The government is to enshrine the objective of superannuation in legislation. What would that wording look like? TOM GARCIA, chief executive of the AIST, has a suggestion.
Imagine if an ASX-listed company was asked by its shareholders “What is your purpose?” and the response was “We are not sure”? Do you think the stock might be affected? Or the chair, board and CEO put under pressure?
We now have a new PM and a new federal Treasurer who have put super firmly back in the mix for tax reform – a move that has been broadly welcomed by many industry stakeholders, including AIST.
However, in considering super tax reform, we must first achieve a consensus on the purpose of our retirement income system. Enshrining the objective of super in legislation was, of course, a key recommendation of the Financial System Inquiry, and it was great to see the government pledge to do this last month.
It is long overdue. Legislating objectives for super will hopefully put an end to ad hoc policy tinkering and provide a robust framework with which to assess future policy proposals. It will also build on the international regard for Australia’s superannuation system.
Already, there are all sorts of ideas about what an objective for super should look like. AIST supports an objective that clearly and succinctly sets out what super is for, ensuring that it is also clear what it is not for. We do not support an objective that gets lost in the details.
Key performance indicators (such as numbers around adequacy and the level of government support), while extremely useful to track the performance of our system, could change as the years roll on and are better dealt with separately to super’s ‘mission statement’.
This is the approach taken by the European Union, which in 2012 developed a very broad objective for pension systems.
The EU definition includes the statement that pension systems are about “adequate retirement incomes for all and access to pensions which allow people to maintain, to a reasonable degree, their living standard after retirement, in the spirit of solidarity and fairness between and within generations”. The definition also notes the need for transparency, financial sustainability and makes a specific reference to the system being “well adapted to the needs and aspirations of women and men”.
The key themes are fairness, adequacy, gender equality and sustainability. Not a bad starting point for Australia.
Assuming we arrive at a clear and well-understood objective for super, we can then set to work on its KPIs. These will be equally challenging to get right.
Talking about super in the media recently, Treasurer Scott Morrison noted that it was his party’s objective to see “as many Australians as possible be self-sufficient in their retirement and we need a system that will encourage that”.
There can be no doubt that this would be a wonderful outcome. Doubtless there are very few
Australians who wouldn’t want to be self-sufficient in retirement. But, in reality, most Australians will still be reliant on at least some age pension. This will be the case even decades from now when our system is fully mature and workers (hopefully) get the benefit of a compulsory super rate of 12 per cent for a ‘working lifetime’.
As AIST outlined in our recent Busting the $1 million retirement myth paper, a person entering the workforce on median wages (around $55,000 pa) can expect to retire with about $325,000 in super (in today’s dollars). This is not enough on its own to provide self-sufficiency in retirement. And it’s hard to see how “incentives” – such as higher concessional caps above the current rates of $30,000 or $35,000 – are going to be of any real help for people earning a median income with mortgages and other living costs to contend with. And we mustn’t forget that, by definition, half the Australian population earns less than the median income.
When it comes to debating the objectives of the super system and what makes for a dignified retirement, all too often the debate centres on the aspirations and expectations of high-income earners, as opposed to what is relevant for the majority of working Australians.
Any meaningful objective and performance measurement of Australia’s retirement system must recognise that super is only part of the story. The age pension has an equally important, taxpayer-funded role to provide part or all of most Australians’ retirement income. This is how the system was designed and we need to get this message out.