Superannuation: an incentive to save or upper-class welfare?

Superannuation reform – how boring, right?

I suspect you aren’t aware of this fundamental loophole though. Consider this. Currently, the Australian superannuation system allows an individual who has (a) reached 60 years of age and (b) decided to permanently retire to simply withdraw all of their funds from super – completely tax free – and then to splurge it all on whatever they like. It’s important to note that this amount could have been just a few thousand dollars or, alternatively, many millions and that despite the lump sum withdrawal ‘belonging’ to the individual, a large part of it would have been brought about through the subsidised nature of Australia’s superannuation framework. Here’s the real kicker though: having enjoyed a period of superfluous spending – potentially with millions of dollars – that same individual, provided that they were now aged 67 or older, would then be eligible to receive a full aged pension (and its many associated ancillary benefits) courtesy of the federal government for the rest of their life as long as they didn’t earn more than about $3,952 in a year (from interest on their now non-existent savings!) or have greater than $192,500 in assets, excluding their home. Does that sound reasonable to you?

While the Australian superannuation system obviously isn’t generally a complete waste of public funds like in the aforementioned scenario, the Commonwealth Treasury estimates that superannuation tax concessions currently cost the federal budget $32 billion each year and that by 2015 this will grow to be a staggering $45 billion (the latter being roughly what the NBN will cost). Beyond 2015, as superannuation savings continue to grow, the problem will only become exponentially worse. Furthermore, analysis has shown that less than a quarter of the concessions assist the poorest 60 per cent of Australians and that an entire quarter of the tax breaks are targeted at the wealthiest 5 per cent. Clearly, given the status quo with superannuation policy isn’t fiscally sustainable or equitable, some profound changes will have to be made at some point in the future. However, these required fundamental alterations now don’t look likely any time soon.

The Federal Government’s announcement on Friday regarding superannuation reform – if you can call it that – appears to have defused the issue for now and, with a likely incoming Abbott government, possibly for many years to come. The superannuation industry – currently receiving around $20 billion in fees each year from superannuation account holders – has promised to suspend plans for a mining industry inspired advertising campaign against major reform. The majority of criticism is now only coming from those who think that the Gillard Government hasn’t cut back superannuation concessions nearly hard enough.  Some political pundits are even suggesting that, given the extent to which the superannuation policy adjustments have been watered down from what was originally signalled by Wayne Swan, Labor is simply passing the politically toxic issue over to the Coalition for it to deal with if it wins government on September 14.

The reality with superannuation is that there will always be a need to ensure the balance is right between maintaining an incentive for people to save for their retirement (so they don’t have to rely on a government aged pension), fiscal sustainability and the equity of the concessions integrated into the system. That balance does not seem to have been perfected in any way following Friday’s policy announcement and it’s hard to see an incoming Abbott government being able to do much better given how politically inexpedient it would be for any government to do so. What does remain clear is that while the opportunity for substantial reform may have been lost for 2013, there will have to be changes implemented at some point. After all, whether superannuation reform is a Cyprus style ‘raid’ on people’s savings as Abbott suggests or not, it’s still a huge drain on the budget that he has promised for so long to bring back to surplus.

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