Lift the super preservation age to help fix Budget

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By Leith van Onselen

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).

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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.

 

unconventionaleconomist@hotmail.com

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28 Responses to “ “Lift the super preservation age to help fix Budget”

  1. AB says:

    “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.”

    I’m sure there’s a reason why he left that out. Oh wait, here it is:

    http://www.theaustralian.com.au/business/opinion/gillards-super-tax-concessions-argument-a-bit-rich/story-fnc2jivw-1226612834653#

    The shrill plan to gouge a few more billion from the “wealthy” — not to invest constructively in public infrastructure but to expand the welfare state further — will have damaging consequences for Australia’s longer-run prosperity. Super contributions are simply another form of saving. And economic theory and evidence are clear that high rates of saving are linked to economic growth and prosperity.

    It also undermines the “rule of law”, a quaint idea in our Westminster tradition, which says laws should be very stable and individuals should not be subject to arbitrary taxes, especially retrospective ones. In that sense any increase in superannuation earnings taxation deserves more condemnation than changes to contributions taxation.

    Moreover, punishing people on higher incomes simplistically assumes they are always on high incomes. Life is more complicated: individual incomes typically rise and fall throughout people’s working lives. Why ratchet up the tax rate when people’s earning potential is at their greatest?

    The notion that Australia’s superannuation system is somehow “unsustainable” is ridiculous. Its broad architecture has been unchanged since Paul Keating introduced flat 15 per cent taxes on contributions and earnings in 1988. Few were complaining about the “unsustainable” tax concession back then.

    • ceteris paribus says:

      AB,

      Congratulations. You should have been a detective. Sherlock would be proud of you. You catch this Oz pretender spinning for all he is worth. The “retrospective” furphy. The confusion of”savings” with the outrageous Government welfare cream that sits alongside it. Anything to confuse and trick the honest worker into not seeing the odious scam that super is.and how he is being dudded by comparison to the shifty elite.

      AB, take your award as the commentator of the day.

      • AB says:

        Thanks for the unexpected compliment CP – I chalk it up to reading way too many papers when I should be doing more constructive things!

        I normally enjoy reading Creighton but there’s no question where he lies politically and morally.

        He does occasionally write some pieces that I believe the majority of MB readers would agree with, like this one from 2011 on government support of banks and the housing markets.

        http://www.cis.org.au/media-information/opinion-pieces/article/3050-hey-regulators-remember-the-gfc

        The elephant in the trading room — that many banks are too big to fail — looks set to drift off the agenda. Yet it is the most fundamental problem with the existing financial system. And it is not only a foreign affliction. It is patently obvious that Australia’s four major banks are too big to fail, which means Australian taxpayers subsidise them, including their more risky proprietary-trading and speculative activities.

        Publicly guaranteed private companies should not be part of a free market. As both Mervyn King, governor of the Bank of England, and Alan Greenspan, former chairman of the Federal Reserve Board in the United States, have suggested, if banks are too big to fail, then they are too big.

        Ideally, the government’s promise not to rescue banks would be credible. Unfortunately, in a democracy, it never will be. The free-market solution is therefore to offset the benefits to private banks from their guarantee and try to curtail the perverse incentives created by it.

        It is therefore ironic that Adam Bandt, a Greens MP, is calling for a “too big to fail” levy on Australia’s major banks. How any such a levy were designed would be crucial. But given Australia’s major banks do not even pay a fee for the government’s $1 million deposit guarantee, some scope exists for some type of compensation for taxpayers.

        The most likely outcome, however, is that little will change. For Australians the GFC was a foreign spectacle more than a genuine economic crisis. That is unfortunate, because the problems created by explicit and implicit subsidies are no less real simply because they do not manifest themselves at a particular time.

      • athalone says:

        @ AB

        The government guarantee for deposits is $250,000 not $1,000,000.

  2. Diogenes the Cynic says:

    The tax concession would be the best change as then does not matter as much as when the money comes out it will be taxed. That concession rate means most will prefer annuity type income not lump sums which is a good change.

    That said you if you raise preservation age and do not change to the concession you will lose tax revenue as people will put less in super and pay less super tax, and lower super taxes on income. I cannot see myself voluntarily putting in anymore money until 1-2 years out from being able to access it.

  3. glissom says:

    I really hate Australias compulsory superannuation system. In collection it acts as a payroll tax (one of the worst taxes currently in use) and pretends that it’s still my money while preventing me from investing it in the most productive way (i.e. reducing my mortgage which would be a very high return and low risk option).
    Unless you can afford to setup a self managed fund your money becomes a tool for others to become rich with mostly investments in zero sum or speculative activity. Most of us would be much better off if the government just taxed us and paid a better pension. Probably end up cheaper as well.

  4. spleenblatt says:

    Not sure how it is more equitable to prevent people from accessing their ‘own’ money, particularly when you have been encouraging them to ‘save’ for their retirement within that structure. If my super preservation age is lifted by so much as half a year I am going to go f***ng apeshit on my local member.

    • Hector says:

      You and 10 million others to varying degrees.
      The super Bait and Switch scam is firmly in Switch phase which technically started in 2011 on the demographic calendar.

      • two plus two says:

        Yep, and that temptation to pull off the switch will only get greater as the national super pool grows. Anyone relatively young would have rocks in their head to put more into super than is mandatory. The political risk across a single government term is significant enough… The political risk alone spanning multiple decades massively outweighs any of the current ‘bait’ in my books.

        Income protection, TPD and death insurance policies paid for in super are as close to a current benefit to me for a long while yet, and given the increasing incentive to pull off a ‘switch’, might be the only benefit.

      • athalone says:

        Yeah, very true Hector.

        The other point that upsets me is the recent Financial Repression, whereby the RBA cash rate is now lower than the inflation rate.
        Anyone retired in a period of depression is stupid to be investing in shares or bonds and should have most of their money in either precious metals or cash, as they are just too risky and bound to crash, but the RBA’s Financial Repression is making it very difficult to live on the earnings of historically, extremely low interest rates.

        Boomers, like any generation, want to be independent, but when interest rates are so low that having a full single pension is comparable to having a $700,000 deposit in the bank, and a couple on full pensions is like having $1,000,000 deposit in the bank… they will nearly all have to sign up for it.

        The other point that worries me about the younger people on this site is that they forget we boomers have children and grandchildren.
        We want the best for them.
        We would like to see housing prices crash tomorrow so that they can afford a decent life.

        There are very few parents and grandparents who would like to be afforded any advantage that is not then given to the next generation of our families.

        Sincerely,
        Dr Stephen Nordstrom

    • Monkey says:

      And if they prevent lump sum withdrawals, aren’t they effectively increasing the preservation age anyway? Basically whatever you can’t withdraw as a lump sum at the current preservation age is being held for longer.

      I’m more concerned about the idea that superannuation should be invested in infrastructure. So many infrastructure projects run over budget, aren’t finished on time and are never profitable. If it is compulsory, then it’s basically equivalent to confiscation.

      • pithoneme says:

        I don’t have an issue with super investing in infrastructure, as long as it is the private sector that is actually investing the funds and was based on a federal mandate that would prescribe, for example, that a fund’s default balanced option must allocate a certain % (say, no more than 10%) into Australian domiciled infrastructure projects meeting certain criteria specifically related to supporting productive output. In such a regime, members should retain the ability to opt out of the default option if they don’t want to have their funds invested in that way.

        There is a ludicrous amount of money being allocated by superannuation investment into secondary markets and dumb monkey alternative investment strategies (e.g. currency carry) which adds absolutely nothing to the productive capacity of this country, and is a far greater confiscation of the potential benefit of superannuation.

      • Monkey says:

        Agree with that. It’s the mandatory part that worries me.

  5. Tassie Tom says:

    Raising the preservation age would not be necessary if:

    1) The “family home” was included in the pension assets test (as money ploughed into it would be reflected in its value).

    2) “Gifts” – giving money to children, was included from superannuation preservation age instead of from pension age.

    Tinkering with the 15% flat tax would not be necessary if:

    1) Income tax was also a flat tax (I propose everyone gets equal welfare and everyone pays flat income tax)

    2) Superannuation was also taxed at 15% after preservation age is reached (making it tax-free was quite silly – I haven’t even heard Peter Costello defending this decision recently.)

  6. Jason says:

    Sorry UE, but attacking the preservation age is not the way to go about it. If lump sum withdrawals are a problem (and it seems they may be) then eliminate that particular policy.

    Don’t penalise people who might have invested more in super so they can retire early. You’ll only scare off the small number of people remaining who still do voluntarily contribute to super.

  7. Explorer says:

    The rort in super is the conversion of assessable income in the rpesent to tax free income in the future at extreme levels by the very high income people.

    The abolition of reasonable benefit rules and taxation of excesses was the catalyst.

  8. Evetsllub says:

    What’s it going to get to by the time us Gen Y’ers retire?? The boomers got it at 55, Gen X 60, we’ll be waiting till 80 and it will just end up being an inheritance fund for our kids!

    The real problem is the ability to access super as a lump sum. This should never had been the case, and it should have always been designed to take as an annuity. Prior to Costello’s changes it went someway there by providing 50% exemptions for aged pension if you locked into a complying income stream. But the infamous Costello handouts made that no longer necessary by essentially doubling the assets allows for Age Pension.

    Making you last longer is just unfairly punishing those who have used super as it was intented – to fund their retirements.

    • athalone says:

      Most boomers will retire at 65 or even later.

      They lost 40% of their super in 2008 and will probably lose 60% of their super over the next couple of years if they are silly enough to invest in shares or bonds before the capitulation of markets.

      • pithoneme says:

        They didn’t actually lose anything in 2008 unless they sold down their holdings, and certainly not 40% – that close to retirement it would have been an act of sheer stupidity to have 100% exposure to shares. A generation about to retire has never done better from taxation settings and asset market returns in the 20 years leading up to their retirement. Most boomers I know have already pared their equities exposure right down, but they shouldn’t be too worried. The RBA will do everything in its power to support share prices to ensure that franked yield continues to support boomers during their drawdown phase, and do its best to make long bond yields behave. The alternative is to completely smash the country’s fiscal position, which they will try and delay until the following generation.

      • athalone says:

        @pithoneme

        I understand what you are saying but the vast majority believe that bank shares with their franking are fail-safe, and when the boomers saw those shares halve, they understandably panicked and sold.
        Most are not sophisticated investors, and don’t forget, in the last iteration of these times (1930s) the bourse lost 89% of its value and didn’t get back to 1929 levels until 1954, and the financial repression of central banks didn’t finish until 1968.
        I think you have too much faith in central banks… don’t forget that they caused these problems to begin with, and they are hell-bent on proceeding down the same path despite its failure.
        Quantitative Easing is a money supply expanding and inflationary policy by design, and the PhD-standard in central banking continues to promise almost certain failure.

      • Evetsllub says:

        athalone, I was referring to the legislated preservation age of when you can access your super. For boomers its 55, for anyone born after about 1960 its 60 and no doubt for us born after 1970/80 it will be pushed out. The fact that many boomers have ignored super and therefore will need to work till 65 is irrelevant.

        My post also had nothing to do with investment returns. If they were smart and didn’t panic sell in 2008, then the 40% they lost would now be recuperated.

      • athalone says:

        @ Evetsllub

        Smart retirees don’t have any money in the sharemarket.
        When the Dow crashed 89% by 1933, most retirees were dead by 1954 when the Dow eventually reached the pre-crash level of 1929.

  9. bob.smith says:

    I think youve simplified the math a little too much. Youve compared marginal rates with effective rates and in he process mislead people.

    The tax on 100k using the numbers above is $24, 947 excluding medicare. $24, 947 into 100k is 24.947%, so only 9.947%, not 22% By saying that someone on the 37c marginal bracket gets a 22% benefit means your assuming everyone in that bracket earns $80k. A little hard to swallow

    If the feds were serious about reducing the dependence on the aged pension they would encourage those who are in a position to sacrifice to do so, yet at the same time getting rid of lump sum withdrawal, and looking into ways to prevent those who draw a lump sum to pay their mortgage and then claim the aged pension. Also, why not pursue an immigration policy where the only skilled labour allowed to enter the country is below the age of 30 so as to further prevent the dependency on the aged pension.

    Further, if every is of the opinion they pay too much in tax, or dont get anything for the tax they pay, and then proceeds to arrange to reduce their tax via sacrifice, gearing or fraud, who is going to cover some of the lavish policy we so arrogantly accept on one hand but want someone else to pay for on the other? why pursue expensive policies that the country cant afford sustainably in the first place? So of the happiest people I have ever met have lived in third world nations where there are such policies, concessions and allowances. Why not start with the expenditure of government first, then decide how the community pays for it fairly?

    • bob.smith says:

      I think youve simplified the math a little too much. Youve compared marginal rates with effective rates and in he process mislead people.

      The tax on 100k using the numbers above is $24, 947 excluding medicare. $24, 947 into 100k is 24.947%, so only 9.947%, not 22% By saying that someone on the 37c marginal bracket gets a 22% benefit means your assuming everyone in that bracket earns $180k. A little hard to swallow

      If the feds were serious about reducing the dependence on the aged pension they would encourage those who are in a position to sacrifice to do so, yet at the same time getting rid of lump sum withdrawal, and looking into ways to prevent those who draw a lump sum to pay their mortgage and then claim the aged pension. Also, why not pursue an immigration policy where the only skilled labour allowed to enter the country is below the age of 30 so as to further prevent the dependency on the aged pension.

      Further, if every is of the opinion they pay too much in tax, or dont get anything for the tax they pay, and then proceeds to arrange to reduce their tax via sacrifice, gearing or fraud, who is going to cover some of the lavish policy we so arrogantly accept on one hand but want someone else to pay for on the other? why pursue expensive policies that the country cant afford sustainably in the first place? Some of the happiest people I have ever met have lived in third world nations where there arent such policies, concessions and allowances. Why not start with the expenditure of government first, then decide how the community pays for it fairly?

    • athalone says:

      ” Why not start with the expenditure of government first, then decide how the community pays for it fairly?” —bob.smith

      Yeah the increase of a backbencher’s pay to $195,000… 160% increase? last year is going to make it a little difficult for politicians to ask people to tighten their belts.

      • bob.smith says:

        How much does Alan Joyce earn? Or Sam Walsh? Or Andrew Forest? Or Gina Rinehart? Or Andrew MacKenzie? What about the CEOs of the big four?

        Cheap by comparison…?

      • athalone says:

        Sure bob.smith
        But I think you would have to agree that at a time when inflation is 2.7%, and with the official interest rate below the inflation rate, and when most self- funded retirees have taken a 50% cut in income, a 160% increase is pretty heavy.
        And with all the paid help backbencher’s get, they aren’t working too hard.
        Obama gets USD400,000.
        Abbott gets AUD1,000,000.

        I don’t understand why anyone on a salary in Australia gets more than $1,000,000.