Lifting the super guarantee is not a panacea

Lifting the superannuation guarantee to 12 per cent is only part of the equation necessary to ensuring Australians have adequate retirement incomes, according to Mercer.

The Federal Government’s decision to lift the superannuation guarantee from its current level of 9 per cent to 12 per cent represents an important measure capable of alleviating pressure on Australia’s age pension, but it is only a part of the answer, according to analysis conducted by Mercer.

In an analysis released in February this year, Securing Retirement Incomes – Tax, Super and the Age Pension, Mercer stresses the need for the Government and the financial services industry to look over the horizon and develop both policies and products capable of enhancing Australia’s position.

Looking at the current retirement incomes environment, the Mercer analysis concluded:

• The level of total government support provided for retirement income is remarkably level across most individuals, irrespective of lifetime income, dispelling the myth that government support favours high-income earners.
• Increasing life expectancy presents a real risk that reliance on the age pension will rise, and points to the need to continue to encourage Australians to save more for retirement, to relieve pressure on government and to ensure a sustainable system over the longer term.
• Increasing the Superannuation Guarantee to 12 per cent will bring two-fold benefits – both increasing the retirement savings pool and reducing the reliance on the aged pension in the future, with minimal long-term cost increases to the Government.
• Appropriate policies and product development need to occur to create adequate post-retirement solutions for Australians, so that most superannuation benefits produce a retirement income stream into the future.
• The proposals in the Henry Review will deliver little net gain, add complexity and risk eroding confidence in the system.

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What the Mercer analysis makes very clear is that the taxation treatment of both superannuation and post-retirement incomes has to be a part of the longer-term equation.

The analysis says that Australia’s progressive personal income taxation system determines the level of taxation paid according to the individual’s income each year, and therefore their capacity to pay income tax in that year.

However it says superannuation is very different because the rules dictate that the benefit will be received by the individual in many years time.

Referring to the findings of the Henry Review of the taxation system, it said the final report had noted that the individual’s capacity to pay tax in respect of their retirement benefit should not be based on their income in a single year during their working career.

It said several examples highlighted this disconnect, including sports players who might receive high income for a few short years, and many women who returned to the workforce after family responsibilities.

 “A progressive tax on concessional contributions would penalise some women who have not had a full working career but have the potential to reach the same superannuation benefit as another person who has been able to work full-time throughout their career,” it said.

“Such an outcome would be neither fair nor good social policy.”

The Mercer analysis then posed the question of what might be a solution to “this inconsistency between our progressive income tax system which is based on annual income, and superannuation which aims to spread an individual’s earned income from their working years over their total lifetime?”

The analysis looked overseas and pointed to the fact that numerous countries had adopted an ‘EET’ system in relation to their taxation of funded pensions or superannuation, namely:

• Exempting contributions from taxation (sometimes up to annual limit);
• Exempting investment income received by the pension or superannuation fund; and
• Taxing the lump sum or pension benefit when received by the retiree.

It said such an approach was consistent with taxation normally being paid when a benefit is received by an individual.

“Of course, the actual levels of taxation can be debated, but the advantage of the EET system is that it considers the financial position of the individual in retirement and not their position years or decades earlier,” the Mercer analysis said.

It said the Australian system was very different, having evolved into a ‘ttt’ or a ‘ttE’ system, where ‘t’ represents taxation at a concessional rate as distinct from ‘T’ which represents a full rate of taxation.

The analysis said the current Australian system could be described, in broad terms, as:

• Concessional taxation on concessional contributions (including employer contributions) at 15 per cent;
• Concessional taxation on investment income within the fund at 15 per cent; and
• Tax exemption for benefits received after age 60, with a concessional tax treatment of benefits received between the preservation age (currently age 55) and age 60.

The Mercer analysis argued that it was apparent that the current Australian taxation treatment of superannuation was, “in effect, a flat tax system, as the same tax treatment is applied to all individuals, irrespective of their income in any year or the size of their superannuation benefit”.

“This does appear unfair and the Government is to be applauded for planning to reduce the tax on concessional contributions for low income earners,” the analysis said.