A lot of the debate in the Senate Select Committee’s inquiry into living standards in retirement went into the ‘second pillar’ — compulsory super — and whether nine per cent Super Guarantee alone will give Australians the retirement living standards they expect. The Investment and Financial Services Association (IFSA) believes nine per cent won’t be enough, even for people with long working lives.
Regardless of the arguments about nine per cent, there are many, many people who will not get 30-plus years in the workforce. If these people are to achieve the retirement income they hope for, it will be through voluntary superannuation — the third pillar.
Sadly, the third pillar has never been particularly robust. Now that the compulsory system has reached its legislated limit, it is time to get to work on the voluntary side. There are many things that can be done — IFSA’s suggestions are outlined in our submission to the Senate Select Committee.
On the incentives, IFSA’s research into co-contributions showed that a significant number of people in low and middle income ranges would respond to matching, even at a co-contribution level of 50c for each member dollar contributed. This provides a larger ‘bang’ for the Government’s co-contribution ‘buck’.
n A scheme offering $1 for $2 up to annual income of $30,000 would cost $102 million a year for total extra contributions of $251 million a year.
n A scheme offering $1 for $2 up to annual income of $40,000 would cost $158 million a year for total extra contributions of $371 million a year.
Co-contributions could help people trying to ‘catch up’ on superannuation. For example, a woman returning to the workforce at age 45, earning $35,000 a year, who works for 15 years until retirement at age 60, could improve her retirement income from $15,681 a year (or 58.6 per cent of pre-retirement consumption expenditure) to $17,371 a year (or 64.9 per cent of pre-retirement consumption expenditure) through 15 years of voluntary contributions at $1,000 a year with a co-contribution of $500 a year.
On disincentives, IFSA showed the committee how the superannuation surcharge is hitting older workers with low account balances. This is a very serious problem: taxes are hitting people who need to be saving most, and who probably have the means to do so — since their current income is in surcharge territory. Winding back the surcharge will have important benefits for people who have achieved a higher income and wish to ‘catch up’ on superannuation.
Removing age-based contributions limits would also help people who wish to catch up superannuation through extra employer contributions. The RBLs will still limit overall tax concessions.
We’ve also pointed out the many legislative impediments and barriers to voluntary super, particularly later in life. In my last column, I suggested removing the employment nexus from voluntary super. All these suggestions would help and encourage people who will not get far enough on compulsory super to use the third pillar to build their own retirement income adequacy.
— Richard Gilbert is CEO of the Investment and Financial Services Association.
