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Superannuation the start, how it is now, and the future

For most individuals their superannuation will be their largest asset outside of the family home. For some of those just starting in the workforce it may be their largest asset as the housing market may be out of reach. How important is superannuation to the Australian economy and to the personal wealth of each individual?

The Beginning

Superannuation has existed in the Australian labour market in some form for many years, mainly under industrial awards that meant smaller wage increases as a component was instead put to superannuation for retirement savings

The compulsory Superannuation Guarantee that we have today was announced in it's original form on 21 August 1991 by the Keating government with an operative date of 1 July 1992.[1]

The scheme imposed an obligation on employers to pay 3% of an employee aged under 70 and over 18 base wage, provided it was more than $450 per month, to an approved fund for the purpose of providing funds in retirement. This percentage was to increase to 9 % by 1 July 2002.

Since then it has increased further and is currently 9.5% with an intended further increase to 12 % by 2025.[2]

The reasoning was based on the projected demographics of Western society there would be a large need to provide income for an ageing population. A population that would outstrip what could be provided through the public welfare system budget.

It was based around a three pillars approach to retirement income. This includes public funds, compulsory savings through the superannuation guarantee and voluntary superannuation savings.[3] When compulsory superannuation was implemented it was felt that individuals were not considering the income they would need in retirement.

The Age Pension was designed to be a poverty alleviating measure and is means tested to ensure the greater benefit is provided to the greater need. Compulsory superannuation was intended to relieve the public burden of the age pension by ensuring that more of the population, once they obtained retirement age, had a private means of income support.

To assist in encouraging individuals to contribute to their own retirement savings quite attractive taxation benefits were applied to superannuation. For the majority of Australian workers employer contributions and any pre tax (e.g. salary sacrifice) contributions to superannuation are taxed at 15%.

The earnings on these contributions also attract the concessional rate of 15%. As it stands, most workers once they earn over $37,000 will be paying 19% in tax plus the Medicare levy of 2%. So for the majority of workers the tax concessions of superannuation are effective.

Even more attractive was that once preservation age is reached any money you withdraw from your taxed superannuation fund has no further tax payable and does not count in your taxable income.

On the downside, this money is potentially not accessible until the individual reaches their preservation age. This has been a moving bar and currently stands at 60 for those born after 1964.[4] There are some circumstances where it is socially justifiable to allow early access to superannuation but these are based around hardship.

Recent changes

Since the original introduction of superannuation each successive government has tweaked and prodded the legislation. Most recently there has been a substantial wind back on the tax concessions available.

Concessional contributions have now been limited to a total of $25,000. In previous years, based on the tax payers age, it was possible to pay up to $50,000 into superannuation at the concessional tax rate of 15%. For higher income earners, or those nearing preservation age this was a very tax effective way of boosting their retirement income.

There has also been caps placed on the amounts allowed in superannuation for which the earnings in pension phase are tax free. Along with this there have been changes to the transition to retirement concessions which allowed earnings on superannuation investment to be tax free.

Much of this has come from treasury modelling showing the loss of government revenue from the generous tax concessions applied to superannuation. There has been a presumption that superannuation was to continue your lifestyle in retirement - not just provide an income.[5] This has led to the winding back of how much of an individuals wealth that can be invested in tax protected superannuation.

For most tax payers it is unlikely that they will ever meet the concessional cap of $25,000 while working. The majority of workers in Australia earn less than $80,000 per year. [6] This equates to about $1,170 in take home pay or less a week and compulsory superannuation of $7,600 a year.

To be able to boost their superannuation to take advantage of the concessional, and the non concessional cap of $100,000 or $300,000 in any 3 year period, would only be likely to occur on the sale and non replacement of a significant asset. This would normally be on downsizing the family home.

The new legislation has made some concessions for those reentering the work force to allow them to make catch up concessional contributions, but again this would rely on free income to be able to allocate to superannuation.

Looking forward

Is our superannuation system effective? Is it achieving the original purpose of providing for retirement?

The Keating government were certainly looking to the future when they legislated for compulsory super. The issues have been whether the tax concessions have undermined other budgetary measures and whether the funds have been used for their original intention.

Superannuation invested in Australia now totals more than $2.7 trillion.[7] This is a significant driver in our economy and has been seen to have helped protect the stability of our financial system.[8]

However, if we reconsider the original purpose of the superannuation system - that of providing for an income in retirement - it's not clear that this has been met.

The first arm of this is that for the majority of Australians the amount that is being accumulated in their super fund will not be sufficient to provide an income for all of their old age. With the average life span now being 83 years [9] and the average age of expected retirement being 65[10] an individual will need sufficient superannuation to provide an income for nearly 20 years.

This is not allowing for the fact that most women will have an even lesser amount in superannuation due to time out of the workforce and part time work while raising families. Self-employed individuals, depending on the structure they operate through, are also not obligated to pay superannuation contributions for themselves and therefore will be relying on other means for income in retirement.

The second arm is that once you meet the requirements of preservation there are no rules on what you can do with your super.

This, I believe, is the biggest hole in our superannuation system. While gifting of money and assets will be considered as part of the age pension application it is still possible to have spent a large amount of your superannuation on non essential items tax free once an individual is aged over 60 and then rely on the aged pension.

Without legislation to enforce that superannuation be taken as in income stream and lump sums only be available in hardship cases, as they are prior to preservation age, the objective of superannuation is not met.

Including superannuation in an individuals pay would do nothing to further their retirement income. Based on the average Australian mentioned earlier after tax they would only receive approximately $90 a week or less. It's unlikely with the rising cost of living that any of this would be allocated to saving.

My suggestion to the legislators to ensure that the integrity of superannuation is protected are:

To limit the use of self-managed superannuation funds as I believe they are misunderstood and too easily compromised. I have seen examples of trustees making very poor investment decisions, still within the trust deed and investment strategy, that has seen the fund left with nothing or assets that are difficult to liquidate to provide income;

To change preservation conditions so that, other than in cases of hardship, superannuation is only accessible on total and effective retirement from paid employment and only as an income stream. An actuary could determine based on expected life span an amount of pension to be paid each year from the individuals superannuation balance;

To extend the superannuation guarantee to all self-employed persons as a minimum payment. This would include those working through structures that do not make them an employee for superannuation purposes;

To ensure a system is in place to guarantee a minimum superannuation balance for all Australians. This may be through measures such as the co-contribution:

It is important that the primary objective of superannuation be remembered - To provide income in retirement to substitute or supplement the Age pension. [11] [12] If we are to continue with a compulsory retirement saving system all decisions need to be based around this primary objective.

Written by Kathryn Harris, partner, TrustOne Partners.

[1] Hassan, Zein El 'Module 2: Superannuation Guarantee' (21 February 1996), p 1

[2] Power, Trish 'Employer Super contributions: SG rate 9.5% for 2018/2019 and 2019/2018 years' (24 May 2018) <>

[3] Australia's future tax system 'Retirement Income Strategic Issues Paper' (12 May 2009) <>

[4] Australian Taxation Office 'Preservation of super' (1 December 2015) <>

[5] Australian Government The Treasury 'A Super Charter: fewer changes, better outcomes' (5 July 2013) <>

[6] Australian Bureau of Statistics '6333.0 - Characteristics of Employment Australia, August 2017' (26 February 2018) <>

[7] Asfa the voice of super 'Superannuation Statistics' (April 2018) <>

[8] Reserve Bank of Australia 'Submission to the Financial System Inquiry, 7. Superannuation' (March 2014) <>

[9] Australian Government Australian Institute of Health and Welfare 'Deaths in Australia' (18 July 2018) <>

[10] Australian Bureau of Statistics 'More Australian intend to work longer' (18 December 2017) <>

[11] Financial System Inquiry 'Objectives of the superannuation system' (7 December 2014) <>

[12] Superannuation (Objective) Bill 2016 (Cwlth) 5 (1)

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