In conjunction with the Department of Family and Community Services, the Treasury is responsible for advising the Government on broad retirement incomes policy, with a view to improving the current and future welfare of Australians. Within the context of retirement income policy, the Treasury has direct portfolio responsibility for providing advice on superannuation and taxation policy, including on appropriate taxation policy for superannuation.
Scope of the submission
The terms of reference for the Committee's inquiry are:
The adequacy of the tax arrangements for superannuation and related policy to address the retirement income and aged and health care needs of Australians.
This submission discusses the key features of Australia's retirement income system, and the policy and institutional context within which it functions. Reflecting Treasury's core portfolio responsibilities, the main focus of the submission is on the implications for retirement incomes of the current superannuation framework and the taxation regime applying to superannuation. The submission discusses the determinants of retirement living standards and issues associated with their measurement, and also presents the results of quantitative analysis of the adequacy of retirement incomes under the combination of the current Superannuation Guarantee and Age Pension arrangements. The submission does not endeavour to address specific issues associated with the aged and health care needs of older Australians, these issues falling more directly within the portfolio responsibilities of the Department of Health and Aged Care.
This submission is divided into four chapters. Chapter 1 contains a discussion of the key determinants of retirement living standards and issues around their measurement. Chapter 2 outlines the main features of the policy and institutional context in which the retirement income system functions, including the three pillars policy, the concessional taxation regime applying to superannuation and the broader economic and fiscal policy context. Chapter 3 presents the results of quantitative modelling of the adequacy of retirement incomes under hypothetical cases involving the Superannuation Guarantee and the Age Pension, as well as aggregate (whole of population) modelling of adequacy. Chapter 4 summarises the results of research undertaken by the Treasury highlighting the concessionality of the taxation arrangements applying to superannuation in Australia.
Summary of main points
- A number of determinants will impact on the level of retirement incomes of Australians. Such determinants include compulsory superannuation arrangements, length of time spent in the workforce, the means-tested Age Pension, the ability to accumulate additional private savings (both inside and outside of superannuation), and other factors such as superannuation fund returns and fees and charges. Government policy can affect, directly or indirectly, most of these determinants.
- In this context, Government initiatives such as the Senior Australians Tax Offset, the extension of eligibility for the Commonwealth Seniors Health Card, and legislating to link the Age Pension to 25 per cent of Male Total Average Weekly Earnings will directly benefit the living standards of Australians in retirement.
- At a broad level, the incomes and living standards of Australians, including retirees, will be enhanced by policies aimed at maximising sustainable economic growth along with economic and social participation. As a result, analyses or proposals in the retirement incomes area that do not have regard to this broader context are of limited use in informing policy.
- The adequacy of overall retirement incomes is commonly assessed using a replacement rate concept - that is, the ratio of an individual's income or spending power after retirement to that before retirement. The Government has not set an explicit replacement rate target for Australia's retirement income system. Research by the Association of Superannuation Funds of Australia (ASFA) has indicated that the average net replacement rate from public income maintenance schemes in nine OECD countries is 53 per cent1.
- Analysis undertaken by Treasury's Retirement and Income Modelling (RIM) Unit indicates that current policy will deliver substantially higher replacement rates for senior Australians, as a group, over the longer term. The Superannuation Guarantee (SG) system in conjunction with the Age Pension is projected to provide a spending replacement rate for an individual on median earnings of 72 per cent after 30 years of contributions and 77 per cent after 40 years2. These replacement rates are conservative in that no allowance is made for superannuation contributions above the SG or for additional private savings outside of superannuation. Replacement rates for women with interrupted careers are also calculated.
- Aggregate projections for the entire Australian population also show average potential replacement rates for all workers rising to 71 per cent by 2050. These projections are based on the full diversity in labour force participation of the population.
- The submission also contains an analysis of the tax concessionality of superannuation which demonstrates that for persons in all tax brackets receiving SG employer contributions only, superannuation is a tax preferred investment over a working lifetime.
1 Achieving an adequate retirement income - how much is enough? Summary of research findings and issues for discussion. Ross Clare, Association of Super Funds of Australia (ASFA) Research Centre, October 1999;
2 These replacement rates are based on individuals retiring in 2032. For individuals retiring under a fully mature SG system in 2042, the SG in conjunction with the Age Pension is projected to provide a spending replacement rate of 82 per cent, after 40 years of contributions.