After years of pressure from industry groups and CPA Australia, an
overhaul of our retirement income system is imminent. But even if the
review is delayed by the next Federal election, the wheels of debate are
spinning.
The review will be a golden opportunity for Australia to put the finishing
touches on what should be a world-class retirement income system.
We need a system that better integrates all three pillars of the retirement
income system - age pension, compulsory and voluntary super. We also need
one that provides adequate savings, is simple to administer and is sustainable.
The number of retired people is climbing. More than 10 per cent of Australia's
population is aged over 65. The Australian Bureau of Statistics predicts
the figure will double during the next 30 years.
This fact alone presents major economic issues for Australia expanding
well beyond pure retirement income needs. The retirement crunch of the
21st century must be dealt with now, otherwise governments will be confronted
with either raising taxes or cutting back existing levels of support provided
through the old age pension.
Tax treatment
The tax treatment of superannuation is a significant problem. Many other
countries tax superannuation either when it enters or exits the system.
Australia is unique in that it taxes superannuation at three points: when
a contribution is made, on investment earnings and when taken as a benefit.
The superannuation surcharge, in particular, is a shambles, costing
$200
million to administer the raising of less than $400 million.
All governments have classified superannuation as a revenue 'soft target'
where billions can be collected with minimal political pain.
At the moment, the Government earns more than $5 billion in tax revenue
from superannuation every year. Every dollar that is taken out of superannuation
now is money that won't be available for the future retirement needs of
Australians.
To deal with these impending issues we need forward policy planning now.
For CPA Australia, the review of retirement income policy will form
a key part of our work for the next couple of years.
The first of several discussion papers by the Superannuation Centre of
Excellence forms the platform for extensive review and involvement of
members in the ensuing debate. The paper suggests the key principles for
reform are a sufficient, sustainable and simple retirement income system.
Firstly, and most importantly, we need a system that provides adequate
savings to alleviate poverty and provide income replacement for aged people.
Even with the Superannuation Guarantee rising to nine per cent in the
next couple of years, there may not be enough savings for retirement.
This will require a broader and deeper approach and commitment to encourage
Australians to save for their retirement.
While boosting the Superannuation Guarantee is an option; it must be
remembered it would likely be employers who would be obliged to shoulder
this cost.
We also need a system that can be sustained over the long-term. The system
must be affordable and one that pays for itself. This means inflows and
outflows must reconcile. It must also be politically sustainable and supported
by all parties. As the Australian Financial Review reported recently,
one of the main problems with superannuation is that it is a long-term
plan while politicians are short-term creatures.
To work, the entire system must be simple and transparent. This will
help the decision-making process and also ensure administrative costs
are contained.
Past imperfections
Simplicity should also extend to implementation so past difficulties,
such as those experienced with the surcharge, are not repeated.
Finally, without question, the system must be supported by policies
that make it easy to save and instil national value and purpose in retirement
savings.
As superannuation writer Barrie Dunstan reported in the AFR: 'We need
to develop sound investment practices and we need to protect income for
retirement.'
The COE's discussion paper on the principals for a retirement income
policy is the first of a series of papers on retirement income. A series
of fact sheets dealing with areas such as taxation and savings is being
prepared as part of CPA Australia's campaign to help drive the debate
and shape the direction of retirement income policy in Australia.
About the author
Brad Pragnell is CPA Australia's superannuation
and financial planning consultant