The financial services industry needs to play a role in delivering people the products they need to make the transition to retirement when confronting the reality of not being able to access the age pension until they reach 70. That was one of the key outtakes from a Super Review Editor’s Lunch attended by a group of superannuation industry decision-makers just days before the handing down of the 2014 Federal Budget.
At the core of discussion over the lunch was not only the Government’s declared intention to lift age pension access to 70, but also the likely consequent lifting of the superannuation preservation, with concern among the participants about how members of Australian superannuation funds would be able to span the gap.
However it was AIA head of product management - individual life, Tim Tez who pointed to the need for the industry to be proactively conserving and developing the products necessary to assist superannuation fund members deal with the new environment.
Further, Tez said he believed the regulatory regime underpinning any Government changes would need to reflect the need for product development.
Discussing the likely gap that would be created between a higher pension age and superannuation preservation, Tez said,“This is where I think the regulatory framework and the industry has a role to play in developing these products”.
“You know, at the moment people who are coming to retirement don’t have a lot of options and we can do better as an industry to create some options for different sets of circumstances and needs.”
Tez said that, ultimately, it came down to a need for some forward-planning by the Government.
“Isn’t it the objective for the country to have as many self-funded retirees that aren’t relying on the public purse and therefore are we setting the policy framework to achieve that goal whether it be 10 years 20 years and things like that? I mean isn’t that the question?” he asked.
However other participants in the luncheon argued that the Government needed to be more prescriptive in terms of how people utilised their superannuation savings.
Superannuation Complaints Tribunal chair, Jocelyn Furlan said that many overseas observers were surprised by the contrast in the compulsion associated with the accumulation phase of superannuation in Australian and then the relative free-for-all post-retirement.
“When I’ve been overseas and speaking at conferences, people, commentators or observers have said, ‘it’s amazing that you have this amazing system where you’re able to effectively compulsorily divert the best part of 10 per cent of people’s income and they don’t mind and they support the system, and then when they get to retirement you let them do whatever they like with it’,” she said.
Furlan said that, internationally there seemed to be the perception of a mis-match “because we’ve had no problems in Australia, no sort of strikes or any concerns, any backlash in starting the compulsory superannuation system and yet we get to retirement and then you’re on your own”.
Hostplus chief executive, Paul Cahill agreed with the seeming policy disconnect between the accumulation phase of superannuation and post-retirement, but argued that it would be wrong for government’s to become prescriptive in circumstances where there were limits to how much people could ultimately contribute.
“The contribution gaps, how is someone supposed to put money away for retirement when you’re limited to an amount that’s artificial?” Cahill asked, arguing that the current $25,000 concessional contribution cap imposed by the Government represented an “absolutely an artificial construct”.
Deloitte partner, Russell Mason suggested that a part of the answer might lie in the adoption of “timetime caps” with respect to concessional contributions - something which had been advocated by the Association of Superannuation Funds of Australia (ASFA).
“The life-time cap thing which I think is getting a bit of air-play at the moment, is worthy of consideration,” he said.
However Mason said one of the greater challenges was then convincing younger superannuation fund members to take advantage of such arrangements and in the meantime the low level of the concessional gap was creating serious problems for Australians in late middle-age trying to play catch-up.
“When you’re 23 or 24 and you’re earning 30,000 a year and you’ve got three grand going into super, great. No one cares really, you don’t care, but then when you’re 40 something and you want to plough it all in, you’ve got to be able to fill the hole somehow,” he said.
EIS Super chief executive, Alex Hutchison said that notwithstanding Budget pressures, the current Coalition Government needed to seriously consider the implications which flowed from the previous Labor Government having reduced the concessional contribution cap from $50,000 a year to $25,000 a year.
“So the previous government, by reducing the caps from 50 to 25, you know, is something that the present Government should seriously look at,” he said.
Tez said that Australian governments could ill afford to lose sight of the original intention of the nation’s superannuation regime.
“We seem to be tinkering for tax policy reasons, whether it be revenue short-falls or expenditure or whatever else. We need to keep in mind the objective is to have as many self-funded retirees as possible, it’s just from quality of life perspective and system perspective and government budget perspective,” he said.
The real value of tax concessionality
Consistent claims that superannuation tax concessions were placing an undue drag on the Budget have been strongly contested by the luncheon participants.
Deloitte partner, Russell Mason questioned the validity of some of the Treasury figures being discussed in the general debate, and said there was a case for genuine, objective research of the issue.
“What I’d like to see is some good quality research on Treasury’s argument that the concessions to super cost us $25 billion a year,” he said. “I’ve seen other analysis that’s had that as low as $12 billion a year, so I’d like to see that reconciled.”
“Then I’d like to see this myth that only the very wealthy, or high net worth individuals really take advantage of all the super concessions and everybody is subsidising that group. Is that true? Has there been some real analysis done of that work? Because I suspect it’s not true. I suspect there are a lot of average income couples who get to their early or mid-50s and they really want to take advantage of concessional contributions. I think most people aspire to be self-funded they want it and we should do all we can to encourage that.”
Super Review editor, Mike Taylor pointed out that former senior adviser to former Prime Minister and Treasurer, Paul Keating, Dr Don Russell had a week earlier told a Super Review post retirement forum that he seriously questioned the Treasury hypotheses around the cost of superannuation tax concessions.
“He [Russell] made the very valid point that all the Treasury hypotheses are based on the assumption that in the absence of tax concessionality people would continue to contribute as much as they are now and happily contribute 9 per cent growing to 12 per cent,” Taylor said.
“He [Russell] argues that in the absence of tax concessionality they wouldn’t, therefore the notion that Treasury throws out there that they are foregoing this is revenue is a fallacy because the revenue wouldn’t be there to the extent that they think it is,” he said. “He argues that the super guarantee would actually probably over time collapse as a revenue base.”
Mason argued that not enough work had been done on the underlying factors feeding into the overall Australian post-retirement equation.
“I don’t think there’s been enough work, today there’s roughly one retiree for every four working Australians and in 2025, 25 years’ time that’s going to be one retiree for every three working Australians, so the retired percentage of the population becomes a bigger and bigger part of our economy and if they are wealthier in retirement, if they are more affluent in retirement, then surely spending, they’ve got the ability to keep the economy going, to stimulate the economy,” he said.
However Hostplus’ Cahill said that it also needed to be recognised that elderly retirees tended to spend less the older they got.
“They don’t spend, Russell, they don’t spend. My parents, your parents, they buy what they need and it just goes in the bank,” he said.
Mason said he believed that while what Cahill was saying was true of the current time, he believed Australia was about to encounter a different era of retirees - “far more active, far younger in terms of their behaviours”.
“They are going to generate, their spending is going to generate a huge amount of GST,” he said. “I think if you are going to do the analysis you’ve got to look at the impact that retired segment has on the economy generally. I suspect they are going to have an enormous impact. You’re right about some of the current ones, but I think it’s going to change over time,” he said.
Mason said account needed to be taken of longevity and the reality that longevity was increasing by about a year every 10 years and healthcare was improving at a rapid rate.
“I would argue that 80 years old in 20 years’ time is going to be very different to the 80 years old today,” he said. “Look at our grandparent’s generation where, you know, they were lucky to make it to 80, but they were pretty well worn out by their mid-60s. None of us expect that to happen to us in our mid-60s.”