Is Australia’s superannuation system working?

Just on 20 years ago the Hawke Labor government introduced the superannuation guarantee.

Twenty years ago the future ageing of the population and the resultant decline in taxpayers who could pay for a large pool of age pensions was already recognised. The SG’s purpose was to provide employees with retirement income so the strain on the public purse would not be so severe. The SG demands that employers take 9 per cent of each employee’s salary and place the money into a superannuation fund. This has seen Australia’s super assets explode. It also often makes people think the system is already successful.

I think it is still too early to call the system a success, although it seems to be tracking reasonably well. We will have to wait another 20 years before finding out if it achieves its purpose.

Perhaps this midway point in this policy’s life cycle would be a good time to ask the Productivity Commission to conduct a wide-ranging review of the SG system to determine if it’s fit for the purpose and operating efficiently and transparently as possible.

Like any law, the SG rules are not perfect. Here are some issues that need to be thought about:

Low-income earners: employers have to make SG contributions for anyone earning more than $450 in any calendar month and this has not changed for 20 years.

By way of comparison, between June 1991 and June this year, the average weekly ordinary time earnings index has increased from $560.20 to $1304.70, an increase of almost 133 per cent. If the $450 figure had been indexed it would now be about $1048 a month.

Most lower-pay workers, once the super preservation rules allow access to their super assets, will be withdrawing lump sums. Because of the way the super tax laws work, these withdrawals will be tax-free. But these lower-paid people are forced into a savings vehicle that has a tax rate higher than their own personal tax rate which is nil. Super’s flat tax rate is 15 per cent for earnings on pre-retirement money.

Taking into account the low-income tax offset, an individual earning more than $48,000 a year will pay about $7200 tax, an average tax rate of 15 per cent. The amount of tax is lower if someone is eligible for a wide range of other tax offsets such as the family tax benefit.

The government has proposed that from next year it will hand back up to $500 of the contributions tax for many low-income earners.While welcome, this doesn’t address the earnings tax and cuts out at a fairly low income amount.

If the government believes low-income earners must save for retirement it should ensure these savings aren’t subject to higher taxes than applies to a person’s take-home salary.

If this is not possible from a cost perspective then the system needs to be redesigned.

At the other end of the spectrum we have too much tax being paid by some high-income earners.

The concessional contribution cap for many people is $25,000. Contributions above this threshold are taxed at the highest marginal tax rate.

If someone earns more than $277,777 and their employer automatically contributes 9 per cent of salary into super they will breach the $25,000 threshold. This means the highest marginal tax rate is paid on those contributions. These contributions will be classified as a taxable component and may face additional tax on withdrawal from super.

Many employers don’t realise that once a person earns more than $43,820 in a quarter (or $175,280 a year) they only have to contribute up to 9 per cent of that lower figure.

A more tax effective approach is to make after-tax contributions, which are classified as part of the tax-free component.

Clearly this is not a problem with the compulsory super system, so much as with the general knowledge of how all the different bits to the system fit together.

Increasing the SG rate: the government has a plan to increase the SG rate to 12 per cent of salary by July 2019.

Many people have welcomed these changes but, ideally, the above issues need to be addressed at the same time.

The need for the higher rate to provide retirement income would also be lessened if employees were discouraged from retiring too early and there were more employment opportunities for willing and able older jobseekers.

The policy focus of the SG system is funding income for retirement.

But according to Treasury modelling the much bigger issue from a government budgetary perspective is funding health care for older ages. The super system is a good place to enable retirees to save for these unfunded future costs.

More than 10 years ago some people predicted the internet would change the way Australians shopped. Some nay-sayers, especially those with a business model not well suited to internet shopping, thought this was rubbish.

Australians have realised that they can buy items for a lot less online. I’m hoping that Australian employees will soon realise that they have been paying too much for their super funds and that these high costs are reducing their retirement future. I’m hoping they will demand a better deal with their super.