(03) 9020 2905PORTFOLIO POINT: Is super headed towards becoming a defacto age pension system, designed to encourage only the lower-paid to put away for themselves?
I’m not sure that any political party really believes that there are too many votes that will be actually won or lost in regards to superannuation.
Sure, political parties know that superannuation is vitally important. Clearly, that’s why they spend so much time playing with it. The endless bloody playing with it!
SMSF trustees have lived in fear of the three government inquiries that have been variously running over the last two years. And in recent days, Treasury secretary Dr Ken Henry has confirmed we’ve had reason to with a placed briefing on his report.
In the same way that the good news from all federal and state budgets is leaked each year – to maximise publicity, control the news flow and make sure the “good” messages aren’t lost amongst the bad in the headlines – a sizeable portion of the Henry tax report has already found its way into the media.
This only adding to the sense of frustration. The dribble of information coming out from the report, makes Henry and his “boss”, Treasurer Wayne Swan, look like children with a secret. Big grins on their faces and a sneering “we’ll tell you when you’ve squirmed enough” demeanour.
So what has Henry recommended and what does it mean?
Let’s start with a declaration: I haven’t seen Henry’s report, so the following comments are based only on media reports (and assume that they’re accurate).
Of what has so far been leaked, there seems to be six broad recommendations that will impact on super.
Stop the “wealthy” getting higher tax benefits from contributing to super
Henry postulates that it’s unfair that someone earning in excess of $180,000 a year gets a larger benefit from contributing to super than a worker earning less than $34,000.
If someone earning $200,000 a year took the money as salary, they would pay 46.5% in income tax. However, if they put it into super, they would pay just 15%. Income earners between $6000 and $34,000 would only pay either 15 or 16.5% (including the Medicare Levy) if they took it as salary. If they contributed money to super, they would still lose 15%.
Henry believes this is unfair and wants to square up the ledger. (One of the ways the ledger is squared up, of course, is through the government co-contribution, where lower paid workers were getting an automatic tax-free return of 150%, which Labor has temporarily cut to 100%.)
Compulsory lifetime annuities – run by the government
I looked at this proposal from funds manager Challenger last year (click here). The most interesting of Challenger’s points was that it would guarantee a higher income than the full pension for life, even if it was only $20 or $50 a week.
The problem with lifetime annuities has been that few providers are still offering them, because a vicious circle was operating. Only those people who expected to live long were taking them out, which forced providers to reduce the returns available, which then meant even fewer people were prepared to buy them.
Henry recommends that the government step in to offer lifetime annuities. (Probably not what Challenger was proposing.) But the underlying point makes sense.
Whether or not this is a good idea comes down to the detail. Will the Government force Australians to take a particular portion of their superannuation balance, at retirement, as a lifetime annuity? If so, what percentage? Should it be a minimum, across-the-board, percentage, such as 30-50%? Or should those who have a lower super balance be forced to have a higher percentage paid from their super into the lifetime annuity (to ensure a higher proportional lifetime payment)?
And having the government provide a base service, perhaps against which private enterprise could compete, also seems sensible.
Delay access to super
In last year’s Budget, the government announced that access to the government age pension would be slowly pushed back. Those changes will be phased in between mid 2017 and mid 2023. It means that anyone born after July 1, 1956, won’t be able to access to super until they turn 67.
Henry has promoted that idea for superannuation as well, in order to keep Australians working longer and therefore paying taxes longer. (This is an issue about when you stop paying taxes, which is what Henry’s interested in, rather than when you get access to super.)
Thankfully, the government is not warm on this idea. There is little doubt that this age will be pushed back at some stage. It’s just not going to happen now.
Close the tax gap on different types of savings
Full taxes are paid on salaries and any sort of other income-like payments, such as interest, dividends or rent. However, if you make a capital gain on the sale of an asset that you’ve held for longer than a year, you only pay tax on half the gain.
Henry argues that bias towards capital gains in favour of other types of savings is wrong and needs to bee changed. Any change here will impact on the relative values of investing inside or outside super. We just don’t have enough details yet.
Cut income taxes for older working Australians
Give workers the incentive to stay in the workforce longer by cutting taxes. Not enough detail leaked so far, but again, any change here will impact on the relative attractiveness of super.
Increase the 9% SG contribution
Henry is not going to recommend an increase in the mandatory 9% super contribution for employees, claiming that those who have been in the SG system for their entire working lives (that is, those who started work in 1992) will have enough from this to retire on.
Henry also claims that it would have a more direct and immediate impact on lower paid workers current take home salaries.
Many, many people will disagree with Henry on not recommending a raise in the SG levy. As do I. A reasonable body of opinion believes it should be raised to either 12% or 15%.
*****
The Henry report is reportedly a 10cm thick document, so there will be plenty that hasn’t yet been leaked. Henry may not have covered some things. Or, in true political style, he may be saving all the really bad news for the day the report is released.
Two important questions that have not yet been answered are whether tax-free super pensions are to be scrapped and whether funds in pension mode will keep their tax-free status. Changes here could devaste investment plans.
Labor seems intent on a serious shakeup. But we won’t get to see the biggest portions of their shakeup – Jeremy Cooper’s review – until much later this year.
Henry’s recommendations will get many people wondering whether committing too much money to super is really a wise idea. Should they instead invest in property and shares directly?
Is that too drastic? I’m not convinced it is. Superannuation under Labor is looking more and more like it will become something designed to become a defacto age pension system. That is, it will become a system that will help the lower-paid put away for their future, with so many restrictions being placed to make it of marginal benefit for average to well off Australians.
It’s laughable that where the Henry report considers itself a long-term thinking document by talking about “longevity risk”, it completely fails to understand the myopia it engenders by further considerable changes to the law.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.