It is 30 years tomorrow since the introduction of the Superannuation Guarantee which entrenched retirement saving into the plans of the majority of Australians. The $3.4 trillion pool is expected to increase to $10 trillion by 2040, or around 200% of GDP.
In 2013, we published three articles by former Treasurer and Prime Minister, Paul Keating, considered the principal architect of compulsory super. It is a valuable record of Keating's thoughts, and we have selected highlights from the articles plus two recent interviews.
7 February 2013
Our retirement income system is built on three pillars:
- the means and asset tested age pension
- compulsory superannuation
- tax-assisted voluntary superannuation.
The big leap forward came with occupational superannuation which morphed into compulsory superannuation with the introduction of the Superannuation Guarantee Charge (SGC) in 1991 and its extension to universality in 1992. That change was a defining one for Australia because few democracies can encourage their workforce to save at least 9% of their wages and even more on top of that voluntarily. But Australia did.
But it is now clear that the current system does not provide enough because people are living longer now than when my Government created the scheme for them. We built something that took people from age 55 to 75, but these days, if you reach 60, you have a reasonable likelihood of getting to 85. And the numbers continue to change materially with every decade that passes.
So, we have two groups in retirement – a 60 to 80 group and an 80 to 100 group. The 60 to 80 group is all about retirement living and lifestyle, which I think the current superannuation system adequately caters for. But the 80 to 100 (which is technically, the period of life beyond the previous life expectancy) is more about maintenance and disability and less about lifestyle.
I don’t believe the current system caters for this. The policy promise of a good retirement cannot be fulfilled with such longevity, and so, the promise has to change.
While I believe that private enterprise has been the appropriate outlet to provide for products and services for our country’s compulsory superannuation system (and I have never been in favour of government mega-funds of the European variety), I do think deferred annuity structures are a different kettle of fish.
A government-administered, universal, compulsory deferred annuity scheme would be a fully-funded scheme, with the capital provided by the annuitant from a portion of their lump sum superannuation benefit. This would mean that if there was any shortfall in the actual assets set aside and the liability due to the annuitant, the government would fund the gap. However, careful asset management with a long term horizon should ensure that any such shortfall should, over time, be insignificant.
I am still of the view that the compulsory superannuation component should increase further beyond the 12% level. If the compulsory superannuation charge was increased from 12% to 15%, it would provide more options to adequately provide for the final phase in life, rather than relying on the age pension.
15 February 2013
When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds (SMSFs) to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.
Employer contributions to superannuation rose from 4% of salaries in 1992-93 to 9% by 2002-2003. I wanted to reduce the future reliance on the age pension, and over time, give ordinary people a better retirement. Back in the 1980s, only wealthy people were in the stock market, but I felt mums and dads should be able to share in the bounty of the wealth of the nation. Owning a home was fine but they needed more. And through superannuation funds, everyone is now in it, and it’s been good for both investors and the nation.
The wealth would address the growing economic problem of an ageing workforce, and realign the mix between capital and labour through labour contribution to real capital growth. Very few countries have developed an adequate retirement income system with no ‘false promise’ in such a universal way, leaving the age pension – an income and asset tested pension – as an anti-destitution payment, which ceases when the recipient dies.
So the SGC was not introduced as a welfare measure to supplement the incomes of the low paid. It was principally designed for Middle Australia, those earning $65,000 to $130,000 a year, or one to two times average weekly ordinary time earnings (AWOTE). This is not to say that those on 50% or 75% of AWOTE should not benefit equitably from the superannuation provisions. They should. But for Middle Australia, the SGC and salary sacrifice was and is the way forward.
At an SGC of 12% and tax arrangements as now, someone on one to two times AWOTE plus adequate salary sacrifice limits should be able to secure a replacement rate in retirement income of around 70% over a 35 year working life.
I mention this to provide context commentary on the rapid growth of SMSFs. As a general statement, I believe people’s expectations as to rates of fund returns are too high. The Australian superannuation system is both large in world terms and large in absolute terms. It is simply too large in aggregate to consistently return high single or double digit returns.
I am certain expectations as to returns and the search for yield have done two things:
- managers have adopted a higher risk profile in portfolios, and
- lower returns than expected have soured expectations, encouraging more people to take the initiative and manage their own assets, including taking on the trustee role when setting up an SMSF.
I believe returns expectations are inflated and those expectations lead to incentives to drive higher fees for managers, but at much higher risks, as was the case between 2002 and 2011. We only have to look at asset allocations. At December 2011, total Australian super assets were weighted:
- 50% to equities
- 18% to fixed income
- 24% to cash and term deposits
- and the rest across other asset classes including property.
By contrast, the average weighting of OECD country pension assets was:
- 18% to equities
- 55% to fixed income
- 11% to cash and term deposits
- and the rest to other asset classes including property.
So, Australia is 2.5 times more heavily weighted into equities and relatively underweight in other asset classes. We are disproportionately weighted into the most volatile and unstable asset class.
The question is – how does this weighting work to deliver the key objective of the system? 60% of total superannuation assets are held by investors over the age of 50. A large proportion of these assets should be moving towards less risky, more stable asset classes, protecting capital ahead of the retirement phase. When we reach the point where outflows are increasingly matching inflows, the weighting to equities needs to be rectified.
How many SMSF investors are competent in matters of asset allocation and general investment savvy? This becomes a real problem for the SMSF system and its deliverability as it occupies an increasingly higher proportion of overall system assets.
For systemic prudential reasons, investment in stable asset classes, such as government bonds or higher rated corporate bonds, could be desirable for SMSFs. That is, perhaps some form of minimum investment will be required which is mandated to mitigate downside risks. As the system reaches the tipping point, where inflows are increasingly being matched by outflows, it will need to be monitored for capital adequacy risk.
22 February 2013
Before I became Treasurer, company income in Australia was taxed twice: once at the company rate, at the time 46%, and then the dividends were taxed at the top personal rate of 60%. On $100 of company income, this left only $21 in the hands of the taxpayer!
In 1985, I changed the system completely and removed the double taxation of company income by introducing full dividend imputation. This meant that company income would only be taxed once. And this concession was reserved for Australian taxpayers.
People should understand that for Australian taxpayers, the company tax is broadly a withholding tax. The government collects it at the 30% rate on company income – and temporarily hangs onto it – before returning it to shareholders (including local superannuation funds) in the form of imputed credits.
In other words, when a company issues its dividends on a fully franked basis, it hands back the company tax paid earlier and staples it to the dividend.
This is my point. If the company tax rate is reduced from 30%, the principal beneficiaries will be foreigners, those who do not qualify for imputation credits. A reduction in the 30% rate, to say 25%, will diminish the value of dividends paid to superannuation funds and self-funded retirees. Such a move would effectively increase the rates of tax applying to superannuation.
Dividend imputation revolutionised capital formation in Australia. The Treasury was uncomfortable with it because of its cost to revenue, and about every seven years it promotes a debate to remove it.
Superannuation is about de-risking the future. In the system I set up, people were encouraged to salary sacrifice in later life, when mortgages had been paid off and they had discretionary income. Under that policy, people could salary sacrifice up to $100,000 a year when over 50 years of age. I believe the current limit of only $25,000 is too low, certainly for those over 50.
This is where long term vision is important. While the government and the Treasury would see an increase in permissible voluntary contributions as a cost to the Budget in revenue forgone due to reduced tax revenues today, such increased limits would provide the government with certainty in the later years by reducing its future funding obligations. This was one of the original intentions when the foundations for the current superannuation system were laid over 20 years ago.
23 November 2020
LS: What would you say to an Australian who said to you, “I get what you're saying about needing money for my retirement, but I need money right now because I've got rent to pay, I’ve got kids and it's my money. Why shouldn't I have it now if I want it and let later worry about later?”
PK: The Report gave the answer. It said for every $10,000 allowed out in the early release programme for someone in their 30s, it costs them $100,000 later. It’s a tenfold increase leaving it in because of the compounding. So, we're talking about a half a percent, on 1 July it goes from 9.5% to 10%, the half a percent is eight dollars a week, two cups of coffee. For two cups of coffee, people are supposed to walk away from their future.
And of course the other thing the Libs are up to is in the Report. I'll just read this to you. “If the SG rate remained at 9.5% and people made more efficient use of their retirement savings, many would have higher replacement rates than they would have under the SG at 12%.” And what they mean by that is accessing home equity. So, the idea is this. You can do better than 9.5 but you got to eat your house by reverse mortgaging your house.
LS: People now tend to live off their investments and when they die they have their house and they have most of their super which they then pass on to their kids. Doesn't it bake in inequality because if you are rich then you've got an asset to pass on your kids but if you're poor and you actually have to run down your savings, then your kids get nothing.
PK: Well, you can’t blame the system, poor people have all sorts of choices. But the idea that a Report endorsed by the Government is putting about is that you don't pay more than 9.5% but you should start reverse mortgaging your house. In other words, give the kids nothing, eat the house, and then you don’t have to go above 9.5%. Now, just remember this. There's been no increase in real wages for eight years now. There's been a 10% improvement in labor productivity and the legislation for the super is passed. People have earned the superannuation, they've earned that 2.5%, the employers are going to pay it. And today the stock market was 6,500 on the index because the wage share of GDP is falling and the profit share is rocketing. So that's why.
4 August 2020
“It is a breach of the preservation rules to just let anyone take out their money willy-nilly. There has been no scrutiny whatsoever ... The whole point of superannuation was a great public bargain with the community: defer consumption for your working life and you will get a very low rate of tax.”
Keating argued that much of the money was probably spent on discretionary items such as cars, boats and motorcycles, and the long-term savings of young Australians are now compromised. As others have argued, the people who needed money could have been protected by the right fiscal policy:
“Every dollar which came out of young peoples' super balances could have been funded by one press of the computer button at the Reserve Bank.”
Hon Paul Keating was Treasurer of Australia between 1983 and 1991 and Prime Minister between 1991 and 1996. This article is general information.