We recently contributed to the Australian Government’s Retirement Income Review to support better retirement outcomes for our members.
Our view of the Australian retirement income system is that the superannuation components are delivering reliable baseline support and will be increasingly robust as SG increases to 12%.The Australian superannuation system has been shown to be hugely beneficial since its inception. It has contributed to a reduction in the number of people fully dependant on the Age Pension, accounted for 10% of the drop in old age poverty between 2000 and 2014^1 and is responsible for improved living standards for people in retirement. These benefits are already significant given the super system is halfway towards maturity—it will be another two decades before all workers will have had a full working life with SG of at least 9%.
Good may not be good enough
The superannuation system works well for a majority of people, with the incentives set broadly at the right level. Having said that, there are three cohorts where we believe the system does not work so well—women; those with broken work patterns (including indigenous workers, casuals, part-timers, people in the gig economy); and those with very low wages. There is of course overlap between these groups.
The super system is supportive of full-time workers with 40-plus years of steady employment, people in high tax brackets and homeowners. However, it is not so effective for women (or any person) with long periods not working and part-time work, the casualised workforce, those not defined as employees, or renters. The high cost of private home rental is particularly hard on retirees on the full Age Pension, especially if they live in a major city, and contributes to the increasing numbers of older women who are homeless.
Recent changes level the playing field
Government support through favourable tax concessions, especially the up to 15% tax on investment earnings (and no tax on investment earnings for pension phase), for superannuation has historically favoured wealthier people—perhaps unwittingly. The Government has recently taken steps to rebalance this by introducing the Transfer Balance Cap, lower contribution caps, and higher contribution tax rates for high income earners. These measures will remove the worst excesses but could take a decade or more to be fully effective.
What more can be done?
We support measures to increase SG payments during parental leave, increasing the SG to 12% by 2025. By doing this more Australians will be able to retire with an adequate standard of living and fewer Australians will be solely reliant on the Age Pension.
At present, if you are paid less than $450 a month your employer does not pay the SG. Removing the $450 threshold and expanding the Low Income Superannuation Tax Offset (LISTO) for low income earners would help level the superannuation playing and ensure those who need it receive more government support. The government’s support is most effective for lower income earners when paid in the form of subsidies (LISTO and Age Pension).
Our analysis suggests the Age Pension assets test has cut too deeply into the retirement incomes of middle earners. The targeting of government support should be considered and include revisions to the taper rate. The taper rate is part of the assets test used to determine eligibility for the Age Pension. Since 1 January 2017, a retiree's annual pension is reduced by $78 for each $1,000 of assets above the relevant thresholds. Our research suggests the taper rate is too high and is disincentivising some Australian’s from putting more money into super.
Where possible, employers can be thinking about making sure SG contributions are paid on any parental leave. They can also pay super on all wages regardless of the $450 threshold if feasible to help build the super of those who hold multiple jobs. Employers can also encourage their staff to have only one super account to minimise fees and build up their balances.
At First State Super, we can help members to set up regular additional contributions – every dollar saved in your twenties is worth between $5 and $7 in your 50s and 60s. In other words, if you try to catch up savings pre-retirement to build up your balance, you would be putting in $5-7000 for the same result as putting in $1000 when you were 23.
Employers can do more than what is federally mandated
As employers we can do more to help breach the gender super gap. As well as providing employee benefits, like paying super on parental leave, First State Super provides access to flexible working arrangements, learning and development and mentorship; all activities that can make a real difference to the retirement outcomes of our employees.
You can you make a difference to the retirement outcomes of your employees. First State Super can helps you and your employees with educational programs and online tools – send us an email to discover exactly how we can support you.