Financial System Inquiry boss David Murray might want all references to adequacy kept out of the legislative objective of superannuation, but that doesn’t mean he has given the government a free pass on the vexed issue.
In fact, the government’s special adviser on financial system integrity has voiced his preference for an almost 60 per cent increase in the rate of compulsory superannuation contributions employers are obliged to make on behalf of their workers.
Australia would have to lift the “super guarantee” from 9.5 per cent to 15 per cent to give ordinary workers a shot at retiring with an “adequate” nest egg, Murray said.
He made the comments on Monday, at an Australian Centre for Financial Studies luncheon, to launch the eighth annual Melbourne Mercer Global Pension Index (MMGPI).
In 2016 Australia maintained its ranking as the third strongest pension system in the world, but its overall index rating fell from 79.6 in 2015 to 77.9.
Mercer senior actuarial partner David Knox, lead author of the report, said this was largely due to a reduction in the net replacement rate. Last year’s federal budget to defer a planned rise in the superannuation guarantee contribution rate bore most of the blame for this decline.
Adequacy is one of the key metrics the researchers compiling the MMGPI use to compare retirement income frameworks around the world.
Tax changes get thumbs up
Speaking exclusively to Investment Magazine on the sidelines of the event, Murray said that he agreed with Knox that increasing the super guarantee was critical if Australia wants to improve the adequacy of its super $2.1 trillion super system.
However the crackdown on superannuation tax concessions available to the very wealthy, flowing from the federal budget, were a “very good start” to making the system more sustainable, Murray said.
Sustainability is another key benchmark used to calculate the MMGPI.
Knox told the crowd that Greece was a prime example of why there was little point in striving for a more generous super system if it was not financially sustainable.
Australia’s current compulsory contribution rate of 9.5 per cent is “in effect closer to 8 per cent on an after-tax basis” and “does not go anywhere near” providing a sufficient level of savings to guarantee an adequate retirement income for average workers, Murray said.
He proposed an effective after-tax rate of 11 per cent would be the bare minimum to achieve the goal of a truly adequate system.
“To get that you need a pre-tax compulsory contribution rate of 14 to 15 per cent, but I’m not sure how that can be achieved.”
However Murray stopped short of calling on the government to extend the super guarantee to 15 per cent, or even accelerate its planned rise to 12 per cent by 2020.
While a 15 per cent super guarantee rate would be the best way to bolster the adequacy of the super system, it is “highly unlikely” that this will be able to be achieved in the near to medium term, he conceded.
Fiscal and industrial constraints
“The reality is there are fiscal constraints on the government.”
Because super guarantee payments are taxed at a “concessional” rate of 15 per cent, a discount to most workers’ applicable income tax rate, lifting the compulsory employer contribution rate means less tax revenue for the federal treasury’s coffers.
Murray also acknowledged the risk that increasing the cost of labour could lead to unwanted consequences in the industrial system.
The former Commonwealth Bank of Australia chief executive and Future Fund chairman was the head of the 2014 Financial System Inquiry which, among a raft of recommendations, said the government should enshrine in legislation that the objective of the super system was “to provide for an income in retirement to substitute or supplement the age pension”.
While this may seem obvious, Murray argued it needed to be written into law to better guide future policy changes and reduce “tinkering” with the system.
The Turnbull government, with bi-partisan support from Labor, has said it will proceed with instituting the new definition for the 25-year-old super system. But this has been met with furious lobbying from all corners of the industry keen for an amendment to include a reference to adequacy or a desirable living standard.
Earlier this month, Murray used a speech to the Committee for Sustainable Retirement Incomes’ Leadership Forum in Canberra to plead with lobbyists for the superannuation industry to drop this campaign that risked “complicating the issue” of ensuring that super policies were directed at delivering retirement income.