One of the more sensible recommendations from David Murray’s Financial System Inquiry is to enshrine the purpose of superannuation in legislation.
Despite our compulsory super system having been around for more than 20 years, there is still no clear consensus on the key objective of super.
There is a broad understanding that super is about funding retirement, but to what extent is it meant to replace or supplement the Age Pension? What proportion of self-funded individuals versus part or full age pensioners in retirement represents success? And at what point in time should this goal be reached?
A lack of universally-recognised objectives with super has made it easy for successive governments of both persuasions to tinker. Short-term policy changes have been driven by fiscal or populist pressure on governments rather than concern about whether the system is meeting its long-term goals.
Acknowledging this in the FSI’s final report, David Murray recommended that the government seek broad agreement on a primary objective for the superannuation system, that is: To provide income in retirement to substitute or supplement the Age Pension. Murray says the government should also seek broad agreement on the secondary objectives of super to:
• Facilitate consumption smoothing over the course of an individual’s life
• Help people manage financial risks in retirement
• Be fully funded from savings
• Be invested in the best interests of superannuation fund members
• Alleviate fiscal pressures on government from the retirement income system
• Be simple and efficient, and provide safeguards
Notwithstanding the notable exclusion of the important role of super in nation-building, these secondary objectives are widely accepted. It’s the primary objective of superannuation that needs to be agreed upon and then enshrined in legislation.
A good starting point would be to re-visit the dawn of universal super in the early 1990s when the then Labor Government gave a very clear explanation of the three pillars of our retirement income system – not just what each pillar was – but also the purpose of each pillar:
• The Age Pension – to provide a minimum level of income support
• Universal, mandated superannuation – for the middle classes with a goal of a replacement rate of 70 per cent of pre-retirement incomes
• For those with the means – voluntary savings above and beyond superannuation. This was to be concessionally-taxed within a reasonable benefit limit
Arguably, these objectives – outlined by the Federal Minister John Dawkins at the 1993 Conference of Major Superannuation Funds (CMSF) – are still relevant today. But they have never been universally recognised or used as a framework for evaluating policy changes.
Had super’s long-term objectives been agreed upon at the start, we may have avoided some of the flawed policy initiatives of the past which, today, are among the key causes of Treasury’s throbbing fiscal headache. Take for example the Howard Government’s 2006 decision to make super payments – in addition to the tax on the earnings of pension products – tax-free to people aged over 60. Notwithstanding the ongoing appeal of this policy among older voters, it certainly appears to have been made with scant regard to the challenges posed by our rapidly ageing population, intergenerational tax equity issues and the long-term sustainability of our retirement income system. Indeed, this policy is routinely cited by one leading Australian economist as the worst tax policy decision in the past decade. In another example of tinkering (on a grand scale), the Howard Government introduced transitional rules allowing people to put up to $1 million into their superannuation. Some people borrowed to do just that and ended up being badly hit by the GFC.
The development of a clear agenda for super will put pressure on governments to properly evaluate the effectiveness, fairness and sustainability of proposed changes for super. As Murray notes, it will also help reorient the community mindset around superannuation, away from account balances and towards the provision of retirement incomes.
Unfortunately, Murray’s final report stops short of adopting AIST’s recommendation for the establishment of a publicly-funded independent body to assess the super system’s performance and report on super policy changes. This is something AIST will continue to push for. We believe such a body will be necessary to ensure that current and future governments are held accountable to the enshrined objectives.
As part of our contribution to the development of a superannuation framework, AIST has joined forces with Mercer to design an industry-first “super tracker”. The AIST-Mercer Super Tracker will provide an objective method for measuring the costs and benefits of the super system, including the ability to see how potential changes will affect this system. This will include the ability to track the super gender gap, overall adequacy of super, as well as the fairness of government support for the super system across various income levels.
No one can sensibly argue that our current super system should never be changed. But future policy decisions must be well-considered, evidence-based and take a long-term perspective.