The 2016 federal budget has now been delivered and one of the big talking points to emerge from it is the changes to superannuation.
Among the superannuation measures included in the budget was a reduction in the concessional contributions caps from $30,000 to $25,000, the introduction of a lifetime non-concessional contributions cap of $500,000, the introduction of a $1.6 million transfer balance cap and the removal of the tax incentives for transition-to-retirement strategies. The rationale behind most of the changes, particularly the $1.6 million transfer balance cap, was to make the country’s retirement savings system more sustainable – the logic being more tax being levied on the assets held in super. It’s an interesting argument considering the debate about the ultimate effect of the tax concessions on super was never definitive either way due to less than reliable calculations.
Further justification for the $1.6 million transfer balance cap has been offered through the government’s claims the measure will only affect 4 per cent of the population. Given the average balance of an SMSF is now just over $1 million, it’s pretty obvious the type of superannuants most targeted.
These arguments are all good and well, but there is one amendment to the system that cannot be justified by either of them and that is the effect of the reduction in contributions caps as this affects every Australian participating in the country’s superannuation system.
Reducing the amount people can contribute to their super funds has direct implications for the ability of individuals to self-fund a comfortable retirement without any reliance on the age pension.
Of course, the effect of the super amendments contained in the budget can only be assessed in the here and now and not further down the track when the true results will be revealed.
By that time though the current brains trust in Canberra will be long gone and will no longer be accountable if the contributions caps reductions result in age pension dependence for the majority of Australians – a completely unsustainable set of circumstances. But then it will be too late to do any meaningful soul searching to rectify the situation.
So what price will we ultimately pay for something we are told will aid the sustainability of the system and is it really sustainable within these parameters?
Another first is the immediate nature of some of the rule changes. For example, the lifetime non-concessional contributions cap of $500,000 is effective right away and the $1.6 million transfer balance cap comes into play on 1 July 2017. This gives individuals little or no time to adjust any existing retirement savings strategies they might have in place that may now fall foul of the rules.
A good case in point would be anyone who has just invoked the three-year bring-forward rule for non-concessional contributions caps to make a contribution of $540,000. This alone would now breach the lifetime cap and need to be rectified at once.
A further point of criticism I’d have to raise is politicisation of the process. The government has just asked for submissions regarding the enshrinement of the purpose of the super system in law. Does anyone else share the view the timing of these changes is pretty convenient?
Of course, if any unwinding is needed in future years, the assumption is the purpose of super would have been legally enshrined, potentially making it more difficult to process any necessary changes.
So again I ask: what price have we paid in the name of sustainability? And I hope from an adequacy perspective the calculations used in this year’s budget are all accurate and correct.