Superannuation: an overview

The superannuation system

8.2 The primary aim of the superannuation system is to ‘deliver private income to enhance the living standards of retired Australians’.^[1] For many people, superannuation is one of the most significant forms of wealth.^[2] Other policy aims of the superannuation system include:

• helping to address the challenges posed by Australia’s ageing population;^[3]

• intergenerational equity—so 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’;^[4] and

• income smoothing—‘to enable individuals to smooth their income over their lifetime, and thus maintain their standard of living once they retire’.^[5]

8.3 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 1, mandatory and voluntary superannuation savings respectively constitute the second and third pillars of Australia’s three-pillar retirement income system.^[6]

8.4 Superannuation is generally provided through a trust structure in which trustees hold funds on behalf of members. Trustees owe members statutory fiduciary duties under the Superannuation Industry (Supervision) Act 1993 (Cth).^[7] Superannuation funds are governed by this Act, its regulations, trust deeds and governing rules. Superannuation funds are regulated by the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Tax Commissioner.^[8]

8.5 Most Australians have their superannuation in a ‘defined contribution’ (also known as ‘accumulation’) fund.^[9] 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.^[10]

8.6 There are a number of age-based rules in superannuation law. These rules restrict the accumulation of superannuation for older persons when they reach certain ages, and stipulate when members can access their superannuation. The former group of rules has the potential to ‘push’ older persons out of employment due to the messages conveyed about retirement expectations. The latter group of rules, by contrast, may constitute a ‘pull’ to early retirement if age settings are too low.

8.7 Some age and other restrictions may be necessary to ensure that tax concessions are targeted to best support the accumulation of superannuation over the course of a working life. As noted by the Law Council of Australia (LCA), 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).^[11]

8.8 In considering the role of superannuation in the context of barriers to mature age workforce participation, it is worth noting that the system is not yet ‘mature’. As stated in Australia’s Future Tax System Review (the Tax Review):

The retirement income system is still in transition and will not fully mature until the late 2030s when employees retire after a full working life (for modelling purposes, usually assumed to be 35 years) of compulsory superannuation contributions.^[12]

8.9 The Superannuation Guarantee (SG) was introduced in 1992. Generally, this means that older cohorts have had less time to accrue retirement savings through the SG system than younger cohorts. The following examples roughly illustrate how this transitional period may affect people of different ages:

• a person who retires at age 65 years in 2012 will have received 20 years of SG contributions—less any period he or she has spent out of the paid workforce, for example, due to caring responsibilities;

• a person who is aged 55 years in 2012, and retires at age 65 years in 2022, will have received 30 years of SG contributions—less any period out of the paid workforce; and

• a person who is aged 35 years in 2012, who started working in 1995, will have SG coverage during her entire working life—less any period out of the paid workforce.

8.10 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.^[13] Taxation at the contribution and benefits stages is discussed in this chapter, as specific age-based rules apply at these stages.

8.11 Superannuation generally receives preferential tax treatment across these three stages. The Tax Review outlined the rationale for this treatment. This included that tax concessions on superannuation deliver a ‘more neutral overall tax treatment of deferred consumption relative to current consumption’^[14] and reflect the ‘social benefits of overcoming life cycle myopia’,^[15] that is, ‘people not saving adequately for retirement because it is too far in the future for them to adequately “see”, and so make adequate provision for their needs’.^[16]

Assessment of superannuation

8.12 Australia’s retirement income system (including the superannuation system) is considered strong by world standards. It ranks second in the Melbourne Mercer Global Pension Index survey of 18 countries. This report describes Australia’s system as of ‘sound structure, with many good features’, though with some areas for improvement.^[17]

8.13 Notwithstanding the strengths of Australia’s superannuation system, some commentators have criticised it on a number of grounds—including that it is inequitable. The Australia Institute states, for example, that tax concessions are designed so that ‘the more income a person earns the more taxpayer support they will receive’.^[18] It is also argued that a small portion of high income earners receive a substantial percentage of superannuation tax benefits.^[19] Lower income earners may receive comparatively little benefit—and lowest income earners may receive no benefits.^[20] The Australia Institute comments:

Despite Australia’s superannuation system often being described as ‘universal’ in fact a substantial portion of the working age population does not make contributions to superannuation and, in turn, receive none of the $30 billion available to ‘boost retirement incomes’.^[21]

8.14 This may particularly affect those who spend time out of the workforce, or work part time, to care for others. As noted by the National Welfare Rights Network (NWRN), ‘carers for children with disabilities, or adult family members or older frail parents’ have limited opportunities to accumulate superannuation.^[22] Women, in particular, do ‘exceedingly poorly in the superannuation stakes’.^[23] This can result from the gendered nature of care provision^[24]—‘women who spend their lives caring for others are at the highest risk of spending their retirement having to care for themselves’.^[25] Additionally, women’s superannuation may be affected by ‘domestic and family violence and divorce or separation’ and the ‘gender pay gap and women’s lower earnings in general’.^[26]

8.15 Another criticism made of the superannuation system is that its justifications are weak, or that it does not meet its underpinning policy aims.^[27] For example, it has been argued that the system fails to achieve its ‘stated goal of taking pressure off the Commonwealth budget by reducing outlays on the age pension’.^[28] The Australia Institute refers to the cost of superannuation concessions:

Australian taxpayers contributed $30.2 billion to the private accounts of that portion of the population with superannuation [in] 2011–12. By 2015–16 this sum is projected by Treasury to rise to more than $45 billion by which time it will be, by far, the single largest area of government expenditure. By 2015–16 the taxpayer contribution of $45 billion to private superannuation balances will account for almost twice the $24 billion projected to be spent on defence in that year.^[29]

8.16 Dr Richard Denniss of the Australia Institute also notes that:

A dollar spent on tax concessions for super simply does not lead to a dollar’s reduction in the cost of providing the age pension, now or in the future. It doesn’t even come close.^[30]

Reviews of superannuation

8.17 As discussed in Chapter 1, in 2008 and 2009 the Australian Government initiated two major reviews addressing superannuation: the Tax Review (chaired by Dr Ken Henry AC) and the Super Systems Review (chaired by Jeremy Cooper).

8.18 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.^[31] Some relevant recommendations are discussed in this chapter.

8.19 The Super Systems Review addressed the governance, efficiency, structure and operation of Australia’s superannuation system. The review proposed ten recommendation packages aimed at creating member-orientated architecture for the superannuation industry.^[32] This 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.^[33] The Australian Government’s response to the review is the ‘Stronger Super’ package, and it is in the process of implementing the Stronger Super reforms.^[34]