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A gap on the horizon
After months of public hearings and submissions, the Parliamentary Inquiry into how to encourage under 40 year olds to focus on superannuation appears to have been pipped at the post.
Federal Treasurer Peter Costello gazumped some of the inquiry’s recommendations in his Budget announcement. However, the Treasurer’s announced changes are unlikely to have an immediate effect on how people under 40 view superannuation.
The Parliamentary report, however, is still good reading and, hopefully, the Government in the months ahead will pick up many of its recommendations. After all, the generational issues of retirement are still hanging around.
One issue raised before the committee by Tower and others was a call for the removal of Reasonable Benefits Limits (RBLs). Most within the industry saw RBLs as a distant ‘disincentive’ to save, and an administrative cost on the industry that was ultimately borne by the investor.
The Treasurer, in May, wiped that issue off the board with the proposed abolishment of RBLs from July 1, 2007.
Clearly, under-40s can now start ‘socking’ it away in super, with less fear of savings and investment returns putting them into a tough tax position later on.
Other changes announced by the Treasurer should also make superannuation the best retirement saving solution going forward, and this should also make it more attractive to under-40s.
Simple super, as outlined by the Treasurer, should make it attractive to more people.
So what has the Parliamentary Inquiry recommended that has been left undone by the Government and which, hopefully, can be addressed in the future, or is now being dealt with in some other way?
The key positive findings of the inquiry were:
* Introduction of a voluntary contribution scheme, which was proposed to be 3 per cent default salary sacrifice with opt-out provisions. This offered the opportunity for under-40s to just let their super investment happen automatically. It becomes income not missed and not spent elsewhere.
* To keep the minimum Superannuation Guarantee (SG) threshold the same level, or reduce the threshold, providing super investment opportunity for parents staying at home to look after kids but continuing to work part time. The compound interest generated could boost returns significantly.
* Greater education push in schools, among adults and, especially, women to make super investments a simpler concept and to promote its benefits. The Financial Literacy Foundation was urged to work with the funds on this matter. Clearly, this work is already underway.
* The alignment of the tax treatment for total and permanent disablement cover in the super of incorporated self-employed and sole traders. This is considered by many to be a long overdue step to prevent unfair tax treatment for the sole trader. Given that many small-business start-ups are one person aged under-40, this has advantages.
* The extension of the co-contribution scheme to parents not working and who stay home to look after the family. Tower, and others, clearly identified this as a way to encourage families to build up two super reserves for the future.
However, Tower is still of the view that superannuation and/or retirement is not really top of mind for people under 40 when it comes to competing priorities.
After all, there is paying the mortgage, feeding, clothing and schooling the kids, running the car(s) in conditions of high petrol prices, and then planning to have a break away every now and then.
When those spending priorities dominate, thinking — and saving — for retirement up to 25 years away really doesn’t make it to top of mind.
Tower therefore recommended to the inquiry an incentive program that would link a top priority issue (i.e, the mortgage) to the low priority item of super savings.
Clearly, the superannuation landscape has changed dramatically since the inquiry started. However, many of its recommendations still offer considerable scope in terms of encouraging people aged 20-40 to start thinking about, and taking advantage of, superannuation arrangements and savings early.
Without RBLs, and by utilising compound interest, starting early and saving often can produce a very comfortable retirement. The challenge remains, however, in getting that message across when for many under-40s, “money is too tight to mention”.
Carly O’Keefe is with Tower Australia Limited
AUTHOR
Mike Taylor
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