In the recent public debate about superannuation we have witnessed both sides of politics eager to characterise the super system as having a case of ‘financial obesity’, fed by an overgenerous system of tax incentives. The lack of reason and balance in this debate has ended up with an ill-considered ‘crash diet’ of measures, which run the risk of seriously undermining public confidence in the system.
A lot of the motivation behind the proposed changes seems to be the crusade for budget repair. Super, along with the age pension, has been identified as fair game when it comes to finding budget savings. The danger of such an approach is that sound, long-term retirement income policy will be compromised for the sake of narrow, short-term political and fiscal expediency.
Time for some perspective
The backlash against some of the more drastic and “unfair” proposals has resulted in considerable heat being applied by the electorate to backbenchers, resulting in a watering down of some proposals. While this is welcome news in the short term, what we really need is for our politicians to take a step back and see more cohesive and thoughtful approach to retirement income policy, which will allow people to build financial independence in retirement, restore confidence in the system and ultimately deliver on the long term objective of reducing pressure on the social security system.
A blow to confidence
In the lead up to the 2016 budget we heard some irrational and unsettling rumblings about super from both sides. When the budget finally hit the streets, those fears were confirmed when the treasurer announced the retrospective lifetime $500,000 cap on after-tax super contributions. This was on top of the reduction in concessional contribution caps and the move to halve the taper rate on part age pensions, which would effectively see tens of thousands of retirees losing some or all of their pension entitlements.
It was a blow to confidence, particularly in relation to the retrospectivity. People who had been planning their retirement in good faith, based on a long tradition of super changes not being retrospective, were understandably upset. Thankfully the backbench revolt that followed saw a back-down on the $500,000 lifetime cap, but the faith that people have long held in the system had been shaken.
Pre-retirees and retirees could be forgiven for wondering what might be around the corner and whether super had lost its effectiveness as a retirement savings vehicle.
The call for clarity
The motivation behind changes to super, of course, does have some merit. Yes, there is a need to address budget repair and that task needs to be shared across all segments of society. It’s also true that the age pension system is on a dangerous trajectory with people living longer and a shrinking ratio of working people to retired people. We expect our politicians and thought leaders to deal with these challenges, but not with such ad hoc, knee jerk measures.
The cynicism in the electorate is also being fed by the lack of time being allowed for public discussion on proposed legislation. For example, the second tranche of super proposals released on 27th September this year only allowed 13 days for the super industry, interest groups and the public to comment on 234 pages of very complex legislation. Such moves seem unnecessarily opportunistic, rather than showing a serious desire for broad cooperation to achieve sound public policy.
Few would argue with the budget’s stated premise that “a prosperous Australia needs a well-targeted superannuation system that supports and encourages all Australians to save and not be dependent on the Age Pension in retirement”, but the test for legislators is how they will go about it. This evolution needs to be managed with an integrated and constructive approach to taxation, superannuation and social security that underpins confidence in the system rather than undermining it.
Broadly speaking, the superannuation system needs to aim at providing the right balance of incentives for people to save for a self-funded retirement, while avoiding measures that undercut confidence in super and force them back toward a reliance on the age pension. Simplicity, reliability and clarity are all critical aspects in seeking those objectives.
Is it all doom and gloom?
Fortunately, the short answer is “no”. Despite all the political posturing and ill-conceived changes, superannuation still holds a unique and central position as a means of wealth creation and retirement security. Confidence may be shaken, but the fundamentals for building financial independence using legitimate tax efficient opportunities within super are still well and truly available. It is just a matter of knowing how to use them most effectively.
The question for all those who want to save for a comfortable retirement is who they will take their lead from? Will they be swayed or spooked by the politicians, bureaucrats or vested interest groups who seek to use superannuation as a political football? Or will they seek a more sober and strategic voice of reason from professionals who understand the superannuation, taxation and social security systems and can plot a path that will maximise the available benefits?
Good personal investment decisions are seldom based on fear and over-reaction, so it is vital to seek out well-qualified advice that will cut through the rumour and speculation. That advice will focus on making the most of the substantial advantages that super offers and will negotiate a steady path through inevitable changes (good or bad) that the legislators may impose.