What is super for? It seems strange to be addressing this question a quarter of a century after our current superannuation system was introduced.
But, as David Murray pointed out in his Financial System Inquiry (FSI) report, nowhere is the purpose of superannuation written down in legislation.
It should be because there needs to be community consensus and political agreement on the purpose of such an important, long-term economic and social function as superannuation. Hopefully this would stop, or at least reduce, the temptation for governments to fiddle with super and especially to regard it as a handy source of revenue whenever the budget is in trouble.
Murray made the point that once the objective of superannuation is enshrined in legislation, then any policy changes must be consistent with achieving the objective. Governments should have to justify any change in terms of the agreed objective. We agree.
However, we believe the FSI report fell short in its suggested definition: “To provide income in retirement to substitute or supplement the age pension.”
This sketchy statement is too limited and vague to be a meaningful guide to the evolution of the superannuation system for the long-term benefit of all Australians.
For one thing, it positions the role of super just in the context of the age pension. The age pension is only one of the three pillars of our retirement income system; the other pillars being mandatory superannuation contributions and voluntary contributions.
It implies the age pension is the primary retirement income system with the role of super just to replace or supplement it. We think these roles should be reversed. The super system should enable most people to achieve self-reliance in retirement, while the age pension is the safety net for the minority. Of course, it may take many years to achieve this given the current high degree of reliance on the age pension (70 per cent), but it should be stated as an objective to work towards.
Another shortcoming is the FSI objective doesn’t mention the word ‘saving’, yet the whole point of super is to encourage and enable people, with the assistance of tax incentives, to save for retirement.
The linkage of superannuation to the age pension in the FSI definition also implies a levelling of aspirations that does not sit well in an economic system that should encourage and reward individual self-help, hard work, savings and innovation to maximise the economic and social wellbeing of individuals, families and the nation.
Nor does the FSI objective set any broad performance target for the super system or indicate what is an adequate level of income in retirement.
In 2007, the European Union set an objective for retirement incomes as “adequate retirement incomes for all and access to pensions which allow people to maintain, to a reasonable degree, their living standard after retirement”.
This concept embodies what is known as the ‘replacement rate’, which was canvassed by Ken Henry in his landmark review of Australia’s taxation system in 2010. It is generally accepted that an adequate replacement rate is 60 per cent to 70 per cent of pre-retirement, after-tax income. Such a specific target need not be stated in the objective, but should be adopted by government.
So what does the SMSF Owners’ Alliance think the objective should be? We have offered Treasury this definition: “The primary objective of the superannuation system is to give every working Australian the opportunity and encouragement to save enough so that they can fund an income in retirement that allows them to maintain, to a reasonable degree, their living standard after retirement.”
This statement should be accompanied by a set of principles to shape superannuation policy. Among the most important of these are:
• For individuals to have confidence investing their savings in superannuation for many years, it must be stable with any changes limited and justified in terms of the objective, not retrospective nor adversely affecting those who have made retirement decisions.
• The adequacy of retirement savings must take into account the risks borne by each individual with regard to longevity, health, aged care and other unpredictable costs during retirement.
• The distribution of tax incentives must be equitable, meaning they should generally be proportional to the income taxes paid by each individual. Any tax concession that is not proportional to taxes paid represents a transfer to others, is inequitable and must be justified.
• Limits on tax incentives must apply to contributions rather than investment outcomes and provide flexibility to allow for uneven income over an individual’s working life.
We accept that getting bipartisan agreement may be difficult, but urge the government to go for a clear and robust statement of what super is about with the least political compromise.