Protecting retirement savings protects the economy

In particular there has been a suggestion that the tax treatment of interest on bank deposits be brought into line with the tax on returns to superannuation. Any change to the tax treatment of superannuation relative to other forms of savings puts at risk the retirement incomes of Australians, the pool of savings that sustained Australia through the global financial crisis and the Government’s five-point plan to reduce pressure on prices and interest rates. Earnings from superannuation funds are currently concessionally taxed at 15 per cent. There are dual policy reasons for superannuation to be concessionally taxed. Superannuation allows people to save towards becoming selffunded retirees which reduces the dependence on the age pension and ultimately reduces the burden on the Commonwealth Budget.

In the 1995-96 Budget which announced increasing compulsory superannuation, the-then Treasurer Ralph Willis stated: “One of the principal objectives of this Budget is to meet the medium-term imperative of improving national saving to maintain investment and employment . . . “The goal is better retirement incomes for Australians. The commitment, simultaneously established, is to substantially increase the nation’s savings.” Australia’s low level of savings has been identified as a concern for the Australian economy by the Government and the International Monetary Fund (IMF). The Prime Minister identified increasing savings as one of the five points to reduce inflation. Australia’s current account deficit is 4.5 per cent of GDP, the 10th largest in the OECD.

In addition to having insufficient savings overall, Australia is facing a superannuation savings gap of $695 billion. That is, if Australians are to have a retirement equivalent to 62.5 per cent of their final income they each need to save an additional $73,000. (Source: Rice Warner Actuarties Savings Gap Report ) Since Australia has low levels of domestic savings it must draw on savings from other countries to fund investment. Over the past two decades, this has not been a problem since credit could be readily sourced from international markets. However, over the past two years this situation has changed as Ken Henry points out: “The global financial crisis serves as a reminder that countries like Australia with high rates of domestic investment cannot take for granted that it will always be financed by a perfectly elastic supply of foreign saving to supplement domestic savings.

The level of domestic savings matters.” Changing the relative tax treatment of interest on bank deposits compared to superannuation will have a significant impact on Australia’s retirement savings as it will reduce the incentive for Australians to save for their retirement through superannuation. Rather there will be a greater incentive for Australians to put their savings into short-term deposits. The tax-preferred status of superannuation returns gives Australians an incentive to save for their retirement. In a world where other types of interest income receive similar tax treatment there will be less incentive to save for retirement with a number of results. In addition, the pools of funds Australian companies have to draw on to finance investment, as they did during the GFC, may be lower.