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System outcomes assessment needed prior to SG rise

Just after the federal government was officially sworn in in early June, Treasurer Josh Frydenberg announced he intended to conduct a review of superannuation broadly in line with a recommendation of the Productivity Commission.

“Oh no, not another review of super” has been a common response. For those of us who work in this sector, it’s an understandable reaction.

But here’s what the Productivity Commission recommended late last year: “[The government] should commission an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings, distributional impacts across the population and over time, interactions between superannuation and other sources of retirement income, the impact of superannuation on public finances, and the economic and distributional impacts of the non-indexed $450 a month contributions threshold. This inquiry should be completed in advance of any increase in the superannuation guarantee rate.”

As the commission notes: “These public policy issues have not been subject to review since they were (partially) considered by the FitzGerald report on national savings in 1993.”

I’m old enough to remember when Vince FitzGerald handed his report to the then-treasurer John Dawkins. So, the last time any such similar government-initiated research was conducted was more than 25 years ago.

In other words, the parliament agreed to increase compulsory employer super from 9 per cent of ordinary time earnings to 12 per cent without actually assessing, firstly, what the superannuation guarantee has achieved (good and bad), or, secondly, determined what the impact of this increase might have on savings, take-home salary, age pension costs and so on.

As could have been predicted, there has been a long line of people arguing the review is unnecessary and we need to move to 12 per cent of ordinary time earnings as soon as possible and preferably higher, maybe to 15 per cent for all employees, regardless of income level.

The problem we have is that the outcomes of compulsory savings are anecdotal. How can we possibly assume the system ‘works’ without a national assessment that checks FitzGerald’s initial expectations?

I’m old enough to remember when Vince FitzGerald handed his report to the then-treasurer John Dawkins. So, the last time any such similar government-initiated research was conducted was more than 25 years ago.

Tony Negline

Often the level of income needed in retirement is clouded by the Association of Superannuation Funds of Australia (ASFA) Retirement Standard. The most recent data for March 2019 shows a couple needs $61,000 and a single person needs about 70 per cent of this amount each year for a comfortable home-owning retirement.

As we all know, these are theoretical numbers. They were first published in February 2004 and created by the University of NSW’s Social Policy Research Centre. Over the past 15 years, there have been some revisions to the underlying numbers to take into account changing lifestyles, for example, the use of mobile technology.

In contrast to this widely referred to data, last year the Grattan Institute published data that questioned its accuracy. This newer research referred to retirees’ actual spending patterns and showed only very high-income-earning retirees spending anything like the ASFA Standard. The institute claimed expectations of how much we think we might spend in retirement while we are working are unreliable because most of us spend quite a bit less than we initially estimated once retired. In addition, expenditure falls dramatically for all income groups once a retiree reaches age 80 and beyond.

Whose research is right? At this point in time it’s too early to say with any certainty. It is this type of research the government needs to conduct before moving forward with any policy changes.

One group that needs to be looked at is age pensioners who privately rent as many of them suffer quite significant financial hardship.

By the time you read this article, the government will have announced its response to the Productivity Commission recommendation. Hopefully any review will be sufficiently robust to consider the efficacy of legislating compulsory employer super contributions for all, including the lower paid who are forced into a savings vehicle that is not tax effective for them while they will often end up on the full age pension.

The commission also recommended that the government should review its comprehensive income products for retirement (CIPR) and the requirement that all super funds develop a retirement income covenant. In relation to CIPRs, it says the government should reassess the benefits, costs and detailed design of the products’ proposed features. We support both recommendations.

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