The superannuation system was saved from radical overhaul in the May 2014 federal Budget, but it is becoming increasingly apparent that the tax concessions to the wealthy are unsustainable in the long run.
A number of people, including Liberal heavyweight Malcolm Turnbull and Treasury Secretary Dr Martin Parkinson, have intimated that the excessively generous deductions in superannuation available to the wealthy are unsustainable and need to be considered in any genuine tax reform process.
The government’s promised review of the tax system is the most likely conduit for any changes, although in order to maintain its pre-election promises (to not make adverse changes to superannuation in its first term) the government will most likely put off implementation of any changes until after the next election.
Taxpayers Australia’s view is that the superannuation system should be designed to get as many people into self-funded retirement as possible. The reality is the superannuation guarantee (SG) rate – even at its eventual 12 per cent – will be insufficient to meet most people’s needs.
People will need to make personal contributions to their superannuation and this should attract concessional tax treatment to make up for the money foregone through doing so.
This means we need to keep the tax-effective nature of contributions to encourage personal contributions above the SG rate.
While most of us will need superannuation to provide for our retirement, the wealthy do not. Without it they would still be able to make adequate preparations for their retirement years. The question then becomes do they need, and should the system continue to provide them, generous tax concessions.
With some studies concluding that 40 per cent of the available tax concessions go to the top 5 per cent of Australians, this is a fair argument.
The difficulty is how do you create a system that encourages those who can – and need – to contribute more, while ensuring the already wealthy are not able to minimise tax through abuse of the system.
The solution in our minds is to have lifetime contribution caps and tax on earnings of funds over certain thresholds.
The first step is to determine what represents an adequate level of superannuation savings needed to pay for a reasonable retirement. The Association of Superannuation Funds of Australia’s (ASFA’s) Retirement Standard is often seen as the benchmark. It says a modest retirement will require an average couple to have $33,509 in income a year, and for a comfortable lifestyle the annual income required is $57,817. If we assume that an annuity returns 6 per cent per annum, this would require an annuity of around $1 million.