Forget superannuation, lift the Aged Pension

In its submission to Treasury for the Retirement Income Review, Mercer has called for a universal non-means tested Age Pension to be considered in place of raising the superannuation guarantee:

Mercer senior partner, Dr David Knox, said a universal Aged Pension with the right tax structure would be feasible without a substantial impact to the budget.

Knox said it would also give Australians an incentive to save for retirement as this “isn’t the case today”.

“While the Age Pension would be taxable, there would be a clear benefit to the individual for every extra dollar contributed into super, ensuring the three pillars of the system – the Age Pension, compulsory super and voluntary contributions – are complementing each other,” he said.

The submission noted funding costs that needed to be considered were:

  • Taxing the Age Pension for all those who receive it, which could be achieved by basing the Age Pension tax rate on the balance of an individual’s tax-exempt pension accounts;
  • Given every eligible aged Australian would receive the Age Pension, modifying the tax arrangements for super, such as introducing a limited tax on the investment income generated in the pension phase; and
  • Drawing on some of the fiscal headroom expected since the projected cost of public pensions in Australia will be one of the lowest of any OECD country by 2050.

The submission said the universal Age Pension would:

  • Ensure financial decisions made by retirees were not informed by how to best maximise their access to the Age Pension;
  • Provide retirees with greater security of income with the knowledge of longevity protection, leading to a better quality of life;
  • Provide stronger incentives to downsize from the family home, improving housing affordability for younger families; and
  • Enable a simpler, more efficient system with reduced administration costs incurred by the Government from the means-tested Age Pension.

“While the universal Age Pension may not be a viable option in the current political environment, it is a compelling proposition for a simpler, more effective system with a clear objective that delivers stronger long-term retirement outcomes for older Australians,” Knox said.

While not exactly the same as what Mercer is proposing, there is strong merit in abandoning the current superannuation concession system altogether and instead making superannuation contributions tax-free, but treating all superannuation withdraws and Aged Pension receipts as income, taxed at the marginal rate for the individual involved (including for heirs who inherit superannuation savings from their deceased parents).

After all, the whole purpose of superannuation was to regard it as deferred income, and it was intended as a replacement/supplement for pensions not as a means of saving capital. Further, such an approach would discourage lump-sum withdrawals, since these would be taxed at a higher rate than if withdrawals were spread over a large number of years, making retirement savings last longer.

In fact, if I were to create a retirement system from scratch, then the above approach would be far superior than the current convoluted system of concessionally taxing super contributions on the way in but treating them tax-free when they are withdrawn, alongside the complicated (and frequently gamed) pension means/assets test.

However, it would also represent a fundamental change, and in my view would be near impossible to implement politically given how entrenched the current flawed system is.

This is why I continue to advocate pragmatic iterations to the current system, such as abandoning the scheduled increase in the superannuation guarantee, alongside making the concession system equitable and progressive, since these are more likely to be achievable in practice.

Regardless, most can agree that the current superannuation system is highly inequitable, inefficient and unsustainable, and desperately needs fixing.

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Comments

    • many years ago, back in the seventies, some people rented homes to live in and other people took out a bank loan and bought a home. some of those homes are now worth millions, not because of devilish scheming by the owners, but because of the long running mass Third World immigration program
      the root cause of almost all that’s wrong with australia over the past 20 years.

  1. This problem is easily solved. Just get the RBA to print up a million dollars for every household and we’ll all be rich together.

    Creating large amounts of money out of thin air has no negative side effects. No really, I heard it from several economists.

    I can’t see what the issue is – we know it’s coming. Just do it now. MMT.

    • Jumping jack flash

      Printing is oldskool. Debt is the printing of the 21st century. So long as the million dollars is debt, and it is attached to an asset that would then inflate in price exponentially as debt is attached, this would be fine.

      The trick is to ensure that every prospective retiree has a house. Houses are obviously the “new gold”, the store of wealth du jour. Since amazingly huge amounts of debt are required to purchase a house, then these must be easily obtainable by everyone.

      Pretty soon, within the next 5 or 10 years I guess, there will be a push for new legislation to ensure that everyone is able to get their share of debt. I’m not sure what that would look like but it will be essential. There will be a couple of reasons for this. The first reason will be that there will be debt saturation and nobody without debt already will be eligible for debt (unless the rules change). The second reason is that house prices will be so high after a few 7-10 year periods that (unless the rules change) over half the population on average fulltime wages of 78K or less, will be unable to obtain the amounts of debt necessary to be able to purchase one, and “the government will need to do something!!1!”. Besides the banks will not be happy. Their debt ponzi, like any ponzi, needs a steady flow of new entrants but the “buy-in” – a mortgage – will be too high.

    • The present system is costing us even more that what is proposed here, although I think that there should be a cap on what can be saved tax free in the accumulation phase. The benefits of superannuation essentially flow to the top 10% (i.e. the people who are least likely to need government support), with a few crumbs for the the next decile down. The top 10% are receiving an average of twice the value of the full pension in superannuation tax concessions, so it would be a lot cheaper to take away the tax concessions and give them the pension. As boomengineering points out below, you would also save around a billion dollars a year on Centrelink if you could get rid of the means testing. The Australia Institute has costed this.

      https://www.tai.org.au/content/sustaining-us-all-retirement

    • Creating large amounts of money out of thin air has no negative side effects. No really, I heard it from several economists.

      Might be what you heard.

      Pretty sure it’s not what they said.

    • Smithy, you’ve never been exposed to the inane witterings of Paul Krugman, obviously. But there plenty of economists who basically support the idea if they don’t say so explicitly. Supporters of MMT (Magic Money Tree), for example. To be clear, MMT is the printing of money by central banks to fund the spending of Govt. Except the supporters of MMT astonishingly believe that central banks have the wherewithal to put the inflation genie back in the bottle should it ever represent a threat.

      This belief is garbage of the stinkiest kind – it really plumbs new depths for contemporary economics. Did I say ‘garbage’? Perhaps I should have said ‘arrogance’.

  2. Jumping jack flash

    It really depends on what the purpose of super is. We need the government to define their expectations properly.

    Firstly, does the government expect that retirees can achieve the average standard of living in retirement, relying on super or the pension?

    Then the government needs to clarify the purpose of super:

    If the purpose of super is to *replace* pensions entirely, then it fails hard in the current debt-inflated New Economy. No sensible amount of saving over 40 years is going to be able to keep up with the debt-inflation driven costs of living for 20 years after that. This is considering what we know about the real effects of debt inflation on an economy observed over the past 15 years or more.

    If super is simply to relieve some (currently about 1/4, but this will obviously fall) of the government’s pension “obligation” over 20 years of retirement, then its fine.

    Similarly, if the government expects that retirees’ standards of living should be well below the average, then super/pension is also fine.

  3. Fact checks.
    Save for retirement? At 2% interest!
    Downsizing of retired persons homes will help younger families. So 35yr old plus couples who can buy a large million dollar home. This will help. B.S!

    Otherwise a good plan. Get rid of super it has failed just ask anyone who works or invests with AMP. AMP was the norm not the exception.

  4. boomengineeringMEMBER

    Get rid of the means test, get rid of centrelink, get rid of all the beurocrats involved, then just pay all pensioners a couple of hundred a week with the savings.

  5. I also largely agree with Mercer partner Knox, and Leith, and boomengineering (above).
    Undo Costello’s gifts to wealthy retirees.
    Reintroduce income taxes for the over 60’s.
    Tax super payments like income.
    Tax lump sum withdrawals from super at marginal rates.
    Use the tax raised to pay aged pension to all over 65s, no means test (why not? they paid for it during their working lives, and we don’t means test medicare benefits)
    Tax the (raised) aged pension payments.

    We can do it a lot better.

  6. It’s simple when you look at it the right way. Money now or money later. Australia’s system is good because 10% of income gets put away for later. When my cohort retire, that money we saved for later will save the government is own “now money”.

    Another way of looking at it is who pays for pensions – people in the past, present our future? Super ensures more payment from the past – very sustainable. Payment from the present (taxes) works as long as there are more taxpayers than retiree’s (generally speaking). Payments from the future (debt funded) are very unsustainable.

    Sure, Super has some major faults and blindspots (should benefit poor more than wealthy etc.) But at least it’s paid for in the past.

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