8.7 The superannuation system broadly consists of two components: mandatory employer contributions to private superannuation savings (the ‘superannuation guarantee’); and voluntary contributions encouraged by preferential tax treatment. As noted in Chapter 2, mandatory and voluntary superannuation savings respectively constitute the second and third pillars of Australia’s three-pillar retirement income system.
8.8 Most Australians have their superannuation in a ‘defined contribution’ (also known as an ‘accumulation’) fund. In these funds, a member’s superannuation benefits in retirement are based on the amount contributed by his or her employers, the amount contributed voluntarily by the member, and the amount earned by the superannuation fund in investing the contributions.
8.9 Superannuation can be taxed at three stages: when it goes into the fund (the contributions stage); while it is in the fund (the earnings stage); and when it leaves the fund (the benefits stage). Superannuation generally receives concessional tax treatment across these three stages.
8.10 The Income Tax Assessment Act 1997 (Cth) refers to two categories of contributions: ‘concessional contributions’ and ‘non-concessional contributions’. Concessional contributions include mandatory employer contributions made according to the superannuation guarantee or under an industrial agreement or award, contributions made under ‘salary sacrifice’ arrangements, voluntary contributions and most contributions made by self-employed people. Currently, concessional contributions are taxed at 15% on entry to the fund and there is a cap of $25,000 per year on concessional contributions.
8.11 Non-concessional contributions are those made by members from after-tax income, including contributions for a spouse. They are not further taxed on entry to the fund.
8.12 Investment earnings within superannuation funds are taxed at 15%, and withdrawals after the age of 60 years are tax-free.
Reviews and recent developments
8.13 The Australian Government initiated two major reviews addressing superannuation: the Tax Review (chaired by Dr Ken Henry AC) and the Super System Review (chaired by Jeremy Cooper). Both reviews reported in 2010.
8.14 The Tax Review examined the retirement income system—including the superannuation system—as a key part of the tax-transfer system. It made a wide range of recommendations for significant reform of the superannuation system, particularly in relation to taxation arrangements. Part of the Australian Government’s response to the review was to increase the superannuation guarantee levy from 9% to 12% and to remove the exclusion of employees 70 and over from the entitlement to the superannuation guarantee. The Australian Government also introduced the Low Income Earners Government Contribution that returns the tax paid on contributions to low income earners.
8.15 The Super System Review addressed the governance, efficiency, structure and operation of Australia’s superannuation system. The review made recommendations aimed at creating member-orientated architecture for the superannuation industry. These included the creation of ‘MySuper’, a simple, low cost default superannuation product; and ‘SuperStream’, measures to improve the ‘back office’ of superannuation, improving its productivity and ease of use. The Australian Government responded to the review with the ‘Stronger Super’ package, and it is in the process of implementing the Stronger Super reforms.
Age-based rules and work tests
8.16 There are a number of age-based rules in superannuation law. These rules restrict contributions to superannuation by members when they reach certain ages, and stipulate when members can access their superannuation.
8.17 Some age-based rules are necessary to encourage and support the accumulation of superannuation over the course of a working life. As noted by the Law Council of Australia (Law Council), age restrictions
allow people to benefit from their superannuation at an appropriate time to fund their living standards, while preventing them from accumulating assets in a tax advantaged environment for purposes other than funding their retirement (or providing for dependants in the case of early death).
8.18 The present settings allow a person to make voluntary contributions to superannuation until the age of 75 and to withdraw from the age of 55. These settings mean that people can make their own decisions about when to work and contribute to superannuation funds, and when to retire and withdraw from superannuation funds. The settings are consistent with contemporary values of choice and flexibility. However these settings also create a risk that, for people between the ages of 55 and 75, the tax incentives of superannuation will be used to increase current expenditure rather than to save further for retirement.
8.19 One response to this risk is to allow continued contributions after a certain age if the person is working—that is, to impose a work test. Contributions made while a person is working are consistent with saving for retirement. This has been the approach taken regarding voluntary contributions by people aged 65 to 75 years, contribution splitting with spouses who are 65 and over, and spouse contributions to spouses between 65 and 70. As the Tax Review put it, the contribution caps, work tests and age limits are ‘consistent with the primary purpose of the retirement income system, which is to smooth income over a person’s lifetime’.
8.20 This chapter considers whether removing the upper age limits and extending the work tests would have an impact on workforce participation.
Superannuation in context
8.21 This Inquiry examines superannuation legislation in order to determine whether it incorporates limitations or barriers to mature age workforce participation. In conducting such an examination, it is useful to consider the context of the legislation—the purposes of the superannuation system, its effectiveness in achieving these purposes, and its impact on equity and fairness.
8.22 The superannuation system contributes to the ‘smoothing’ of income by delivering private income to retired Australians. While the Age Pension is intended to satisfy the minimum needs of Australians, the mandatory superannuation contribution is intended to contribute to ‘the improved wellbeing of employees in retirement’. Voluntary contributions allow people to increase their retirement incomes.
8.23 The superannuation system is also intended to help address the challenges posed by Australia’s ageing population. By making saving for retirement compulsory, the superannuation system ensures that the increased costs of an ageing population are not ‘fully borne by the generation that will be working in several decades’ time when the dependency ratio is higher’.
8.24 Australia’s retirement income system—including the superannuation system—is considered strong by world standards. The Melbourne Mercer Global Pension Index survey of 18 countries ranked Australia third. The system was described as having ‘a sound structure, with many good features, but has some areas for improvement’. It rated well across the three domains of adequacy, sustainability and integrity.
8.25 However, there are concerns that the superannuation system reproduces existing income inequalities. High income earners receive a substantial proportion of superannuation tax benefits, while low income earners receive comparatively little benefit, and some of the lowest income earners receive no benefit. Because superannuation is linked to workforce participation, people who take time out of the workforce to care for others are likely to have lower retirement incomes. The Australian Human Rights Commission reports that women’s retirement incomes are affected by their caring responsibilities, domestic and family violence, separation and divorce, and the gender pay gap. 
8.26 Recent changes to the system have responded to these problems but not resolved them. These changes include a reduced cap on contributions, a low income government contribution, and an additional contributions tax on those earning more than $300,000.
8.27 There are also concerns that the withdrawal or ‘decumulation’ stage of the system is not well developed. The authors of the Melbourne Mercer survey recommended a requirement that retirement benefits be taken as an income stream rather than a lump sum. They also said the system would be improved if the time between access to superannuation and access to the Age Pension was not more than five years. The Actuaries Institute indicated that there is low consumer awareness of income stream products such as annuities, and considers that current tax and social security laws present barriers to the development of these products.
8.28 These observations regarding the strengths and weaknesses of the Australian superannuation system provide a context for this Inquiry. The Inquiry’s Terms of Reference require a specific focus on the impact of superannuation rules on workforce participation. Issues of equity, efficiency and the policy goals of the superannuation system are taken into account when considering the interaction between superannuation’s age-based rules and workforce participation. The framing principles, including fairness and self-agency, are also relevant.
8.29 Finally, there are concerns about the frequency of change in the superannuation system. The Inquiry’s framing principles of stability and system coherence are particularly important in the case of superannuation because of the long-term nature of superannuation savings and because almost every working person is affected. A lack of certainty about superannuation rules reduces the response to incentives, discourages contributions and makes retirement planning more difficult. Stakeholders emphasised that incentives to work or save are not effective if they are not understood. The ALRC’s consideration of superannuation and workforce participation is guided by the framing principles and is undertaken in a context where system stability is highly valued.
 The third pillar also includes other forms of private long-term savings. The first pillar is the means-tested Age Pension. See, eg, The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues (2009), 8–13.
 ASIC, Types of Super Funds <www.moneysmart.gov.au> at 21 March 2013.
 By contrast, ‘defined benefit’ funds pay benefits according to a formula based on factors such as years of service, age and salary. Certain defined benefit schemes may present particular barriers to work, as identified in the Issues Paper. The ALRC does not make recommendations with respect to defined benefit schemes, as these barriers are generally embedded in the design of individual schemes. Further, defined benefit schemes are declining, with most closed to new members: Super System Review Panel, Super System Review (2010), pt 2, 176.
As discussed below, ‘non-concessional contributions’ do not receive concessional treatment at the contributions stage.
Income Tax Assessment Act 1997 (Cth) ss 292–25, 292–90, 292–165, 995–1.
Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 5.01(1).
 ASIC, ‘Tax & Super’, 29 June 2012 <www.moneysmart.gov.au> at 21 March 2013.
Income Tax Assessment Act 1997 (Cth) s 292–20.
 The Tax Review’s recommendations about superannuation are contained in The Treasury, Australia’s Future Tax System: Final Report (2010), pt 1, Recs 18–24 and The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues (2009), 2–4.
Superannuation Guarantee (Administration) Amendment Act 2012 (Cth). These amendments altered the Superannuation Guarantee (Administration) Act 1992 (Cth) s 19 (increased levy) and s 27 (age limit).
Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 (Cth).
 Super System Review Panel, Super System Review (2010), pt 2.
 The Treasury, Stronger Super <strongersuper.treasury.gov.au> at 21 March 2013.
 Australian Government, Stronger Super—Government Response to the Super System Review (2010). See also The Treasury, Stronger Super <strongersuper.treasury.gov.au> at 21 March 2013.
 Law Council of Australia, Submission 46.
 These settings are discussed in more detail later in the chapter.
 The Treasury, Australia’s Future Tax System: Final Report (2010), pt 2, vol 1, 115–116.
 Super System Review Panel, Super System Review (2010), pt 1, 15.
 The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues (2009), 11.
 Ibid, 8.
 The Treasury, Towards Higher Retirement Incomes for Australians: A History of the Australian Retirement Income System since Federation (2001), 83.
 R Hanegbi, ‘Australia’s Superannuation System: A Critical Analysis’ (2010) 25 Australian Tax Forum 303, 312. See also The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues (2009), 30. In the former article, Hanegbi challenges the assumptions on which this position is based.
 Australian Centre for Financial Studies, Melbourne Mercer Global Pension Index (2012) <www.mercer.com/articles/global-pension-index> at 21 March 2013, 6.
 Ibid, 7
 The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues (2009), 28–29. The Australia Institute, Can the Taxpayer Afford ‘Self-funded Retirement’?: Policy Brief No 42 (2012), 3. For an alternative perspective see ASFA, The Equity of Government Assistance for Retirement Income in Australia (2012) and Financial Services Council, Submission 89.
 National Welfare Rights Network, Submission 50. See also Australian Human Rights Commission, Accumulating Poverty? Women’s Experiences of Inequality Over the Lifecycle (2009).
 Australian Human Rights Commission, Investing in Care: Recognising and Valuing Those Who Care, Research Report Volume 1 (2013), 53; Government of South Australia, Submission 95.
 K Swoboda, ‘Thirty Percent Tax for High-income Earners, Delayed Changes to Contributions Cap’ <www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs> at 21 March 2013. According to ASFA, in 2009–2010 (after the co-contribution and the reduced cap, but before the increased contributions tax), those on the highest marginal income tax rate received 15% of the total tax concessions while making up only 2.4% of wage earners: ASFA, The Equity of Government Assistance for Retirement Income in Australia (2012), Tables 2.1, 2.2.
 K Swoboda, ‘Thirty Percent Tax for High-income Earners, Delayed Changes to Contributions Cap’ <www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs> at 21 March 2013.
 Australian Centre for Financial Studies, Melbourne Mercer Global Pension Index (2012) <www.mercer.com/articles/global-pension-index> at 21 March 2013, 23.
 M Howes, Exploring Barriers to Australia’s Annuities Market (2012).
 Super System Review Panel, Super System Review (2010), 7; Suncorp Group, Submission 66; National Seniors Australia, Submission 27; Association of Independent Retirees, Submission 17.
 B Headey, ‘Economics of Population Ageing: Australia May Not Have a Labour Supply Problem, but Recent Superannuation Reforms Have Not Helped’ in T Griffin and F Beddie (ed) Older Workers: Research Readings (2011).
 National Seniors Australia, Submission 27.
 National Seniors Australia, Submission 92.
 Ibid; J Willis, Submission 42.