A harsh reality
Deloitte's superannuation partner Russell Mason speaks to Katarina Taurian about the adequacy of Australia's retirement savings, and what needs to happen on a government level to address the associated risks.
In the context of retirement income, for Deloitte, what’s the ideal outcome for the FSI?
The ideal outcome is that there’s a tax and deductibility and concessional contribution regime in place, together with compulsory super guarantee, that allows an average taxpayer to accumulate enough over their life to have a comfortable standard of living in retirement.
We’re certainly not advocating that people should use superannuation to put away extremely large amounts of money as a tax minimisation scheme, but simply that they can put enough away to make and maintain their lifestyle in retirement. We’re living longer and longer in retirement, so it becomes increasingly important that money lasts through the various phases we have in retirement.
It’s becoming even more important because I think there’s a view you’re active in these early years of retirement and in the later years [you’re not.] But, there are increasingly large healthcare and carer costs associated with us in the later part of our retirement.
Research has hinted at dire predictions for the state of adequacy in superannuation, from policy perspective, what are the main things that need to happen to reverse that?
Lifetime concessional contribution caps I think are essential. Young people have got other priorities – savings, mortgage, rent, kids school fees – but there’ll be a point in time later on when they’ll be in a position to catch up, why can’t they catch up? And also why are women disadvantaged when they spend periods of times out of the workforce having and raising young children, why shouldn’t they be allowed to catch up, or have their spouse make concessional contributions on their behalf?
More flexibility with concessional contributions with regard to women who are out of the workforce, and generally for people to do catch up contributions later on in life, I think is probably the most important thing.
The other is to recognise the sort of contributions that are needed. We did some research late last year that said at age 30 going forward, the average male should be putting in total, including the super guarantee, about 17.4 per cent of their salary into super. A woman [needs to contribute] 19.5 per cent, again to reflect periods out of the workforce and the fact that they live longer.
So once you recognise how much is needed to be put into super for people to have an adequate amount in retirement, then the next thing we should do is set up the rules and the legislation to tax effectively achieve that.
Does Deloitte have any concerns in terms of minimum balances or the operating expenses of an SMSF?
We believe that in a competitive market those sort of things will largely sort themselves out. There are new players coming into the market, there is new technology being developed to allow SMSF providers to be far more effective in the way they deliver their services and therefore reduce costs.
So, we’ve got to be careful also that we don’t just say ‘you haven’t got enough money to establish an SMSF.’ It’s about not just having perhaps a minimum balance, but your ability to build that balance. So there may be some people that start off with a reasonably modest balance, but they’ve been able to build that up reasonably quickly and therefore they shouldn’t be prevented from establishing one.
Having said that, I think we believe you probably need, or [should] be able to get fairly quickly, to around about half a million dollars in today’s dollars for it to be cost effective. And that’s probably per individual.
In saying that, people should be allowed to establish an SMSF with a minimum amount of complexity and red tape. But certainly, we believe market forces will largely dictate what happens. To some people a retail master trust or an industry super fund will suit what they need better, but individuals should have the opportunity to decide that for themselves.
What are Deloitte’s confidence levels like in terms of turning the state of play with super and with retirement income around?
We’ve got a high level of confidence that it has to be sorted out, because it’s just too important. We’ve got the fourth-largest pension fund system in the world, nearly $1.9 trillion in super. Frankly, without superannuation, government couldn’t afford to pay the social security bill that might otherwise be there for people retiring.
We think that there’s such a vested interest of government to make sure the super system works. So I’m certainly hoping that the Murray Inquiry comes out with good recommendations and again I’ve got faith that will happen. Of course, like the Cooper review, the real test is in which of those recommendations the government actually implements.
It’s having faith that this government or a Labor government realises the importance of superannuation and we’ve got to have a solid sustainable system, and especially in the post-retirement space.
Again, people are retiring with significant amounts of money and in a defined contribution system as we have, we need to have products in a competitive, annuity market to allow people to have some sort of certainty in retirement.
I’m sure the average retiree does not enjoy sitting there sweating on the ups and downs on the share market because of the impact that has on their retirement dollars.