Australian Superannuation system will be taught now, to be objective

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Superannuation rethink by Chalmers

The proposed changes to superannuation by Labour would make it more difficult for Australians to access their retirement savings early. Here’s what you need to know.

The Superannuation Guarantee – was introduced in 1992.

At that time, contribution by employers was just three per cent of each one’s earnings. Now it has gone up, by mid-2025, employers will have to contribute at least 12 per cent of an employee’s income into their designated fund. Individuals can also contribute to their super.

In general, access to super is not allowed until the age of 65 or if you’ve reached the preservation age which depends on the year you were born.

There are limited other circumstances where early access can be applied for, including on compassionate grounds.

Current Labour Govt proposes changes to tighten the withdrawal rules and introduce an objective.The objective to be“preserve savings and deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

The consultation paper also notes that “there is a significant opportunity for Australia to leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities”.

Labor’s proposed superannuation reforms have faced fierce reactions from some and welcome pat from some.

What does the super industry suggest?

HESTA – have more than one million members, said the objective of super was a great move.

“The consultation period is an opportunity to come together and shape a stronger super system now and for generations to come,” chief executive Debby Blakey said.

Deanne Stewart, Aware Super chief executive, said she too supported the proposal.

“It certainly gives the industry a really good sense of what the purpose of superannuation should be, which remarkably isn’t there 30 years since the superannuation guarantee was brought in,” she said.

Bernie Dean, IndustrySuper Funds chief executive, said the proposal reflected what working people already understood as super’s purpose.

“It should help avoid another disaster of allowing people to tap into super early for any reason, which hurts everyone,” he said.

Chief executive of The Australian Institute of Superannuation Trustees, Eva Scheerlinck was saying the legislation of an objective was “long overdue”.

“The definition recognises the centrality of preservation of superannuation benefits until retirement, equity in the system and the important role superannuation plays in providing a dignified retirement,” she said.

“We’ve seen the damage that the Covid-19 early release scheme did to the retirement savings of thousands of fund members.”

But there were many analysts who were against:

Brendan Coates from the Grattan Institute  asks whether investing in affordable housing schemes would be at odds with super funds’ requirement to act in their members’ best interests. That is a big question.

The Australian’s Judith Sloan points out that Treasurer Jim Chalmers wants super funds must serve societal purposes as well as investing for individuals. Super funds with these changes need to invest in initiatives such as social housing and the care economy.

“The Treasurer essentially sees superannuation funds akin to an arm of government”, says Sloan.

“He cites the examples of affordable housing, climate, the care economy and digital economy. He praises the involvement of industry super funds in social housing even though only one fund has announced a modest investment, with the other funds waiting for more information”.

Former RBA governor Bernie Fraser suggests that the federal government’s legislated objective for superannuation should include allowing people to use part of their accumulated savings to buy a home and there is no more comforting thought for Australians than knowing that they will have somewhere to live when they retire. To allow super funds to invest in social projects usually will tend to have low returns.

The Herald-Sun’s Terry McCrann  feels that Treasurer Jim Chalmers has his sights on the biggest pool of money in Australia – the superannuation of ordinary Australians. These reforms would enable super funds to invest in projects that “boost housing supply, manage climate change and spur digital transformation”. However, McCrann argues that super funds can do those things even now, only if it makes sense as an investment and will grow the super fund member’s balance.

David Murray, who chaired the 2014 financial services inquiry, likewise added that super funds would already have exposure to affordable housing schemes if they were deemed to be attractive investments.

We feel there are many problems with the superannuation system as they are today.

Does the Government want to continue to give equally the concession of 15% flat tax on superannuation contributions and earnings to all income and wealth classes? This concession reaches those higher up the income scale disproportionately.

Superannuation tax concessions

There are experts who point out that Superannuation tax concessions generally favour higher income earners

The lifetime taxpayer support provided through Australia’s retirement system is heavily skewed towards higher income earners, as illustrated in the below Australian Treasury chart:

Lifetime taxpayer support in retirement

The wealthy receive far greater retirement support than the poor.

It should ring alarm bells that Australian taxpayers spend more than twice as much supporting the retirements of the top 1% of income earners than they spend supporting someone on the aged pension, according to the Treasury.

For example, the top 1% of income earners are projected by the Australian Treasury to receive more than $700,000 in superannuation concessions over their working lives. That is roughly 14-times the $50,000 of concessions received by the bottom 10% of income earners.

The above imbalances are one of the primary reasons why superannuation tax breaks will cost the federal budget a whopping $52.5 billion in 2022-23, almost as much as the aged pension.

Worse, the Intergenerational Report projected that Australia will spend more on superannuation concessions than providing the aged pension by around 2040:

Superannuation to cost more than the aged pension by 2040.

Finally, the Treasury’s Retirement Income Review warned that Australia’s superannuation system has transformed into a wealth accumulation and transfer scheme that is actually increasing inequality.

“Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests”, the review noted.

“Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances”, the review warned.

The next chart tells the tale. It shows that “superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059”:

Superannuation inheritances growing fast.

These inheritances are unequally distributed, with “wealthier people tending to receive larger inheritances than those with lower wealth”. As such, superannuation inheritances “increase intragenerational inequity”, according to the Retirement Income Review:

Superannuation inheritances increasing inequality.

Put simply, Australia’s compulsory superannuation system fails almost every policy mark, including:

  • It is poorly targeted and largely misses those most in need (i.e. lower income earners).
  • It costs the federal budget more than it saves in aged pension costs.
  • It entrenches inequality by encouraging tax avoidance and wealth accumulation by the rich and their heirs.

Unless the Albanese Government addresses these fundamental flaws, Australia’s superannuation system will continue to fail, effectively taking the disparities in working-life incomes and magnifying them in retirement, thereby enshrining inequality.

Instead of undertaking the required root-and-branch reform, Labor has instead chosen to double down on the system’s failures by raising the superannuation guarantee to 12%.

In the process, Labor has chosen to increase superannuation’s cost to the federal budget.

That, in turn, will require other taxes to be higher than necessary, or will require other social programs (e.g. the aged pension) to be cut to make way for ballooning superannuation concessions..

Hopefully a revisit on negative gearing will also be on the agenda. People will be more open to that now so many people can’t afford to own the homes they live in.

Many opposition MPs fault the proposal and suggest that there should be some percentage say 15% of the super to be allowed to be drawn for specific purposes, like buying houses, education expenses, in case of unexpected financial problems like foreclosure arises, etc. That is a valid point for the Govt. to consider.

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