4The intent of the Charter is to enshrine the core objects, values and principles of the Australian superannuation system, so that Australians can have confidence that superannuation policy is consistent with long term goals of providing for a secure and comfortable retirement income.
Core Principles Underpinning the Charter
The Charter is to be developed against the core principles of certainty, adequacy, fairness and sustainability, in a context where:
- Community confidence in the superannuation system is important because workers’ wages are compulsorily directed to it, superannuation savings are made over many years and cannot generally be accessed until retirement and it is important to encourage voluntary saving;
- The Age Pension provides a basic level of income support;
- People are living longer;
- People need to have sufficient savings to retire comfortably; and
- The policy considerations need to be de-politicised.
Question 1: What is your view of the core principles outlined above?
Question 2: Are there any additional principles that are important in setting retirement income policy?
Superannuation is a long term investment. Superannuation savings made during a person’s working life are likely to remain in the superannuation system for up to 40 years of working life and after 20 years post retirement.
Australians need to feel confident that superannuation policy is not politicised. While public policy, including superannuation policy, must be able to respond to changing economic and other circumstances, too much change can impose unnecessary costs and diminish the confidence people need to invest in superannuation. Given the long term nature of superannuation, there needs to be a high burden of proof on proposals for change.
Certainty includes considering the ability for people to plan or adjust to superannuation policy changes with confidence. This requires consideration of whether there is sufficient time for people to change their arrangements in relation to proposed policy changes.
Question 3: What safeguards can be placed on changes in the superannuation system to promote certainty?
Question 4: How should the Charter reflect procedural fairness, including providing adequate notice of future changes and an open and transparent consultation process?
The Government is committed to encouraging Australians to build adequate savings for retirement.
The ageing population will see greater numbers of individuals entering retirement, and most individuals will hold substantial superannuation balances. The superannuation system will begin to mature from 2019, when the Superannuation Guarantee will reach 12 per cent. A person aged in their mid-twenties today will receive superannuation for around 40 years, with the Superannuation Guarantee rate at 12 per cent for over 30 of those years. However, there may still be gaps in superannuation coverage, such as individuals with broken work patterns or casual employment.
Superannuation is designed to reward and support all Australians to save for a comfortable, secure and financially adequate retirement.
There are different measures of adequate retirement income. The Age Pension seeks to provide a base level of income as a safety net in the retirement income system. The superannuation system aims to provide a higher level of retirement income, relative to a person’s pre-retirement income, than would otherwise be possible.
A commonly expressed aspiration for adequacy is for a superannuation balance large enough to provide an income stream (including capital drawdown) of around 70 per cent of pre-retirement income over a 25-30 year period.
Question 5: What would be appropriate benchmarks for measuring the adequacy of the superannuation system?
The equity of government contributions to individuals’ retirement outcomes is critical to the fairness, acceptability and coherence of Australia’s retirement income system.
Government contributions to retirement incomes will be made across the life cycle – through both the concessional treatment of superannuation and through Age Pension payments. This needs to be taken into consideration when assessing the fairness of Australia’s superannuation system. People with higher asset levels in retirement are likely to have received the greatest assistance throughout their lifetime through significant superannuation tax concessions and the potential provision of part pensions.
The overarching objective of the superannuation system is to encourage people to save so that they may achieve an adequate standard of living in retirement. The superannuation system is not intended to be an open-ended tax concession for capital income, which remains a core tax base for the Australian system. Beyond a certain point, people do not need the same level of taxpayer assistance to build adequate retirement savings.
Question 6: What principles would support fairness in the distribution of government assistance in the retirement income system and how should they be incorporated into the Charter?
Question 7: What limits could be placed on government assistance and how should this be measured?
Superannuation contributions and earnings inside the superannuation system are taxed at a lower rate than normal income for the vast majority of people. The value of superannuation tax concessions in 2012-13 ($31.8 billion) is around $9.2 billion less than the value of direct income support for seniors ($41 billion).
Concerns have been raised about whether this is an appropriate way of measuring the fiscal impact of the superannuation system and the broader benefits of increased private saving.
There are a number of stakeholders in the superannuation system, including consumers, employers, superannuation funds, fund managers and financial advisers.
Whilst the main focus of the superannuation system is on assisting individuals to save for their retirement, the Charter could allow the Council to consider the potential impact of proposed superannuation changes on other stakeholders.
An important aspect of sustainability is administrative simplicity, but this needs to be balanced against a system that targets taxpayer assistance to those who need the most assistance to build adequate savings.
Some of the considerations that are important include the regulatory burden on business and complexity from a consumer perspective.
Question 8: How should the costs and benefits of the superannuation system be measured?
Question 9: How should the Charter take into account the goal of administrative simplicity and balance this against other objectives such as fairness and sustainability?
Superannuation and Retirement Incomes
Australia has a three pillar approach to the provision of retirement incomes, comprising the means tested and publicly funded Age Pension, compulsory private savings through the Superannuation Guarantee arrangements, and voluntary private savings supported by taxation concessions.
Question 10: What weight should be given in the Charter to the considerations below?
- Recognising the inherent trade-offs involved in retirement income policy.
- Considering the interactions between the superannuation system and other elements of Australia’s retirement income system, for example, other savings vehicles and government support such as the Age Pension.
- Recognising the intergenerational costs and benefits of superannuation savings and tax concessions.
Superannuation contributes significantly to national savings, employment, financial
stability and economic growth. Superannuation in Australia today is worth about $1.5 trillion – equivalent to our national GDP – and is expected to rise to around $6 trillion by 2037.
Australia’s superannuation system complements the financial services and insurance sectors. The financial and insurance services sector employs more than 410,000 Australians. Superannuation’s contribution to national savings has risen from ½ per cent of GDP in 1992 to around 1½ per of GDP and, over the next few decades, is projected to reach 3 per cent.
This growing pool of domestic savings will provide an increasingly valuable stream of domestically-sourced finance, increasing the Australian economy’s resistance to global shocks. There are benefits to saving more now to support a progressively older population, before the impacts of population ageing become more pressing.
As the pool of superannuation assets grows in its importance to the financial system, changes to superannuation need to be considered in the context of both retirement income policy and the broader economic environment.
Question 11: How would the Charter reflect the impact of superannuation changes on the broader economic environment?
Implementation of the Charter
The Charter could take the form of a policy document, be set by regulation or enshrined in legislation. The content of the Charter might be much the same under these different possible approaches, but the degree of formality would differ.
Question 12: Should the Charter be a policy document, or be enshrined in legislation?