We are now celebrating the 30th birthday of compulsory superannuation. Of course, the origins of super go back much further. When I resigned from the bank in 1964, I received a cheque for the money in my bank pension fund. It was quite a small amount, it wasn’t preserved, and it was quickly spent.
Before compulsory super
Today in Australia, every employee should be a member of a superannuation scheme, but it was not always like that. Until the early 1980s, superannuation tended to be restricted to white-collar male career workers such as public servants and bank officers. In those days, few women worked after marriage and most men stayed in one job for life. However, super gradually became a significant industrial issue as unions campaigned against the disparity between blue-collar and white-collar workers and their conditions.
In addition, superannuation was used by aggressive tax planners as a tax rort. They established superannuation schemes that were designed to minimise tax rather than provide benefits to employees. Typically, the employer, usually a small business, would make a large tax-deductible contribution to his own superannuation fund and then lend the money back to the business at a tiny rate of interest. The fund suffered and in many cases was unable to pay adequate retirement benefits.
Until 1983, superannuation was an investor's paradise. There was no tax on contributions, no tax on fund earnings and they paid less than 3% lump sum tax on the end benefit. Obviously, the rules then were simple and the tax concessions gave an incentive to place money into superannuation. However, at the same time as they were legitimising superannuation, the Hawke Government raised the tax on retirement payments to 30% to bring them into line with the tax on long service leave.
But the Hawke-Keating Government did much more than simply increase the exit tax to 30%. They also introduced a concept that was unknown in Australia until 1983. To encourage retirees to hold on to their superannuation and not cash it and spend it, they brought in 'rollover funds'. If you rolled your superannuation into a fund such as an Approved Deposit Fund (ADF) or a Deferred Annuity (DA), you could defer payment of the exit tax and leave your money in what was then a zero-tax environment. Of course, this appealed to retirees and rollover funds grew at a great rate.
Raising the tax on superannuation payments tenfold from 3% to 30% may have been a good thing for government coffers but it hit one group particularly hard: airline pilots. They received high salaries and large superannuation payments. They retaliated by banning all flights in and out of Canberra until the government backed down.
A confrontation followed but finally a compromise was reached. The pilots agreed to lift their blockade if the government took away the retrospective nature of the new tax. The government said yes but, in doing so, created the first of the complications in the superannuation system.
The portion of the superannuation payment that related to pre-1983 service continued to be taxed at the old low rate. The portion that related to service after that date (called post-1983 service) was taxed at the new higher rate. This is where the terms 'pre' and 'post' come from.
In 1988, the then Treasurer Paul Keating suddenly realised that he had introduced one of the most unpopular taxes in history, and yet would receive little benefit from the higher tax as most of the money would be collected by future governments.
The move to the current system
How did Keating solve it? Simple. He chopped the 30% exit tax in half and promptly made up the loss by levying a 15% tax on contributions. The change made no difference to the final payment but it gave the government of the day a large and growing income. It also reduced the impact of separating the exit tax into pre and post 1983 components because a tax on contributions enjoyed no such concession.
It was a financial win for the government but Keating still had more revenue raising work to do. He also added a 15% tax to the income of the superannuation fund itself.
In just five years the taxes on superannuation had gone from nil on contributions, nil on earnings and less than 3% on the final payment to 15% on contributions, 15% per annum on fund earnings and 15% on the end benefit.
In 1991, the Superannuation Guarantee (SG) was introduced and legislated in 1992. The compulsory superannuation system ensured Australian employers paid their employees’ super, boosting super coverage to 80% by 1993. Super coverage continued to rise from the 1990s, and in the 2000s, Australians were able to choose their own super fund, and were given the opportunity to transition to retirement. The SG will increase to 10.5% from 1 July 2022.
Complexity creeps in
As superannuation enables people to move assets into a low tax environment, there has long been debate as to how much should be allowed. Until 1994, it was governed by a complicated formula based on your average annual salary and your length of service. It was horrendously complex and on 1 July 1994, new simplified rules were introduced which included the concept of a Reasonable Benefit limit (RBL) which governed the amount that could be held in a superannuation or a rollover fund without penalty. From that date, everybody was allowed a lump sum RBL of $400,000, and a pension RBL of $800,000. The figures were indexed to AWOTE so they grew substantially over time.
In 1996, the Coalition went to went to the polls guaranteeing no changes to superannuation, but within weeks of winning government, Howard split his promises into 'core’ and 'non core' thus giving a whole new dimension to politicians’ promises.
It didn’t stop there. Just one day before the August 1996 Budget, Treasurer Peter Costello appeared on national television repeating the promise that there would be no changes to superannuation. Next day he announced a 15% surcharge on contributions, and justified it on the grounds that the well off should make a contribution to solving the nation’s problems. The result was a loss of confidence in the integrity of the superannuation system. It was a most unpopular measure and after pressure from all sides, it was reduced to 12.5% in 2003 and abolished on 1 July 2005.
Capping contributions to manage benefits
Far-reaching changes were announced in the May 2006 Budget. Non-concessional contributions went from being limitless to limited, Reasonable Benefit Limits were abolished, exit taxes for the over 60s were abolished (except for members of unfunded funds), and there was no longer a requirement that you start withdrawing your money from super at age 65. Tax deductible contributions were limited to $50,000 a year with some transitional measures. Those who could pass the work test were allowed to make tax deductible contributions till age 75. It made superannuation an even more attractive vehicle, but it did prove that change is always with us.
The concept of super had changed. Instead of limiting end benefits, rules were brought in to cap contributions.
As superannuation funds grew, some claimed it was unfair that wealthy individuals could have $5 million or more in a zero or low tax environment. Various solutions were bandied about, but in 2017, the Turnbull Government bit the bullet and announced that the maximum amount that could be transferred to the zero tax pension environment would be $1.6 million. It was known as the Transfer Balance Cap (TBC). Many people were confused about the concept, and there was wide belief that $1.6 million was the most anybody could hold in pension mode. That was wrong - it was the most that could be transferred to it - the balance could grow provided the mandatory annual pension withdrawals were made.
Large balances paid out of super on death
Those worrying about large balances should take into account that most people with large balances are older retirees who have been investing through superannuation for a long time. As they die, their balances can only be paid in cash, or in some cases their pension will revert to a spouse or a dependant. As the pension amount is limited by the TBC (less any drawdowns), a huge amount of money will leave the superannuation system over the next 10 years.
Continual change has been part of our superannuation system and many of these changes have been reasonable and have improved the system. We have tighter limits on contributions that will restrict the future growth of very large superannuation balances but we also have many layers of complexity that most people do not understand. The challenge now for all parties is to preserve the status quo and to refrain from further major changes. Australia needs everybody to trust the integrity of the superannuation system.
Noel Whittaker is the author of 'Retirement Made Simple' and numerous other books on personal finance. See www.noelwhittaker.com.au or email noel@noelwhittaker.com.au. This article is general information and does not consider the circumstances of any individual.