EDITORIAL: by Peter WestmoreNews Weekly
Time to reform super
, November 29, 2003
Last month, after protracted debate, Federal Parliament carried legislation which made some useful changes to Australia's superannuation laws. The most important was to establish a new plan under which the Government has agreed to match super contributions for people earning less than $27,500 a year, by up to $1000 per year.
It will also make contributions of lesser amounts for people earning above $27,500 to a ceiling of $40,000.
The effect of this, for low-income earners, is a direct contribution to their retirement income of up to $20 a week, together with the benefit of long-term investment which superannuation provides.
In light of the fact that low income earners also receive the smallest superannuation payout, the measure is expected to significantly boost the retirement incomes of low income earners who save for twenty years or more.
The other major change will benefit high income earners. The Government has decided to reduce the superannuation tax surcharge for those earning more than $96,000 from 15 per cent to 12.5 per cent in 2005-6.
The superannuation tax surcharge was introduced by the self-styled "world's greatest treasurer", Paul Keating. The Keating contribution tax was a blatant rip-off, made politically acceptable by the fact that these people were high income earners.
In many cases, executives' employment packages were adjusted to maintain previous payment levels, effectively transferring the cost back onto Australian industry, and ultimately to consumers.Serious problems
Welcome as the recent changes are, they go only a little way towards addressing the serious problems which beset the Australian superannuation industry, including its complexity, lack of transparency, and high compliance costs, which prevent it achieving the objective of a self-funded retirement scheme for Australian employees.
Australia needs to look at other countries, such as Singapore, which have successfully established such schemes.
Singapore's Central Provident Fund (CPF) was established nearly 50 years ago to give financial security to retired or disabled workers. CPF has about three million members and in 2001, they had a total of S$90.3 billion (A$70 billion) in their accounts.
Initially an old-age social security scheme, the CPF has gone through a series of changes to allow its members to use their CPF savings for housing, medical expenses and education.
Currently, members' CPF balances are divided into three accounts: the Ordinary Account (for housing, approved investments, CPF insurance, tertiary education and topping-up of parents' Retirement Accounts); a Special Account (for old age, contingencies, approved investments, CPF insurance), and a Medisave Account (for hospital expenses, approved outpatient treatments and approved medical insurance premiums). There are mandatory contribution rates for the individual accounts.
Currently, employees contribute 20% of their income to their own accounts, and employers contribute another 16%.
Members have some flexibility as to where their contributions are invested, although they are weighted towards investment in Singapore-based industry, government bonds and statutory corporations.
This has therefore provided a source of investment capital, which has funded the massive expansion of industry in Singapore, making the island state largely independent of overseas capital raising.
A major problem with Australia's superannuation industry is its high administrative costs, part of which comes from government-imposed compliance costs, and part from the bewildering range of choices facing contributors.
One well-placed observer said recently that it is a nightmare to administer.
An ANU paper by David Ingles, released in September 2000, highlighted the problem. Mr Ingles said that "While Chile has been regarded as a very expensive system administratively (there are front-load costs of roughly 15-20%, equivalent to an annual cost of around 1% of assets), as has the UK system, Australian costs appear to be as high or possibly higher than these."
He added, "Our costs are also higher than in countries like Switzerland and Sweden, which also have elements of mandatory savings in their national retirement income systems. Australian costs are certainly large enough to significantly reduce final payouts to individuals over time, and this effect will become much more obvious if current high rates of real return are not sustained."
This prediction has been borne out, as superannuation returns have fallen since the Asian economic "meltdown" of 1998, and the terrorist attacks on the US in September, 2001.
With the ageing of Australia's population, there will be increasing pressure on governments to cut pensions or restrict access to them. A viable national superannuation scheme is therefore essential for millions of Australians and their families: not only for the elderly, but for younger working Australians who will otherwise have to support them through higher taxes.
Reform of the superannuation industry therefore remains an urgent national task.
- Peter Westmore is President of the National Civic Council