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.