2019-10-22 09:49:071970-01-01 00:00:00

Retirement Income Review

The plan for retirement income system review

Treasurer Josh Frydenberg is considering engaging a review of the retirement income system, including the interaction of superannuation, age pension and taxation on super contribution and payout, to check whether or not it is a good idea to go from 9.5 to 12 percent.

The review was recommended by the Productivity Commission. Mr Frydenberg stated it was “clear” from both the Productivity Commission and the Royal Commission findings “that there is a strong case for reform to strengthen accountability and the overall efficiency of the system”.

It would be a “good idea”  for the Morrison government to conduct an independent retirement income review to work out how the super and pensions could better link together, said Jeremy Cooper, who led the Rudd government’s narrower superannuation inquiry a decade ago

Retirement income streams such as annuities and the super tax concessions and pensions could be examined once the Morrison government gives broad terms of reference to the mooted review.

Anxiety among superannuation industry

Superannuation executives, however, are anxious Josh Frydenberg concealed real intentions at halting the scheduled rise in compulsory super contributions to 12 percent beneath the scheduled review of the retirement income system.

The consensus among most economists and super executives is that higher super contributions are traded off for lower wage increases in enterprise pay negotiations. According to the Grattan Institute’s report,  increasing superannuation guarantee to 12 per cent of wages will decrease Australian workers $20 billion a year in take-home pay and worsen dull wage growth.

Grattan’s John Daley said a review should calculate the net costs and benefits of the retirement income system, including super tax breaks, pension payments and impact on overall national savings levels. The planned rise in the compulsory superannuation from 9.5 percent to 12 percent will also cost the federal budget an extra $2.5 billion a year in forgone income tax revenue from 2025, for tax on concessional super contribution is 15 percent, which is less than the marginal tax rate of most employees’ wages.

Superannuation industry executives are also nervous for the reason that the conservative side of politics has been consistently cautious about the superannuation guarantee (SG) system set up by former Labor treasurer and prime minister Paul Keating.

Both parties support for going to 12 percent. The Morrison government’s official position is supporting the scheduled rise, but Liberal prime ministers John Howard and Tony Abbott both delayed increasing compulsory super contributions. Labor firmly supports the rise to 12 percent.

Martin Fahy, the chief executive of Association of Superannuation Funds of Australia(ASFA), said superannuation had faced 24 government reviews over the past decade, and another review would further reduce member confidence in the retirement savings system. Some executives claimed this planned review as a “stalking horse”.

Eva Scheerlinck, The Australian Institute for Superannuation Trustees (AIST) chief executive, said that “We will continue to strongly advocate for policies that improve the fairness and sustainability of superannuation for all Australians, which includes a commitment to raising the SG to 12 per cent as scheduled.”

Scheerlinck also said that the Government needed to be “focussed and committed” to the smooth implementation of recently legislated policies, such as the Protecting Your Super reforms, to ensure that the best outcomes for super fund members were achieved.

Interactions between super and pension

The Association of Independent Retirees said retirees required certainty and safety of planned retirement funds, “especially those who rely on modest investment income and don’t qualify for the age pension”.

The main point of compulsory superannuation was that it reduced the numbers of retirees who rely on the government pension, but a large amount of tax breaks now given out to super payments could be cancelling out this effect on the federal budget. Compulsory super could also currently be harmful to the poor by depriving them of income that could immediately be used for necessities and be beneficial to the wealthy by offering tax breaks on superannuation.

Another drawback in the system of compulsory superannuation savings is that lower-income earners who save more superannuation for retirement can lose almost the same amount they are entitled to from the age pension as retirement funding sources.

A review, accordingly, may consider pension rules, such as the Assets test, which exempts the main residence(your principal home), the Income test and diminishing rates for when the pension is gradually reduced for certain income and asset levels.

By Frank Zhang

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