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Preservation and the effectiveness of retirement incomes policy: Some results of individual modelling

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Colin Brown
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Conference Paper 97/1

Paper presented at the Fifth Colloquium of Superannuation Researchers, University of Melbourne, 11/12 July 1997.

This paper reviews the development of preservation policy and its importance to the effectiveness of retirement incomes policy. It examines the impact of the new preservation arrangements announced in the 1997-98 Budget, which will apply from July 1999, and compares these with the former proposed preservation arrangements which would have applied from July 1998.

The paper notes the importance of introducing more effective preservation arrangements, both to enhance National savings and retirement incomes policy. It also highlights the desirability of reducing the complexity of the current preservation arrangements.

Finally, it presents the results of modelling for hypothetical individuals, showing the differences in preservation outcomes under the current preservation arrangements, the former proposed arrangements and those announced in the 1997-98 Budget. The complementary aggregate analysis of preservation policies is presented in the paper by Dr George Rothman (1997).

The Development of Preservation

Preservation is the requirement that money saved for retirement through a superannuation scheme should remain in the superannuation system until the person retires at or after a minimum preservation age (currently 55) or retires on grounds of permanent invalidity. This requirement is a safeguard intended to ensure that retirement savings are used to finance expenditure in retirement and are not available to finance other, pre-retirement expenditures. Without preservation, superannuation savings would be in danger of degenerating into a form of deferred remuneration scheme, providing a concessionally taxed windfall payment whenever a person changes employment and becomes eligible to withdraw their accumulated superannuation.

However, it is still the case that a very large proportion (around 65 per cent) of superannuation savings in Australia are not preserved (see Rothman 1997).

In the beginning, there was no compulsory preservation of employer financed superannuation and such benefits often bore little relationship to retirement benefits. Prior to July 1983, the very concessional treatment of eligible termination payments (only 5% was included in assessable income) made employer financed superannuation an attractive form of deferred remuneration. This continued to be the case for many people even after the increases in taxes on lump sum superannuation benefits introduced in 1983 due to the continuing concessional tax treatment of the pre-July 1983 component of ETPs. Compulsory preservation for employer financed superannuation was first introduced with the advent of industrial award superannuation in June 1986. Benefits arising from award contributions were required to fully vest in employees and were required to be preserved until retirement on or after age 55. The introduction of the SG, from July 1992, provided a further extension to preservation through the introduction of a phased in minimum level of employer superannuation support, fully vested in the employee and subject to preservation to a minimum age. From 1 July 1994, benefits financed from existing employer superannuation contributions, up to the minimum support required under the SG, became subject to preservation. However, these increases in preservation only applied to the new or minimum superannuation benefits and did not apply to employer financed superannuation in excess of awards or SG minimum employer contributions or to member contributions.