Look, Up In The Sky, It's Superannuation Man With A Tax Review

Sydney Morning Herald

Saturday December 13, 2008

ANNETTE SAMPSON

If the Government wants to change the superannuation rules, as prefaced by including retirement incomes in the Henry review of the tax system, it will have to be damned sure it's making things better.

After seeing their savings eroded by the market meltdown, jaded investors are in no frame of mind to accept yet another round of government tinkering.

That's the problem with super. It's supposed to be about the long term, about saving for and funding your later years. But governments are notorious for thinking short term, looking for the quick fix to solve a short-term problem or boost their standing in the next opinion poll.

When it commissioned the Treasury secretary, Ken Henry, to conduct the review, the Federal Government was quick to point out that a few things were off limits. The terms of reference specifically excluded any change to tax-free super benefits for the over-60s, but pretty much everything else was on the table.

So it's little surprise that this week's consultation paper opens the door for a wide range of possible changes, while committing itself to nothing.

On ABC Radio, the Superannuation Minister, Nick Sherry, was keen not to alarm investors already suffering from change overload. "You're not going to see massive change tomorrow," he said.

"Whatever the Henry tax review comes up with, it will set a pathway for reform and I'd anticipate those changes would occur over a reasonable time frame."

Change would need to be balanced against investors' need for certainty.

But he also conceded the super system is not perfect and further reforms are coming, whether investors are ready or not.

Both Sherry and the consultation paper highlighted equity as one of the issues where change is needed. It's no secret that higher income earners get more benefit from super than lower earners. That's partly inevitable. Higher earners are more likely to have the spare cash to squirrel away for retirement than families struggling to pay the credit card bill.

But as personal tax rates have fallen, the tax on super contributions and earnings has remained at 15 per cent. You now have to earn more than $34,000 before your marginal tax rate exceeds 15 per cent and thanks to the $6000 tax-free threshold and the low income tax offset, the average tax rate paid by these income earners is much less.

You don't have to be Ken Henry to work out there's no incentive for these people to lock any spare cash they do have away in super.

The review says income tax cuts have increased the proportion of tax concessions going to higher earners. In 2005-06, it says, an estimated 5 per cent of individuals accounted for more than 37 per cent of concessional superannuation contributions.

It points out there are now limits on the amount an individual can contribute each year and that the tax benefits for higher earners are offset to some extent by other components of the retirement income system targeted at lower- and middle-income earners - such as the age pension and the government super co-contribution.

But it is clear this is not enough.

For its part, the super industry has long seen adequacy as one of the outstanding issues. Adequacy is a thorny one. While there is broad agreement that super should provide for a reasonably comfortable retirement lifestyle, one person's comfortable is another person's penury. Providing an adequate retirement income also means lifting the level of contributions from the current 9 per cent to something more like 12 to 15 per cent. Everyone agrees that would be a good thing, but who is going to pay for it - especially in this economic environment?

Many in the industry have taken heart from the review's inclusion of alternative calculations of the cost of tax concessions and probable retirement incomes generated by compulsory super.

"They seem to be putting all the key questions on the table, which is healthy because in the past they haven't done," says the chief executive of the Institute of Actuaries of Australia, John Maroney. "A key indicator is they've included a more balanced analysis of where we are at the moment."

Previously, says Maroney, Treasury consistently put the cost of super tax concessions at close to $27 billion a year. It was easy for the Government to say super was already costing a bomb and no further reforms were needed.

In the latest paper it has also included an alternative calculation that puts these costs at less than $5 billion.

The retiree body National Seniors Australia has also welcomed suggestions to lift the pension age being put on the table - although neither it nor Sherry seem very enthusiastic about the idea.

The bulk of the tax review will not be delivered until midyear but the retirement income component has been brought forward to coincide with the review of the age pension. The two go hand in hand.

The age pension is intended to be a safety net for those who can't afford to fund their own retirement and the whole question of adequacy has to take account of likely age pension entitlements.

This means the Government could be setting out its plans for the future of retirement incomes as early as next year's budget. With the centenary of the first pension payment coming up in June, Maroney reckons a plan to increase pension payments around then is almost politically irresistible.

But it can't assume that a boost for pensioners will overshadow any other announcements. Investors fed up with change will be casting a very cynical eye to see what the catch is.

The review has put all options on the table but the challenge will be to form a long-term plan that investors accept is necessary and likely to deliver better retirement outcomes. That won't be easy.

© 2008 Sydney Morning Herald

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