The super reform that could fix everything



The Australian population is ageing rapidly, and as the government frantically looks for ways of preparing the budget to deal with this looming burden, there is one blindingly obvious solution it is completely ignoring.

That is, make sure Australians are using their superannuation for one purpose and one purpose alone: as a source of retirement income.

It may seem obvious – after all, that was the whole point of compulsory superannuation when it was started – but that is not what super is doing. And this means the huge tax breaks granted to superannuation contributions are a massive waste of money.

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Currently, when retirees hit 65 they can do whatever they want with their super – put it in the bank, buy a car, go on holiday, blow it on the pokies, the choice is theirs.

According to research by Rice Warner, around 50 per cent of superannuation is taken as a lump sum. Once that money is withdrawn, it is very difficult to know what happens to it. Rice Warner posits that many retirees are in fact using it as an income stream, but admits there is no way of being sure.

There is plenty of circumstantial evidence to suggest that many retirees are using their windfall on big, one-off pleasure spends.

This strange quirk seriously undermines what is otherwise arguably the best private pension system in the world, and experts agree something needs to be done about it.

What super was intended for

To introduce a mandatory income stream system would see superannuation doing what it was intended to do – providing Australians with an income through their retirement – rather than what it is currently doing, which is largely acting as a tax avoidance vehicle for the rich, and providing a retirement windfall for the not-so-rich to pay off their mortgage or go on holiday.

In combination with better targeted tax concessions and Age Pension eligibility thresholds, a compulsory retirement income stream system could take a lot of pressure off the budget and lead to a truly sustainable system for funding retirement.

But both the government and the opposition are steering well clear of it, because they believe it would be too unpopular with a public who are wedded to the idea that super is theirs to do what they want with.

Why would it be unpopular?

Jeremy Cooper, the man who led the last major review of the super system, put the problem well in an interview with FS Super magazine last year.

In his view, pension systems work best when people adopt a more collectivist mindset, as they do in countries like Sweden and Denmark. But Australians, he said, do not think about super in that way.

“It’s a genie back in the bottle problem. Since day one in Australian superannuation, people have been told it’s their money,” said Mr Cooper, who is currently chairman of retirement income at annuity provider Challenger.

“They [Sweden and Denmark] are countries that have got a very strong notion of solidarity, a notion of intergenerational sharing and collectivism, things that are really embedded in their societies.”

Such a cultural mindset would make it easier to mandate an income stream system.

But he said trying to transpose their systems on a country like Australia wouldn’t work. “It’s like going overseas and coming back with a whole lot of souvenirs, and thinking, ‘My God, why did I buy that? It doesn’t work in Australia!'”

Are Australians really that selfish?

A recent poll found that the overwhelming majority of Australians support taxing multinational corporations and wealthy individuals more. That includes cutting super tax concessions.

This could be read as evidence of a collectivist mindset. But it could just as easily be read as a reflection of the fact that the majority of Australians are not in the top tax bracket, and do not have millions of dollars of super. In other words, they’ve got nothing to lose, and if they did, they would change their tune.

Whatever the truth, the fact is superannuation will not be doing its job until it is being used to provide an income in retirement. Politicians probably need to start getting people used to that fact. But they are unlikely to persuade ordinary, middle-income Australians of the virtues of compulsory or semi-compulsory income streams, when they are granting the rich such disproportionate tax advantages.

In the words of Tom Garcia, chief executive of the Australian Institute of Superannuation Trustees, “Our compulsory system wasn’t set up as a tax shelter for wealthy Australians. It was set up to provide an adequate retirement income for working Australians, with the Age Pension also doing some of the heavy lifting.”

By avoiding tackling both tax breaks and the super drawdown phase, politicians on both sides of the fence may be underestimating the ability of Australians to take a sensible attitude to the huge problem of the ageing population.

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