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Editorial: Tax and timing crucial to closing the super gap
The superannuation landscape has changed dramatically in Australia over the past three years, but a key question remains: Are we closing the retirement incomes savings gap quickly enough?
What needs to be remembered about the various elements of Government policy introduced over the past 36 months is that the ultimate objective has always been to ensure that Australians become more self-sufficient in funding their retirements, thereby reducing the burden on the nation’s social welfare system.
The problem confronting Australia is that increasing numbers of baby boomers are heading for retirement and taxpayers are going to have to dig deep to fund the gap that exists between the retirement savings these people have accumulated and what they will actually need.
According to Sydney-based actuarial firm Rice Walker, Australia’s retirement savings gap stood at around $600 billion three years ago and, while it has been narrowing, it still stands at around $452 billion or $93,000 per person.
The bottom line of the Rice Walker research, commissioned by the Investment and Financial Services Association (IFSA), was that while a number of the Government’s policy initiatives have gained traction in terms of narrowing the retirement savings gap, more needs to be done, and the most obvious next step is further tax concessions with respect to superannuation.
That much was made clear in March by the chair of IFSA’s Economic, Savings and Tax Board Committee and Perpetual Limited chief executive David Deverall, who said some “heavy lifting” still needed to be done in the area of improving voluntary savings through incentives such as the lowering of front-end taxes on super contributions.
Deverall was speaking at the release of IFSA’s Policy Options for Retirement Incomes and Long Term Savings and made no bones about the fact that tax cuts represented one of the key options the Government needed to consider, especially in circumstances where IFSA’s latest research found that the projected response to reducing front-end tax would create an increase in superannuation savings of $2.51 for each dollar of tax foregone over the next 70 years.
He said the bottom line was that if the contributions tax was removed altogether, the retirement savings gap would fall to less than half its current size.
The problem for IFSA and the other organisations representing the financial services industry is that while the Government may grudgingly acknowledge the manner in which a cut in superannuation taxes would stimulate retirement income savings, the bottom line is that senior members of the Cabinet remain deeply divided on its desirability.
While everyone expects some form of tax cut to be included in the May Federal Budget, only the most optimistic believe the Treasurer, Peter Costello, will deliver any substantive changes where superannuation is concerned.
That said, the reality confronting this Government and its successors is that they can ill-afford to postpone the implementation of policies that will narrow the retirement savings gap in circumstances where the number of baby boomers headed for retirement is expected to increase exponentially over the next five years.
That, too, was made clear in IFSA’s research, which said that in 2002 2.2 million people or 12 per cent of Australia’s population was aged over 65; and by 2042 approximately 6.2 million people or 24 per cent of the population would be aged over 65, with the cost of funding the safety-net age pension expected to be about 5 per cent of gross domestic product.
When it comes to policy development, IFSA has represented a real friend to the Government and one it should not now ignore. IFSA was a primary sponsor of the highly effective co-contributions regime and it was at the forefront of those organisations that argued for the removal of the superannuation surcharge.
It is on that basis that the Government should not now ignore the overtures being made by IFSA, the Association of Superannuation Funds of Australia or a range of other key industry organisations.
The Government needs to understand that while many baby boomers may look to work beyond normal retirement age, their capacity to do so might prove extremely limited, thus increasing the burden on the social welfare system.
A window of opportunity currently exists for the Government to accelerate the closure of the retirement savings gap. If it fails to act now it will only be delaying the inevitable.
AUTHOR
Mike Taylor
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