There is a problem with retirement incomes, but it isn't the super guarantee

A better designed assets test would ensure that we didn’t penalise thrift.

Expert reveals the real problem with the pension assets test
The problem is that extra savings cut the pension, it isn’t the idea of extra savings. Shutterstock

Andrew Podger, Australian National University

There is a case for not proceeding with, or at least further deferring, the legislated increase in employers’ compulsory superannuation contributions from 9.5 per cent to 12 per cent.

But the Grattan Institute’s latest analysis, published in The Conversation and elsewhere, does not make this case.

Rather, it demonstrates extremely well a totally different problem with our retirement incomes system, and falsely ties it to our 9.5 per cent so-called “super guarantee”.

That problem is the pension assets test, tightened in 2017.

The problem is the pension assets test
For a significant group of middle income earners, Grattan finds that an increase in savings through the super guarantee would lead to a reduction in lifetime incomes.

But that is equally true of a voluntary increase in savings, in any form other than increased investment in the family home.

A better designed assets test, preferably through a merging of the income and assets tests, would ensure that increased savings boosted at least retirement incomes. It would ensure that we didn’t penalise thrift.

Whether we should attempt to compulsorily increase in savings through the super guarantee is an entirely separate issue.

Grattan is right to point out that any increase in the guarantee would come at the expense of increases in wages. It falsely accuses proponents of an increase of insisting this would not be the case.


Read more: Productivity Commission finds super a bad deal. And yes, it comes out of wages


Perhaps some proponents of an increase do believe employers would or should bear much of the cost, but that is not consistent with the history of the super guarantee, one of whose strengths has been the sustainability of its funding by not adding to the cost of labour or inflation.

Those super ‘tax breaks’ scarcely exist
Another annoying aspect of the Grattan piece is the continued presentation of superannuation tax arrangements as “tax breaks”.

It is true that a shift in payments from wages to superannuation savings does, at that point in time, reduce tax revenue because of the difference between the contributions tax (generally 15 per cent) and wage earners’ marginal tax rates (for most, at least 30 per cent).

But what is the appropriate tax on savings, particularly savings that cannot be accessed until age 60?

The convention internationally is to exempt from tax entirely contributions and the earnings they generate, but to tax in full the benefits as they are paid out. If we did this, we would be imposing a greater immediate cost on the budget which would presumably be an even greater “tax break”. In reality we would be providing an appropriate tax regime for those looking to spread their lifetime earnings, in the knowledge that tax would be paid at the time they took money out.


Read more: 'Catch up' super contributions: a tax break for rich (old men)


Work done a few years ago for the Committee for Sustainable Retirement Incomes concluded that, after the Turnbull government’s superannuation tax reforms, our regime of a limited but progressive tax on contributions and earnings and no tax on benefits, produced very similar results to the conventional approach at all income levels, although it is implemented the other way around.

It means that by international standards there isn’t a tax break.

Moreover, as Grattan has demonstrated with its analysis of lifetime incomes, the impact of superannuation on age pensions disadvantages many people precisely because it saves the budget money in the long term.

The goal ought to be a comfortable retirement…
What would really help is if Grattan articulated what it considers to be the objective of the retirement incomes system, and focused its analysis on whether increasing the super guarantee would or would not help to achieve that objective, and at what cost.

The objective surely ought to be that Australians have secure and adequate incomes at and through retirement. “Adequacy” here has two components:

-  sufficient to ensure no aged person lives in poverty (the role of the age pension); and

-  sufficient to maintain pre-retirement living standards (which the role of superannuation and other savings, with the age pension contributing for people on less than average incomes)

There are legitimate debates about how to determine “adequacy”, particularly the second component.


Read more: Frydenberg should call a no-holds-barred inquiry into superannuation, now, because Labor won't


Grattan claimed last year not only that the current 9.5 per cent super guarantee would do the trick, but also that most current retirees (who have not accumulated anything like a lifetime of 9.5 per cent of compulsory super savings) already receive adequate retirement incomes.

I remain convinced this is an extreme view, not consistent with international practice or analysis.

…which might mean contributions of more than 12 per cent
For those not eligible for an age pension (likely to be at least 40 per cent of retirees into the future), maintaining pre-retirement living standards will require contributions of 15-20 per cent (18 per cent is the OECD average); for those eligible for some age pension, the contribution rate required will be lower but, even at typical earnings, would most likely be more than 12 per cent according to Committee for Sustainable Retirement Incomes analysis.

Source: Australian Tax Office

Whether such a contribution rate should be compulsory is a legitimate question.

Perhaps the current low rate of wages growth warrants a longer deferral of the next legislated increase (though it will be seven years since the last set of two 0.25 per cent increases when the next increase of 0.5 per cent is due to come into force in 2021, and real wages will have increased by much more than this in the meantime).

Perhaps the burden on some young families of increasing compulsory savings would be more than their circumstances allow (although there are other ways of assisting them).

A concern I have, however, is that Grattan seems to suggest not only that the super guarantee not be increased beyond 9.5 per cent but that we would not then need to encourage most workers to voluntarily save more beyond that, including after their children grow older and become financially independent.

That seems to me short-sighted, and accepts a greater reliance on the age pension in the future than is desirable.The Conversation

Andrew Podger, Honorary Professor of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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    COMMENTS

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    Chris B T
    20th Aug 2019
    9:01am
    May be Eliminate All Asset Tests and everyone Receives The OAP.
    Then Fill out Your Income Tax Return and Pay Tax Accordingly.
    No More Complicated Forms/Procedures and less workers needed to Process.
    No Both LNP @ Labor go with this Complicated and Extremely Hopeless Method only
    To PEEVE you off.
    {;-(@)
    Farside
    20th Aug 2019
    10:57am
    why limit it to the OAP? Why not pay everyone a basic income and eliminate the tax free threshold? This would eliminate the OAP, Newstart, Austudy etc and see off all the bureaucracy and parasitic providers required to administer them.
    TREBOR
    20th Aug 2019
    12:02pm
    Interesting thought, Farside - let me think about it fully ....
    johnp
    20th Aug 2019
    12:02pm
    agree Chris, there should be universal aged pension !! Hang on Govt cannot afford it cos has to pay politicians all their obscene perks, super etc etc. But it would save on all the bureaucracy associated with assets test. Another example $6- per day meal allowance for elderly in aged care, $180- per day meal allowance for politicians is just one example
    Thoughtful
    20th Aug 2019
    1:35pm
    Now we are starting to think. No point in stressing the what has happened, what could have been. Time to move forward in our thinking. Of course figures are terrific if worked out according to full employment for all over a working lifetime but unfortunately that is not going to happen. There will always be the unfortunate, the lazy etc etc but that doesn't mean we can't develop new ideas. The current assets test certainly seems to be penalizing many - so that is a good place to start our thinking.
    Farside
    20th Aug 2019
    1:54pm
    affordability has little do with introducing universal pension, or UBI for that matter. It is ideology and priorities that get in the way and nothing to with MP pay and benefits (excessives as they might be). Aim for one of your issues and you might get lucky, but try for universal pension and cuts in MP remuneration will fail.
    Thoughtful
    21st Aug 2019
    3:23pm
    @Farside I call it philosophy but you are quite right it is ideology. Too many cling to the old ideologies and it is frustrating to try and open minds to new ways. Have we all become so set in our thinking that it is impossible to have a conversation? And I agree - cuts to MP remuneration will really not go that far to resolving anything. While you can disagree with it all, the fact is it costs the country much less than other things. Let's try to aim for making things better for all.
    GeorgeM
    21st Aug 2019
    11:58pm
    Quite right, Chris & john. It is blindingly simple - just get rid of all Asset & Income Tests, and give out Universal Age Pension based only on Age and Residency, and all will win, with Govt costs down, and increased economic activity and revenue. Such a simple idea is too difficult for Grattan Institute or the Professor quoted in the article. I believe Treasury should cost this out - but not sure how this will happen unless Retirees force the issue.

    Beware - I have heard that the Retirement Incomes Review is in danger of being hijacked as a review mainly into the Superannuation system & Super Guarantee, avoiding real reform needed in view of the punishing Deeming and Assets Tests, both being Retiree Taxes which destroy Retirees assets and incomes while boosting the Budget. Politicians don't like to give up their power to tinker with these Taxes, and MUST be made to listen to the people by all Retirees forcing them to listen.
    MICK
    20th Aug 2019
    10:46am
    The reality is that the government seeks to attack any retirees with two bob to rub together.
    First they tried to kick retirees out of the family home and force them to live off the equity they freed up.
    Then they forced them to become a bank to their children.
    Then they reduced the assets test to a miserably lower level to keep retirees off any pension at all.

    Lets not keep writing this sort of BS but rather put blame where it belongs: squarely at the feet of a government which sees retirees as a burden to be plundered and suppressed.
    So who voted this lot in? Oh yes.....the self interest folk amongst us who could not live without their (very few) franking credit dollars. I now know how Jesus must have felt when he was sold out for 30 pieces of silver. The entire retirement community will now continue to be come after. Its not over folks!
    Farside
    20th Aug 2019
    11:03am
    a pensioner came in to the centre where I volunteer the other day to say she had not received her $1000 promised or told how much she could expect in franking credits. She does not own shares and had not submitted a tax return in more than a decade.
    Anonymous
    20th Aug 2019
    11:05am
    Mick - I agree and have been very disappointed with liberals attacks on retirees BUT labor would be no better.
    However the last election was decided by QLD alone and they voted for coalition because they believed they would be better at creating jobs. Further for labor WA was a disappointment because they made no ground there. I think 22 out of 29 federal sears in QLD are now held by coalition and in WA 11 of 15. Also labor vote in QLD was down to 27%.
    As a self funded retiree they have already eliminated me from OAP. The only reason I get discounts is because I get Veteran benefits.
    I totally agree with you that it is far from over - treasury and finance I believe are already looking at ways through income and assets tests to further reduce those who can access OAP.
    Anonymous
    20th Aug 2019
    11:12am
    Mick asks - "who voted this lot in?" Well, the way it looks the other mob would have been worse. Do not have shares myself but possess other assets - Shorten wanted us to have zilch. Worker all my life but Rudd lost me for Labor and maybe Albo restores a bit of Hawkie and Keating's magic. Seems to me that the ALP is a branch office of the Greens at the moment.
    ozirules
    20th Aug 2019
    11:17am
    the assets test threshold should have increased to take account of inflation, not reduced giving pensioners a double whammy. On top of this is the unfair deeming rate which is a direct steal from pensioners. Trouble is once they get away with fleecing the frugal neither party will let go of the financial windfall. Stick with the soft target, much easier than chasing foreign own companies to pay their fair share of tax. Australia is not the lucky country for pensioners.
    MICK
    20th Aug 2019
    4:59pm
    Bob & Jim - respectfully but you are falling into the propaganda trap. Labor is not golden bullet but it is not a party put into power by the top end of society to enact policies for the top end of society. With that in mind I think ordinary citizens might have gotten a fair go rather than being ruthlessly hunted down as is happening. You may both want to read the propaganda piece released by The Grattan Institute. Horrifying and straight from Liberal Party HQ.

    Whilst you two are comparing lets look at Labor debt vs Coalition debt since. The media never mentions it but this a clear indicator of a destitute government, which gained power after the GFC and then removed our debt ceiling and tripled debt with nothing to show. And then it gave the wealth an unneeded tax cut when we can't afford it.....and is now coming after retirees with a vengeance never before seen from any government. As I said read the Grattan story and enjoy what's coming. I think I may have told you so.

    Be careful what media lies you believe and who you vote for. Being groomed by the media is a sign of low intelligence but plenty of people have been conned into voting for a party which is now planning to cannibalise them. Don't believe me. Read all about it:

    https://www.abc.net.au/news/2019-08-20/inheritances-as-we-know-them-are-broken/11429540

    Be happy with your future. It makes no difference to us but it will to m any others.
    Cheers
    Blinky
    20th Aug 2019
    6:18pm
    You are absolutely right Mick.
    Politicians, both Labor and Liberals do not give a hoot about pensioners.
    They remember us when they need to do some cost-cutting in order to balance their budget.
    Hopefully, one day, we will have a PM with the guts to correct this

    20th Aug 2019
    10:57am
    Australia introduced compulsory super in 1991 but other countries have had super since 1960s. Keating believed that 15% was the number required over a 40 year working life to ensure workers would have enough in super that was better that OAP. Well 28 years on we are still at 9.5% and expenditure on OAP is still rising. Also people are living longer - Keating saw all of this happening in late 80s and when he introduced super in 91.
    Something will eventually have to give and if things get tighter then governments of both persuasions will further tighten eligibility through income and asset tests making it harder to get OAP.
    There are still many who work their income and assets such that they can get at least $1 so they can get discounts on the things such as rates, electricity, vehicle registrations etc.
    One thing for sure this topic has a long way to go.
    for what its worth Podger makes many good points against Gratten Institute. I tend to discount them as I am a follower of IPA institute.
    Karl Marx
    20th Aug 2019
    11:59am
    And who is to blame, the LNP have been in government for most of the time since Keating so the LNP are to blame for the current complexity of the OAP & constant attacks on those most vunerable & the super contribution still at 9.5%. The ALP don't help much either but don't forget the LNP are pretty much solely responsible for the current situation this country faces and for the next 3 years.
    Tanker
    20th Aug 2019
    1:29pm
    Thank you Bob for letting us know you follow the IPA as that explains a lot.
    Tanker
    20th Aug 2019
    1:29pm
    Thank you Bob for letting us know you follow the IPA as that explains a lot.
    TREBOR
    20th Aug 2019
    12:01pm
    Well, we penalise hard work and loyalty etc these days of management by ego - why not throw thrift into the mix as well?

    (getting in touch with my inner cynic)...
    Mad as Hell
    20th Aug 2019
    12:24pm
    Scott Morrison orchestrated the fraud on 330,000 part pensioners for the budget emergency from 2017 as a result of the changes to the Pensioner Assets Test saving $0.5 billion a year. Two years later he has legislated $158 billion in tax cuts over ten years to stimulate the economy.
    What budget emergency?
    Remember trickle down economics?
    Farside
    20th Aug 2019
    2:05pm
    both sides of politics know nobody except the gullible ever believed the line about a budget emergency or that trickle down economics would do anything but enrich the wealthy ... this is just part of the theatre
    Karl Marx
    20th Aug 2019
    8:18pm
    If pensioners had more money the great majority would spend most of it with the general economy that would create more jobs, more cash flow etc & also be paying GST that the government gets back.
    Trickle down doesn't work but trickle up does
    GeorgeM
    22nd Aug 2019
    12:04am
    Yes, Mad as Hell, I remember Morrison calling the Labor's proposed Franking Credit changes as a Retiree Tax on 50,000 Retirees, whereas he (and stupid Labor) missed the point that he himself put in place the massive Retiree Tax on 421,000 Retirees (330,000 part-pensioners with reduced income up to $14,000 p.a., as well as 91,000 who lost their part-pensions altogether) with his Asset Test changes of 2017. Time to remind him of this as part of the Retirement Incomes Review.
    Andy
    20th Aug 2019
    1:17pm
    if only we could stop the politicians from ripping us off and then blaming the pension for the shortfall so sick of it so wrong you know the governor-general is supposed to do that if doing the job but being paid to much does not have the time
    floss
    20th Aug 2019
    3:31pm
    What a great idea,Hockey had no idea the pain he caused.
    TREBOR
    20th Aug 2019
    8:04pm
    I'm certain he did, but it didn't affect him, so why should he bother?
    Blinky
    21st Aug 2019
    10:12am
    It was Hockey who said: "the age of entitlements is over," or some like that, but I wonder whether he had been getting both the politicians' pension AND the ambassadors salary at the same time?
    It 'd be good to know!!!
    If he has, surely he hasn't had to meet an asset and income test???
    Blinky
    20th Aug 2019
    6:14pm
    The asset test punishes people who worked and saved x their retirement because it is too damn low!!!
    Example : if u have a little super plus some savings in the bank, plus a nice $30k car, you would probably go over the test threshold n would only receive a PART-PENSION if any.
    Whereas, if u were a long-term dole bludger or a recently arrived old-age migrant, you would receive a FULL PENSION, YHANK YOU VERY MUCH!!!

    Super, therefore, is an oxy-moron. Have none, and u get a full pension, have some and u get a part-pension
    SOLUTION: have a BIG super, e.g. $700k or more, and you do not need to depend on a govt pension and you dont need to deal with Centrelink.
    THIS IS A NO-BRAINER,you dont need the Grattan Institute or a so-called finsncial advisor to work this out.
    RAISE the asset test and you will be rewarding those retirees who worked hard, paid taxes n have saved a little x their retirement!!!!
    TREBOR
    20th Aug 2019
    8:09pm
    Don't limit yourself to the extremes, Blinky - there are countless others who were setting fair for a decent retirement, to be ambushed by filthy industrial relations, bad management, piss-poor government intent on destroying rights under law, bad social policy that generates poverty for the many due to easy divorce etc and a need to rebuild often time and again, over-focus on real welfare in PPL, childcare etc that has nothing to do with the Social security budget but drains it, plus affirmative action and all its evils, and countless other things...

    This country needs to go back forty years,offer a national apology for stuffing it all up, and then make proper restitution.

    Even today there is the argument going around that somehow Australia, on the verge of being the biggest gas supplier in the world, cannot even offer its citizens gas below world parity prices.... the answer offered is 'more competition' - but gas was cheaper than chips when it was run by government as a utility - and NOWHERE has the privatised business model offered anything but higher prices and poorer populace.

    Transfer of public money into the hands of mates of government is what it is.
    cupoftea
    20th Aug 2019
    9:42pm
    bob m I think you should get your facts right regarding the $1.00 payment so they can get cheap electricity rates rego that has got nothing to do with federal hand outs that is state seniors who get it I do think you should get your facts right
    cupoftea
    20th Aug 2019
    9:42pm
    bob m I think you should get your facts right regarding the $1.00 payment so they can get cheap electricity rates rego that has got nothing to do with federal hand outs that is state seniors who get it I do think you should get your facts right
    Anonymous
    21st Aug 2019
    8:45am
    States only give you the rebate if you have a Commonwealth-issued pension card (Centrelink) so I would say bob m is on the money. The Senior Card gives you cheap public transport, nothing else. Had a senior card before the pension card with the former technically useless.
    Skiing
    21st Aug 2019
    11:04pm
    Bob M is correct. Get a dollar of pension and you get the concession card which gives you the State and Local Government discounts
    cupoftea
    21st Aug 2019
    2:10pm
    CJ in western Australia we get a % nocked of a lot of things council rates water rates driving licence electricity etc so I am not wrong
    Anonymous
    25th Aug 2019
    11:37am
    You sure it is a Senior Card not a Pension Card? Here in NSW it is only the Pension Card that gives you the deductions you mentioned. Maybe WA is more generous - in Qld you only get the Senior Card when reaching 65 unless you are in receipt of some Centrelink money>
    cupoftea
    21st Aug 2019
    2:10pm
    CJ in western Australia we get a % nocked of a lot of things council rates water rates driving licence electricity etc so I am not wrong


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