Taper rate needs to be reduced to $2: ISA

Reducing the assets test taper from $3 to $2 along with increasing the superannuation guarantee (SG) to 12% is an effective means of increasing adequacy and will improve the government’s net fiscal position, according to Industry Super Australia (ISA).

In a submission to the Retirement Income Review, ISA said a $2 taper rate would be equivalent to an annual pension reduction rate of 5.2%.

“This rate would exceed returns in conservatively invested allocated pension funds, but it does produce an incentive to save. A $2 taper would have significantly less budgetary cost than returning to the $1.50 taper introduced and maintained by Treasurer Peter Costello,” the submission said.

ISA said the test taper rate of $3 acted as a major disincentive for some to save and said reducing the rate was an effective means of increasing adequacy while reinstating appropriate incentives to save.

VIEW ALL

View all

Source: Industry Super Australia

“However, reducing the taper rate to $2 will necessarily have consequences for the Federal

government's net fiscal position as pension payments increase,” the submission said.

ISA said freezing the SG at 9.5%, or removing its coverage from lower income employees, would result in substantially lower super balances for many and some paying more tax.

“The most effective policy tool for alleviating this problem is to increase the SG to 12%. ISA modelling, making use of appropriate populations and economic assumptions, shows that an increase to 12% will benefit future retirees across all income deciles,” it said.

ISA used Rice Warner to model the net fiscal consequences of a $2 rate compared to a $3 rate – both in the context of 12% SG.

“This modelling remains work in progress. Initial results suggest that compared to staying at $3, moving to a $2 rate will have a small negative impact on the government's net fiscal position over a 40-year period,” ISA said.

“This is preliminary modelling. We are currently reviewing the size of the population that will be subject to an SG increase, and this may have an impact on the assumptions about how an SG increase will offset wage growth.”