine idea if the real reason is to mask the intention of taking super off the political agenda.”
What else can be done
Beyond superannuation’s detachment as a fiscal lever, Ralston also suggests finding a way to make the system more progressive, for example, tax contributions progressively, as it was clearly lacking in the system.
“We’ve got a weird taxing situation now,” she says.
“Ideally, and in many countries around the world, it’s about minimising tax on the input to encourage people to invest, minimising tax on the way through because you don’t want to stop the cumulative effect of maximising balances and then tax on the way out. That is by far the most normal way to do things.
“Having said that, it’s not where we’re starting from so we have to work with what we’ve got.”
She indicated the aspect most distinctive about the system now after 20 years is the huge variation in the outcomes for individuals.
“We need to spread that more evenly across the board,” she says.
“To do that we probably need to look at how we make it more progressive and really look at the coverage quite frankly.”
Another way to protect super to ensure Australians have an adequate retirement nest egg is to establish an independent body.
This concept is backed by Quantum Financial director Claire Mackay.
“You may not enjoy reading this, but just like the tinkering of the tax system, I don’t think the tinkering of superannuation can be stopped,” Mackay says.
“So one idea is the appointment of a council of experts to advise the government on policy settings for superannuation.
“Those with a keen political memory may remember a Labor Party policy from the 2013 election, which they lost to the Abbott government, for a similar Council of Superannuation Custodians to assess superannuation’s success against an agreed charter.
“If we took the politics out of it, the politicians may agree to this type of minimal approach as ultimate decision-making power would still reside in their hands. However, they would also get the benefit of expert advice and a pre-agreed charter.”
George notes while an independent statutory body running super policy may be appealing, a bit like how the Reserve Bank of Australia sets interest rates, the SMSF Association does not believe it is realistic.
Bobbin, on the other hand, suggests multi-party commitment as an alternative that should keep super off the short-term agenda.
“This might buy three government terms, which will take us to 2025, very close to the 2032 date of maturity,” he says, adding the industry may not be doing enough to voice its frustrations about short-term super policy changes.
“But the industry lives off change. So is it genuine in its thirst for stability or is it just tired of change?”
Better investment of super
Another idea that could minimise super tinkering is to take a preventative approach to tax increases, such that the retirement savings pool is used for investments to stimulate the Australian economy. This in turn would have a dual benefit of bringing in possibly greater revenue and lessens the need to increase super taxes. Investment in major projects has garnered strong support from industry bodies and participants, particularly for domestic infrastructure.
Bobbin concedes the more things change, the more things stay the same.
“This strategy of directing super investments was the foundation for the original 70 per cent, now 5 per cent, in-house asset standard,” he explains.
“Where did this come from? It was because of the requirement in the 1970s that super funds had to invest in government bonds, it was the 30/20 rule.
It was 30 per cent in government bonds with 20 per cent being in commonwealth bonds.”
He adds superannuation investment stimulus already exists.
“Super funds are encouraged via the tax and franking credit rebate system to invest in Australian tax-paying companies,” he says.
“I am not averse to super being used for economic and social benefit, just do this via attractive options, not compulsory rules.”
Mackay warns if super starts being regarded as a means to stimulate national economic activity, it starts to move away from its original purpose of accumulating retirement savings for Australians.
“If we extend superannuation’s purpose, we start to create conflicts and dilute its effectiveness, in my opinion,” she says.
“I think superannuants are rightly focused on growing their super savings in the most effective way possible to create their dream lifestyle in retirement.
“I think they’d prefer it if politicians used levers other than their retirement savings to stimulate economic activity.”
Furthermore, if the industry made such moves it could appear a little self-serving, she cautions.
“If superannuants themselves spontaneously decided en masse to push such a policy development, it could work, I suppose, but I just can’t see it happening,” she says.