The retirement tax grab - undignified politics
The purpose of retirement savings seems to be pretty bloody obvious to the average Australian - setting money aside to support a decent retirement with as much financial freedom and minimal stress as those savings, supplemented by the government age pension for most, will allow.
So the fact that the Labor federal government is banging on about the need to define the purpose of superannuation seems to many to be one of those exercises relevant to a cabal of people with somewhat opaque vested interests. What’s the big deal? Who gains from legislating a purpose for superannuation?
There’s a few reasons that it is important. A quick Google search comes up with statements like:
Legislating an objective of superannuation will provide stability and confidence to policy makers, regulators, industry, and the community, that changes to superannuation policy will be aligned with the purpose of the superannuation system. It will also ensure members and funds have a shared understanding of the purpose of superannuation throughout both the accumulation and retirement phases. (Australian Treasury 2023)
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The argument for legislating an objective for superannuation is that it will improve Government accountability and transparency in policy development, by giving successive Governments what will hopefully be clear non-derogable guidelines to inform future superannuation policy. (Coors Chambers Westgarth lawyers 2023)
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Great for bureaucrats and lawyers, but the proposed wording of the legislation is what really counts. While the actual working is yet to be finalised, Treasurer Dr JIm Chalmers gave a sense of his thinking on 20 February 2023, when he said: “the objective of super is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
All good up to the word ‘income’, almost irrefutable. The problems start in the second part of his statement and everyone’s interpretation of his intent will be different. Let’s look it this way.
A ‘dignified’ retirement means lots of different things to audiences. For some it means food, rent and clothing. For others it means living well while having something to spare to help out the kids - perhaps even leave a big inheritance. The Association of Australian Superannuation Funds (ASFA) regularly publishes its retirement standards, dropping its latest data on how much we need for a ‘Comfortable’ or ‘Modest’ retirement. At time of writing the Comfortable standard was Forclose to $70,000 per annum for a couple. What does dignified look like to a person who has spent the past decade earning anafter-tax annual income of more than, say, $200,000 - probably not a drop to $70,000. Hold that thought.
The next rubbery concept is ‘alongside government support’. What does this look like? Does it refer to the concept of superannuation income as merely supplementary to the age pension, or does it also embrace the generous government superannuation tax concessions designed to help us save so we’re less dependent on welfare in retirement? This vagueness leads us into the most contentious of the phrases - ‘in an equitable and sustainable way’.
Simultaneous with launching the public debate on the purpose of super, the government has fired the first salvo in delivering on superannuation’s equity and sustainability, unearthing class divisions along natural political lines and affiliations. It’s a clash between a government eager to claw back around 4% per annum of the $50 billion in foregone tax collection through superannuation concessions and an elite pool of an estimated 80,000 superannuants with over $3 million sitting in their retirement accounts - many in self-managed super funds (SMSFs) - keen to hang onto tax concessions on investment earnings that have nothing to do with a dignified retirement.
The thing is this. Living as a couple, the super savings threshold before additional taxes would cut in at $6 million - $3 million each. A couple living in retirement for 30 years could draw an annual tax-free income of $200,000 even if they earned nothing on their investments. For a single, it will still be a comfortable $100,000 a year. Add in even modest investment returns of 5% per annum, and the income increases. No one is feeling sorry for people earning well in excess of the median salary in Australia of $65,000 (ABS 2022).
The politics and self-interest in the debate about dignified retirement is undignified. One the one hand, the government is proposing a rule change to super while arguing a legislative purpose that is about reducing the scope for rule changes in the future. On the other, we have an opposition hell-bent on lining up with the vested interests with which it naturally aligns at the top end of town, irrespective of the unfair largess with which they reap tax concessions irrelevant to sustainable retirement.
The mandatory savings model which has been the foundation of the Australian superannuation system is one of the most financially sustainable in the world - to the tune of $3.5 trillion in accumulated savings. A blessing for its beneficiaries, a temptation for politicians facing massive fiscal challenges.
$50 billion in annual tax concessions could be rediverted to building critical infrastructure to underpin the nation’s growth and prosperity. It won’t be, but fine tuning at the edges to recoup overly generous concessions will necessarily continue. The current proposal to tax earnings on every dollar in accounts over $3 million at 30% is a logical and modest first step. These people will still pay zero tax on up earnings from the first $1.9 million (for new accounts starting 1 July 2023), 15% on earnings from this to $3 million. So tax on earnings on dollars in excess of $3 million is a first world problem we wish we could all have.
Ultimately, the success of Australian superannuation system with its massive vault of $3.6 trillion in retirement savings has resulted in tug of war between a government arguing the need for reduce tax concessions for the wealthiest superannuants and super’s free marketeers who argue that their prudence and hard work should be rewarded with social permission to passively multiply their wealth in a manner that will benefit their descendents, in some cases for generations to come.
It’s a tax grab on both sides - a claw back on the one hand and claws out on the other.
For the sake of future generations faced with funding the nation’s growing cohort of retirees, the community level goal for the superannuation system should be to minimise the tax burden of burgeoning demand for the government age pension.
Within the system, the purpose of tax-concessioned super should be to ensure that people can look forward to financial security and comfort in retirement. They should be able to do with confidence that they will live our their latter years in dignity, perhaps even financially independent. Covering the costs of life’s essentials without stress, with some financial headroom for leisure and holidays is what dignity looks like. Being the person who dies with the biggest bank balance is not.