For a document that stayed secret for so long, it is hard not to be a little bit disappointed by the Federal Government’s retirement income review.
Despite being very long at 638 pages, there are no actual recommendations so what happens to the superannuation guarantee, age pension, superannuation taxes and those who retire without enough to live on is still something of a mystery.
However, if you look at the report led by former Treasury deputy secretary Mike Callaghan through the prism of current government policies, it is not too hard to see what direction the changes that are likely to be introduced in the Budget next May are likely to be.
Super guarantee rises could be scrapped
First and foremost, it now seems highly likely that the planned and legislated rises in the super guarantee from the current 9.5% of income rising to 12% by 2025 are set to be ditched.
The review presents some compelling reasons for ditching the rises – the strongest of which is that wealthy individuals are getting most of the benefits of super and don’t actually need any more.
Instead, the idea is that workers would get more money in their pockets now if the super increases are ditched – perhaps a dubious proposition given that wages growth has been stagnant for a long time and looks like remaining so in the current recession.
It estimates wages would rise by around 4% a year or 2% over a lifetime if the super increases are removed.
However, we only have to look at the early super release policies that allowed workers to withdraw up to $20,000 from their super to see how compelling the “show me the money’’ argument is.
It is undoubtedly the case that almost all workers would have been better off in the long term leaving their $20,000 invested for their retirement but the latest APRA statistics show that the scheme was grabbed with both hands by 4.6 million applicants who helped themselves to around $34.6 billion while they could.
The attraction of money up front is compelling for many and will be used as a way of selling the ditching of the higher superannuation guarantee payments in return for bigger pay packets – regardless of whether those bigger salaries arrive or not.
The wealthy are hogging superannuation tax concessions
The second and perhaps most surprising thing we learned about what the government might do is to attack the wealthy for hogging too much of the current superannuation concessions.
It has long been known that the wealthy and/or high-income earners get a disproportionate amount of the tax concessions within super but this review showed that this trend will only accelerate over time unless changes are made.
It only makes sense when you think about it – those on the highest tax rate get by far the biggest discount on the biggest amount of money when they pay the 15% tax on their super contributions and 15% tax on earnings.
Even now that the pension phase of superannuation has been limited to $1.6 million, there are many super balances that are much higher than that – some much higher – that have been built up under earlier rules.
In simple terms, the benefit to the government of avoiding the payment of the age pension is increasingly absolutely outweighed by the size and scale of those tax reductions for those on high incomes.
In some ways taking action on this front will be tough medicine for the Federal Government which would like to claim higher income earners as some of their core supporters.
Some groups are being left behind
A third message in the report is that there are some groups that are being left behind by the current superannuation system.
That includes those who retire but still live in rented accommodation, women, those on low incomes or with a variety of low-income jobs that put them below the super deduction limits, those who are forced to retire early, the disabled and Aboriginal and Torres Strait Islander people.
What the report shows is that current supports for these groups are not enough to allow them to have a successful retirement, even with rental support and other payments.
If tax deductions on super for the wealthy are reduced then it would make sense to redirect at least some of that money to these disadvantaged groups that struggle to survive in retirement under the current system.
While death duties have long ago disappeared in Australia, the report provides a good argument for perhaps reinstating some sort of inheritance tax because it shows that many retirees die with their retirement assets largely intact.
Eating the house?
Another issue highlighted by the report is the dangers of the policy distortions around housing.
Retirees who rent privately can really struggle to survive on the age pension or their superannuation while those who own a house can also be income poor because a high proportion of their wealth is tied up in their house.
With the house not counted in assessing the pension, there is a perverse distortion towards buying the most expensive house you can.
Allied to this issue is the fact that the report shows that many retirees live very frugal lives and fail to spend much of their superannuation, often dying with around 90% of their original super and other retirement balances. Possible policy changes to look out for out of this analysis include:
- including the family home in the pension assets test – possibly the portion of the home above a certain value. This would force retirees to use up more of their own assets before relying on the pension.
- improving ways of accessing the value in houses while retirees are alive – something that is already happening through new equity access schemes that allow retirees to effectively “eat their house.”
- perhaps evening up the situation of those retirees who rent versus owning a house, given the current rental allowance and higher investment limits don’t seem to work too well.
Get ready for conflict
One thing you can take to the bank is the fact that there will be the mother of all fights to come over this review before the next election.
Labor and the big industry superannuation funds – and possibly the other super funds as well – will scream blue murder over any changes to the planned rise in the super guarantee.
They will trot out any number of comparisons that show how much superannuation workers will miss out on if the legislated and promised increases don’t go ahead.
Then again, if the Morrison Government can engineer some sort of repeat to the “show me the money” super raid for the pandemic – possibly in the form of promised higher pay rises – perhaps they will be able to win over the masses.
As for the forest of other potential policy changes around retirement incomes, we will just have to wait and see what policies eventuate but of all the issues that may arise, the trenches have already been dug for a battle royale over the super guarantee.