Most Australians’ incomes in retirement will be funded from a combination of superannuation savings, other private savings and a full or part-rate government Age Pension. After allowing for the taxation system, these income sources will provide most retirees with significantly higher standards of living in retirement than would be available from the publicly funded Age Pension alone.
Saving for retirement within superannuation comprises compulsory employer superannuation contributions required by the Superannuation Guarantee (SG), employer contributions that exceed SG requirements and voluntary private saving, either through ‘salary sacrifice’ or member superannuation contributions (which come from after tax income). Because of these contributions and very good investment returns, on average, the superannuation system has grown strongly, with assets more than doubling over the past 7 years to their current level of about $700 billion.
Voluntary private saving outside superannuation has many forms such as real property, shares, bank accounts, fixed interest and other non-superannuation financial assets.
Over an extended period the taxation system has offered incentives for both compulsory and voluntary saving in superannuation; for 2004-05 the tax expenditure on superannuation is estimated at 13.3 billion dollars (Treasury, 2004). There have been a number of recent government initiatives aimed at encouraging even greater superannuation saving. In particular the superannuation surcharge has been abolished from July 2005 and the co-contribution for low and middle income earners was markedly expanded from July 2004. Other relevant changes include the opportunity to contribute to superannuation even when not working and incentives to add to superannuation by working longer.
This paper aims to analyse the incentives for saving within superannuation in the light of these changes, considering the potential impact of the incentives from both the individual and aggregate points of view. It updates and extends work on the concessionality of superannuation compared with saving outside superannuation presented to the 2003 Colloquium (Rothman, 2003). It also updates work on the adequacy of retirement incomes presented to the 2004 Colloquium (Rothman and Bingham, 2004).
The first part of the paper considers the incentives to save and concessionality for the accumulation phase, where a person is saving for retirement. The analysis covers one-off contributions for both high income earners previously subject to the surcharge and for low to middle income earners eligible for the co-contribution.
The next part of the paper extends the analysis into the retirement phase. It analyses consistent saving using the most advantageous saving opportunities within superannuation, comparing the outcome of such saving with parallel saving outside the superannuation arrangements. The equity of concessions and incentives over a wide income range is examined. In a later section the likely aggregate impacts of changes in saving behaviour are also examined.
The RIMHYPO model of the Retirement and Income Modelling Unit (RIMU), Treasury has been used to obtain many of the results presented in this paper. This model is as described in Tinnion and Rothman (1999) except for updating to include new policies such as the co-contribution, changes to the pension asset test, new tax scales and new tax arrangements such as the Senior Australians Tax Offset and Mature Age Workers Tax Offset.