Articles – The Centre for Independent Studies

Australia's retirement income system prompts another round of national navel-gazing

Robert Carling

23 November 2020 | Canberra Times

Australia’s retirement income system – based on a means-tested public pension and compulsory private superannuation – is much admired from abroad. But at home, policy activists and others with an axe to grind just can’t leave it alone.

Not that something that’s broken should not be fixed. But how broken is the current system? Not much, according to this latest review, which says the system is fundamentally sound, effective and broadly sustainable in cost.

The review debunks the myth that the superannuation system will not substantially reduce the cost of the age pension. It does not note that this is a huge turnaround since the worrisome picture in the FitzGerald Report on national savings at the birth of the Superannuation Guarantee and the Intergenerational Reports of the early 2000s, which all projected rapidly rising Age Pension costs bearing on a declining working age population.

This suggests the system is working as intended and while it can always be fine-tuned there are many other problems in more urgent need of public policy attention, such as the nation’s lamentably low rate of productivity growth.

But this review, while giving the system a big tick, goes on to canvass changes anyway – some small, some quite big. We are in for another round of national navel-gazing on pensions, super and tax, so buckle in for the ride.

The review panel was asked to “establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes it is delivering.” No recommendations please.

The panel has met its limited remit, but facts don’t get us far in the often-heated debate over retirement incomes – as the report observes, “there are no facts when making long-term projections”.

So much comes down to assumptions, judgements, and trade-offs. And when people’s life savings and retirement living standards are in play – not to mention $30 billion a year in money managers’ fees – the debate becomes heated.

The report itself clearly ventures beyond mere facts to opinion, judgement, analysis and thinly veiled recommendations, several of which are very apparent. It chooses to emphasise or play down selected issues to steer policy deliberation in particular directions that are remarkably – and one might say suspiciously – like what the Canberra bureaucracy wants.

The issues the report raises are too numerous to canvass fully here, but let’s look at a few big and contentious ones.

The first is the level of the superannuation guarantee (compulsory contribution) rate. Here the report is of immediate relevance, as under existing legislation the SG rate is due to increase in steps from the current 9.5 per cent to 12 per cent beginning on July 1 next year. The government has made it clear it has this under review, notwithstanding its 2019 election promise to allow the increase to go ahead.

The report lends support to the many experts, analysts and commentators that have argued the SG rate should be left at 9.5 per cent. It gives the government a lot of ammunition to cancel the legislated increases or at least defer them again.

For example, it states boldly that more efficient use of retirees’ assets would do more to boost retirement incomes than increasing the SG rate, which would erode pre-retirement disposable incomes. However, cancelling or deferring the increase next July will require legislation, which the government will struggle to negotiate through the Senate.

The report makes clear its view that the pension asset test taper rate should not be eased, and hints that pensioners’ own homes should be included in the asset test.

It spills a lot of ink on the old chestnut of superannuation tax concessions and does not hide its irritation with some aspects of them. There is little new in what the report tells us here – much of it conjectural rather than factual. But the opportunity for another skirmish in the long war of attrition against tax concessions will undoubtedly excite those who have always seen these concessions as an affront to their notion of equity and an unjustifiable drain on revenue they would rather see spent on their own favoured causes.

The rest of us are not troubled by the tax provisions for superannuation because we see them as being consistent with a tax system that would not discriminate against saving; and the money is better left in taxpayers’ pockets than given to governments to waste.

It is unfortunate this review has swallowed the Treasury line and clearly favours increased tax on super, but the current government, at least, has already made substantial changes in 2017 and is unlikely to come back for more.

This report is intended as a ‘go to’ document for this and future governments whenever they want to consider retirement income polices.

It may prove to be a turning point in the tussle over the SG rate. Beyond that, it could remain influential for years to come – or it could just become another report that is forgotten about and gathers dust on shelves.

But it will always be no more than a starting point because retirement incomes policy deliberation moves on quickly from the facts to judgements, trade-offs and raw politics.

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