The Australian’s Adam Creighton has written a great piece today on the need for widespread retirement policy reform, which includes lifting the age of access to superannuation so that it aligns with the Aged Pension:
The incidence of retirement increases by about 150 per cent for workers aged 60 compared to their slightly younger colleagues… This is patently a result of the current “preservation age”. This would not be so much of a problem [except that] around a fifth of retirees are (quite rationally) spending large sums of their accumulation in order to qualify for at least a part-pension later.
This might include renovating or buying a new “family home”, which is shielded from the rather porous pension assets test…
No more than about 20 per cent of retirees are self-sufficient. By the age of 75 about 80 per cent of the population receives a full or part pension and the share is rising beyond that.
We need to dispel the myth that compulsory superannuation will see off the age pension…
Lifting the preservation age is only one of many sensible changes that will improve the fairness and efficiency of the superannuation system. Including the value of the “family home” above a certain threshold, say $1 million, should reduce the share of the pension that is going to people who could easily afford to finance their retirement if they reduced their children’s inheritance.
Another would be to mandate a share of retirees’ lump sums be used to buy an annuity that begins to pay out once retirees are older, say 85.
Spot on. But Creighton should also have included the current structure of superannuation concessions, which under the 15% flat tax means that the amount of concessions received increases as one moves up the income scale (See below table).
For example, someone that earns in excess of $180,000 per year receives a 30% tax concession for each dollar that they contribute into super (i.e. 45% marginal tax rate less the 15% flat tax). At the other end of the scale, someone that earns less than $18,200 per year in effect gets penalised 15% for each dollar that they contribute into super.
According to the Australian Treasury, concessions on superannuation contributions were estimated at $16.5 billion in 2012-13, with concessions on superannuation earnings valued at $15.5 billion. Moreover, the Treasury estimated that the top 5% of contributors would receive 20.3% of contribution concessions, with higher income earners also receiving the lion’s share of the earnings tax concessions.
Given that the main rationale behind superannuation is to both adequately provide for retirement and take pressure off the Aged Pension, the 15% flat tax system is inherently flawed and designed to fail. By providing massive taxation concessions to those on the highest incomes, the Budget loses billions of dollars of forgone revenue. At the same time, the super system is unlikely to relieve pressure on the aged pension, since those that are most likely to need it – lower and middle income earners – receive minimal (if any) concessions, which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.
A simple reform that would greatly improve the equity and sustainability of the retirement system would be to abolish the flat 15% tax on superannuation contributions and replace it with a flat concession (e.g. 15%) that is the same for all income earners. A reform of this nature would not only improve equity, since all taxpayers would receive the same taxation concession, but also boost lower income earners’ super savings, thereby reducing reliance on the Aged Pension and relieving pressures on the Budget.
Australia’s retirement system is a basket case, failing on the grounds of both sustainability and equity. It requires root-and-branch reform.