The recent government initiative to abolish the surcharge will impact on the relative incentives of saving within superannuation and outside superannuation. Essentially, the level of concessionality available to those who were previously liable for the surcharge will improve significantly, and therefore saving within superannuation will become more attractive, both in an absolute sense and in a relative sense when compared to investments outside superannuation. Charts 5 and 6 show the impact that removal of the surcharge is projected to have on improvements in the accumulated savings at retirement (in dollar terms and percentage terms), while Chart 7 shows the projected improvements in annual average retirement expenditure in percentage terms.
It may not be immediately apparent why the removal of the surcharge impacts upon the improvements available via saving outside the superannuation system. However, while the surcharge does not impact upon the additional dollar value of saving outside superannuation (as shown in Chart 5), it impacts upon the base level of saving within superannuation, as discussed above. Thus, the removal of the surcharge will lead to an increase in the SG accumulated benefit, and therefore any fixed dollar benefit of saving outside superannuation has a lower proportional impact.
The implication of this result is that not only is the removal of the surcharge projected to improve the incentive to save within superannuation in absolute terms, but it is projected to increase the incentive to save within superannuation relative to saving outside superannuation. This result can also be seen for one-off rather than continuing investments in Chart 1.
Chart 5 : Dollar Improvements at Retirement, 3% extra saving
Chart 62: Percentage Improvements at Retirement, 3 % extra saving
Chart 7: Percentage Improvements during Retirement, 3 % extra saving
Chart 5 and 6 highlight that the removal of the surcharge leads to a significant increase in the dollar incentive of saving an additional 3% of salary. The projected savings from the SG base have also increased by the same proportion for these people, such that they have the potential to benefit twice from the policy (once for their SG contributions and once in terms of improved incentives to save). As both of these potential benefits have grown by the same proportion (up to 13.3%3), the additional incentive does not change in percentage terms, despite both the base contribution and the additional saving growing in dollar terms.
As Chart 7 is also in percentage terms, it parallels the broad patterns of Chart 6 taken through to the retirement phase.
2 The incentive to save outside superannuation remains constant in dollar terms (as per Chart 5), but as the projected SG balance increases with the removal of the surcharge, the proportional increase derived from a fixed dollar benefit accumulated by saving outside superannuation is reduced.
3 This is based on the previous legislated reduction of the surcharge rate to 10% in 2005-06 and beyond. For a gross contribution of $1, the net contribution can increase from 75 cents up to 85 cents for a person paying the full surcharge rate. This represents an improvement of 13.3%.