A Plan to Simplify and Streamline Superannuation
The proposed changes would increase further retirement income replacement rates and encourage saving.
Compulsory superannuation, combined with the age pension, will allow many Australians to retire with an adequate retirement income. However, some people may wish to have a higher level of retirement income than they will receive from the age pension and their compulsory superannuation. The proposed changes would provide significant benefits over time to Australians with only compulsory superannuation and would reward people for making additional superannuation contributions to improve their retirement income. Incentives for additional contributions would be significantly increased.
Example 1 — 9 per cent gain in lump sum superannuation benefits for a worker on average earnings with SG contributions made during working life
Under a fully mature SG system, a person on $1,000 per week (about average income) is projected to have accumulated superannuation benefits of approximately $466,000 over a working life of 40 years through the SG arrangements alone. Under the proposed plan, tax of around $37,000 payable when the benefit is paid would be abolished. This average worker would thus gain around $37,000 in retirement, an increase of approximately 9 per cent if they take a lump sum.
Example 2 — 17 per cent gain in superannuation benefits for a worker on average earnings with SG contributions made during their working life who takes a superannuation pension
If the person on average earnings in Example 1 chose to take their benefits as a superannuation pension, they are estimated to have an average of around $136 per week in additional retirement expenditure under the proposed new system. This would represent an increase in retirement expenditure of approximately 17 per cent.
Example 3 — Greater gains if an individual also contributes more to superannuation
If an individual makes additional voluntary contributions to superannuation, they stand to gain even more from the proposed changes.
If the person in Example 1 also made an additional 5 per cent tax deductible (salary sacrifice) contribution to superannuation each year over a working life of 40 years, their retirement benefit would increase from $466,000 to $706,000. Under current arrangements, this extra saving would have provided for a 11 per cent increase in average retirement expenditure. Under the proposed changes, the benefit of saving this extra amount through superannuation would be a gain in average retirement expenditure of 35 per cent (compared with the current arrangements and someone who makes no extra contributions).
Example 4 — Greater incentives for those who have reached age 60 to remain in the workforce
A worker on average earnings of $1,000 per week before age 60 would have significantly increased incentives to work at least part-time rather than fully retiring at age 60. For instance, a person could choose to work part-time (three days per week) and top up their salary by drawing down a pension over their life expectancy purchased with 75 per cent of their retirement savings at age 60. In this case, the person would be able to increase their average income level during these five part-time working years as a result of these changes by some $67 per week (a gain of over 10 per cent).
Appendix A provides further examples of how individuals stand to gain from the proposed system.
Improving rewards for working and for saving is an important component of the Government’s pro-growth policies and strategy for addressing the demographic challenges facing Australia over the coming decades.
Incentives to work and save are affected by various factors, including the rules concerning when people can access their superannuation and the impact of savings on their age pension entitlement. It is important that the retirement incomes system does not encourage people to leave the workforce early.
More incentives to work and save
The proposed changes would boost incentives to work and save in a number of ways.
- With superannuation benefits tax free from age 60, there would be an incentive to remain in the workforce longer.
- As superannuation benefits received after age 60 would not be included in a person’s assessable income, this may reduce the tax paid on other work income — thus increasing the incentive to undertake work while drawing down on superannuation.
- The proposed removal of RBLs and the tax on superannuation benefits after age 60 provides greater incentives to save.
- The proposed changes to the assets test taper rate would also provide a greater incentive to work and save as the current taper rate could result in a person losing more age pension than they can often earn from additional savings. By halving the taper rate, there would be more incentive to work and make additional savings.
Managing the benefits end of superannuation would become simpler for superannuation funds to administer under the proposed changes. Not only are the payment and tax rules complex for individuals, but they also impose significant costs on superannuation funds. These obligations impose costs not only on people aged over 60 but on all fund members.
Under the proposed arrangements:
- Funds would no longer need to ascertain whether the working arrangements of every member aged 65 or over mean their benefits should be paid.
- The requirement to report all benefits paid to members and commutations of pensions for RBL purposes would be abolished. The ATO received around 676,000 reports for RBL purposes in 2004-05.
- Funds would no longer be required to withhold tax from lump sum payments made to a person aged 60 or over or provide payment summaries to these taxpayers.
- As most superannuation pensions would be tax free, funds would no longer be required to withhold tax instalments from these benefits and give pension recipients a payment summary.
- The number of benefit components that funds must keep records of would be reduced from up to eight to two.