Last month, I asked whether the Baby Boomer generation had blown their retirement following a stinging critique by CPA Australia, which argued that many Baby Boomers had been spending and running-up big debts in anticipation of receiving a superannuation lump sum once they reach retirement, leaving them likely to be reliant on the aged pension in old age.
Over the weekend, Jeremy Cooper, one of the architects of Australia’s superannuation system, partially backed the CPA’s claims, arguing that prolifigate Baby Boomers are stressing the superannuation system. From the Weekend AFR:
Jeremy Cooper, whose same-named blueprint for super reform has shaped recent government policy, warns the current crop of retirees should be “watch-listed” so that future super policy could be fine-tuned to prevent budget blowouts.
Mr Cooper, who left being a regulator to become chairman of retirement income at listed financial services group Challenger, said: “It is a serious problem where people are relying solely on the aged pension because that is not what it has been designed for”…
“CPA does importantly raise the issue about a significant minority of retirees using super to pay off their mortgages,” Mr Cooper said. “Superannuation should be used to create retirement income, rather than increasing non-income-producing wealth”…
As noted last time, whether the Boomers have blown the retirement is a moot point. However, the concerns raised by the CPA and Cooper do highlight some of the major flaws in Australia’s superannuation system. Chief amongst these concerns are that it allows someone to retire at 60, withdraw their super tax free as a lump sum, use the money to pay down personal debts or consumption, and then go on the aged pension from 65 years of age. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension.
The flat 15% tax on superannuation contributions is also spurious. Under the current arrangements, the amount of super concession rises as one moves up the income tax scale, resulting in a system where higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement.
These are loop holes that must be closed. Some sensible first steps would be to tax superannuation lump sums whilst at the same time encouraging retirees to withdraw their savings as a annuity. This would discourage retirees from spending their savings too quickly and becoming reliant on the aged pension.
Replacing the 15% flat tax with a flat 15% concession would also improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
The fact remains that Australia’s population is ageing fast, with the proportion of workers to non-workers set to decline significantly in the decades ahead (see next chart). As such, the Government will ultimately be forced to scale back entitlements as the tax base shrinks. Better to begin reform now rather than wait until the situation worsens materially.