Saving for a Stronger Australia
Address by
Senator the Hon. Helen Coonan
Minister for Revenue and Assistant Treasurer
ASFA Conference
Brisbane
13 November 2003
Intro
1. Thank you etc.
2. As we head toward the next Budget and, of course, the next election,
proposals about the superannuation system will abound.
3. Retirement incomes policy is vitally important and I'm sure there
will be a lot of people talking about it over the next few months - including
me! Given speculation about the size of the surplus, an obvious target
for further spending will be superannuation.
An exercise in Nation Building
4. Perhaps science fiction writer John Sladek put it best when, speaking
of the future, he said:
5. "The future, according to some scientists, will be exactly
like the past, only far more expensive."
6. If he is right, the need for Australians to create wealth and save
for their retirement should not only be a personal goal - raising current
savings levels in the superannuation system must be a national priority.
7. An empirical snapshot of an expensive future indeed was delivered
in the Government's first Intergenerational Report released as part of
last year's Budget.
8. The Intergenerational report projected that by 2041-42 the proportion
of the population aged over 65 would be double the current level.
9. As a result, Commonwealth Age and Service Pension payments could be
expected to rise from 2.9 per cent of GDP in 2001-02 to 4.6 per cent
of GDP in 2041-42.
10. Significantly though, the retiring population in 2041-42 will have
had a lifetime of accumulating super under the superannuation guarantee
regime.
11. The greying of Australia presents the Government with twin challenges
- how to provide for baby-boomers teetering on the edge of retirement
and how to encourage Generation X and Y to put away money for their own
retirement.
12. It has become the veritable thorn in the side of young people as
they come to realise that not only will they have to fund their own retirement,
they will be the ones helping to fund the baby-boomers' twilight years.
13. Meeting the imminent retirement needs of an army of baby boomers
and enhancing the prospects of future generations of Australians are
just some of the challenges of building a responsive superannuation system.
14. Financial security and independence in retirement is every bit as
important to Australians as our national security and our personal safety.
15. It is directly underpinned by our economic strength and is definitely
necessary for our social cohesion.
16. I suggest that our superannuation savings and retirement incomes
infrastructure is as important to our national wellbeing as the building
of physical infrastructure - roads, bridges and telecommunications.
17. And as our superannuation system matures there are opportunities
for us to build the nation's nest egg together.
18. Each of us can share the twin goals of securing our own financial
independence while building the nation's wealth - it is a shared endeavour
between Government and those of us saving for our retirement, with the
common objective of our personal financial security and our national
prosperity.
19. This is all part of nation building - all part of building a stronger
Australia.
Vision
20. If that is the objective, what is the vision?
21. To engage the wider Australian population in superannuation then
people must feel part of it. The keys to making this happen are giving
workers ownership of their superannuation as well as education and information.
22. We must have an environment in which people are motivated to plan
and save with confidence and we must work to increase simplicity, security
and choice in our superannuation system.
23. There must be incentives for people to save for their retirement;
people must be given ownership of what is, after home ownership, probably
the largest savings vehicle they have; and we must demystify the superannuation
system, make it simpler, instead of its workings only being known by
the fortunate few.
24. And finally, the system must be flexible and safe to meet the demands
of a changing population.
25. So how might this vision be achieved?
Adequacy
26. First of all, people need to feel confident that by saving for their
retirement they will be financially independent. This in turn raises
the question - will they have enough?
27. Regrettably, many Australians do not think about their retirement
until quite late in their working lives.
28. And, anecdotal evidence suggests that even if they do, they may struggle
to come to grips with what they will need to meet their reasonable expectations
of a comfortable retirement.
29. Much media attention was given earlier this year to the so-called
retirement `savings gap' loosely estimated to be more than $600 billion.
30. The `gap' is the difference between the retirement people expect
to have and the retirement that current compulsory and voluntary superannuation
contributions, combined with the Age Pension, will likely produce.
31. Undeniably, the ageing of Australia presents us with challenges but
the current raft of retirees may be the last who face a retirement totally
reliant on the Age Pension.
32. ASFA research has indicated the average net replacement rate from
public income maintenance schemes in nine OECD countries is 53 per cent.
33. Treasury analysis indicates that the fully implemented Super Guarantee
arrangements, in conjunction with the improved Age Pension after tax
reform, will make the average Australian's financial independence in
retirement more secure than at any other time in Australia's history.
34. The Superannuation Guarantee with the Age Pension, could produce
replacement rates in excess of 60 per cent for Australians on median
earnings working for 25, 30 or 40 years.
35. This also holds true for Australians on median earnings with interrupted
working lives, as so often happens with women in the workforce.
36. Whether or not a particular replacement rate is optimal is a matter
of judgement, and to a large extent the capacity of, the individuals
involved, but it is generally accepted that most people are not likely
to need as much money in retirement as they do during their working lives.
37. By and large they may no longer face life's two largest expenses
- their mortgage and, of course, their children!
38. Having turned our focus to the issues of an ageing population relatively
early in comparison with some other nations, the Government is well placed
to ensure our retirement income system is structured to meet these challenges.
39. The Government has also delivered low interest rates, low inflation,
higher incomes, essential tax reform and exposure to global competition.
40. It is fair to say we have levels of prosperity Australians only dreamed
of 30 years ago and this gives us the capacity to continue to reform
our superannuation system.
41. Although it might sound trite, I believe it is necessary to reaffirm
that superannuation is a long term savings vehicle. It is there
to meet the retirement needs of Australians.
42. It should not be diverted to meet other spending priorities such
as housing, health and aged care, education or agriculture.
43. Which brings me to the issue of how Australians can be motivated
to plan and save more for their retirement and what incentives
would better secure a savings culture.
Incentives
44. As all of you would know substantial concessions make superannuation
a very attractive and tax effective way of saving for retirement.
45. The total value of the Government's existing tax concessions
in the super arena will be around $11.2 billion in 2003-04. It is the
Government's largest single tax expenditure.
46. But more needs to be made of policies that motivate Australian
workers of all demographics to contribute to their retirement savings.
This is an area I am particularly interested in.
47. For example, I am extremely pleased the Government has now delivered
on its key election promise to provide the co-contribution for low-income
earners and a reduction in the super surcharge - a package worth $1.3
billion over four years.
48. Although for those of you who followed what happened, the final days
of debate in the Senate were a bit like the set of TV gameshow - Deal
or No Deal!
49. The co-contribution measure provides significant incentives for low-income
workers to make personal contributions and rewards those who are
prepared to save.
50. It is a direct injection into the retirement savings of workers earning
up to $40,000 and for those on incomes of up to $27,500, personal superannuation
contributions will be matched by the Government dollar for dollar up
to $1000 annually.
51. In the recent package the Government also managed to achieve a reduction
in the superannuation surcharge from 15 per cent to 12.5 per cent over
three years.
52. Although a smaller reduction than the Government originally proposed,
it will help those with the capacity to save more for their retirement
to do so and take pressure off the pension system.
53. The Government is also extending a hand to help non-working and low-income
spouses build up superannuation savings in their own right, by allowing
splitting of super with their working spouse.
54. This is a major step forward, particularly for women, whose accumulated
super savings lag behind their male counterparts.
55. But Australians deserve to have flexibility in choosing a retirement
income option that best suits their needs.
56. The Government is closely examining whether to allow a new class
of market-linked `complying' pensions - growth pensions.
57. This is something that certain parts of the industry are very enthusiastic
about.
58. Growth pensions would be similar to existing complying pensions except
income payments would not be guaranteed, and that will give rise to issues
about consumer disclosure and information about products in the same
way as the Choice legislation.
59. We are examining the growth pensions proposal with a particular view
to the revenue and social welfare impacts. Clearly it is only worth doing
if it produces better retirement incomes for workers with acceptable
risks and costs to Government.
60. Other suggestions have been put forward that, quite rightly, are
aimed at making more of what is already going into the system - such
as reducing up front taxation on super and capping of industry fees and
charges on funds in the system.
61. The ability of consumers to make judgements about fees and charges,
even growth pensions if they were available, would be greatly improved
by a choice environment and industry-wide agreement about disclosure.
Competition and a sound market will put downward pressure on fees and
charges.
62. Not surprisingly, despite having received numerous approaches from
industry on reducing taxes, I am yet to receive a proposal from industry
on how to reduce the impost of fees and charges. The Government prefers
to rely on competition to put downward pressure on fees and charges.
Further prescription, regulation and compliance is the last thing the
superannuation system needs.
63. On the question of tax treatment of super, a recent OECD Economic
Survey on Australia (2003/04) found that even though superannuation is
taxed at three stages, the overall result is equivalent to a system that
only taxes end benefits.
64. This is consistent with the findings of World Bank research that
found that Australian taxes on super over a working lifetime are not
high by world standards.
65. Some groups have called inter alia for a reduction or removal of
the tax on superannuation contributions. Other commentators would fund
superannuation through a bigger tax on end benefits.
66. However, I think the real focus of groups calling for lower contributions
tax or a shift towards end-benefits tax is for an increase in the overall
concessionality of superannuation. For present purposes let us consider
that proposal.
67. Any proposal to increase the concessionality of super must
be underpinned by the likelihood that it will produce real economic benefits
including significant increases in retirement incomes and an increase
in national saving.
68. The benefit of tax concessions depends to a large extent on what
behavioural changes follow.
69. Given that few people save at the indexed rate they are already allowed
each year, it is a legitimate question to ask whether further reductions
will see significantly greater voluntary saving?
70. I am however supportive of policies that can produce significant
increases in retirement income, build the nation's wealth and
produce better retirement outcomes for Australian workers - policies
such as the Government's co-contribution or matched contributions scheme
enables better targetting.
71. But it is worth remembering, as the policy debate hots up, to be
wary of those bearing gifts or promising pots of gold at the end of the
rainbow. The "gold tooth" syndrome has no place in retirement
income policies.
72. The fact is, superannuation is a long term investment. And changes
to superannuation often come with a long lead time and a large price
tag.
73. For that reason, proposals need to be carefully and thoroughly evaluated.
Having ideas is one thing but it's necessary to work them through and
ensure they are efficient and fair and that they hit their target.
Ownership
74. But how can we expect Australians to take an interest in building
up their superannuation when they have no control over it?
75. The Government is committed to handing ownership of their savings
to workers with initiatives such as Choice of fund and portability. But
we recognise that decisions about superannuation need to be made in an
informed way.
76. Choice of fund will give individuals a sense of ownership over their
retirement savings. This is vitally important in encouraging people to
think about their superannuation and plan for retirement.
77. Australians tell me they want choice. They tell me the fund chosen
by their new employer refuses to accept a rollover from a previous super
fund and now they're forced to maintain two super accounts.
78. They tell me they don't like the fund chosen by their employer. Some
tell me they don't want to pay for insurance but they're forced to do
so in their fund.
79. Opposition to Choice is seriously damaging some people's retirement
incomes but the Opposition and minor parties in the Senate have been
denying a right this Government has wanted to give employees since 1997.
80. The arguments against Choice just don't stack up. We know choice
works. Many employers already offer employees choice of fund.
81. Indeed, a recent survey by Business Owner Research of employers with
between 20 and 500 workers found that nearly half the employers already
offered choice - and choice has been operating successfully in Western
Australia for five years.
82. If the scaremongering is true, why is there no evidence of choice
being costly for employers or of unscrupulous funds taking advantage
of employees?
83. The Business Owner Research survey also found that most people who
exercise choice do so to remain with their existing fund when they
change employers.
84. A substantial education campaign will support the introduction of
Choice. The Government has allocated $14 million to the ATO to run the
campaign. It will encourage people to take an interest in their superannuation
and carefully consider any decision to change funds.
85. A robust disclosure and consumer protection regime under the Financial
Services Reform Act 2001 will also support Choice of fund.
86. I urge all industry bodies to get together and resolve any outstanding
issues on a disclosure model. It should not be beyond the wit and will
of good people in the industry to agree to a model for disclosure that
will provide an adequate level of consumer information.
87. Lack of control over and knowledge about where their super is, has
separated some $7 billion of savings from Australian workers.
88. Portability will allow people to move their money when they change
jobs. It will help to address the issue of multiple superannuation accounts
and fees that can eat away at retirement savings.
89. The ATO has been cooperating on the challenge of lost members accounts
and has been working on improving the information available including
using tax file numbers to identify lost members. In addition, industry
members are utilising an electronic commerce interface called Supermatch
to re-connect workers with their lost super savings.
90. On 1 July 2004, portability of superannuation benefits will
become a reality for many Australians.
91. Together with choice and portability, a better understanding of how
to manage money is critical to better risk management, an improved savings
culture and the long-term retirement needs of a greying Australia.
92. The need to improve financial literacy is critical and has not been
ignored. Already a diverse range of financial literacy programs are operating
in Australia.
93. All Australians can benefit from closing the gaps in their financial
knowledge and better manage their money.
94. Both industry groups and the Senate Select Committee on Superannuation
recognise education is the key.
95. The Government is giving close attention to an overarching approach
to improve national financial literacy especially, but not exclusively,
through the prism of financial security in retirement.
Flexibility
96. If education and ownership is the key to understanding, flexibility
is the vehicle that will make super more accessible.
97. Workforce participation by older Australians will help maintain living
standards and economic growth in the future.
98. The Government wants to give Australians a degree of flexibility
and choice as to when to permanently retire from the workforce.
99. We need to extend opportunities for older people to stay in the workforce
rather than encourage increasingly early retirements. This may require
a better alignment of the superannuation rules with the need for flexible
retirement patterns.
100. It may require us to allow people to save outside employment - the
decoupling of super and employment.
101. In this context, some people may prefer a gradual transition from
work to retirement as an alternative to withdrawing fully from the workforce
once they reach a certain age.
102. Others may retire and later wish to return to the workforce. We
need flexible ways to meet the varying needs of older Australians who
are undoubtedly going to be living to a ripe old, and increasingly active,
age.
103. Increased workforce participation can build both SG savings and
the capacity of people to make voluntary savings.
104. The Government has already legislated to remove any age discrimination
in Australian Government workplaces.
105. The Prime Minister's Community Business Partnership will suggest
practical ways the Government can encourage the private sector to employ
more mature workers.
106. Recognising that many Australians are choosing to remain in the
workforce for longer the Government increased the maximum age limit for
personal superannuation contributions from 70 to 75.
Safety
107. But all of these initiatives must be underpinned by a prudential
system that provides the necessary safeguards to keep the nation's superannuation
nest-egg safe.
108. The Government has also proposed the Superannuation Safety Amendment
Bill 2003 which will modernise and strengthen the prudential regulation
of superannuation in Australia.
109. Recent experience with investment returns highlights the importance
of building public confidence in the super system. These reforms to improve
the safety of superannuation cover licensing of trustees of super entities
regulated by APRA; registration of regulated super entities; and development
and maintenance of risk strategies for trustees and risk management plans.
They are an important plank in reinforcing the confidence of Australian
workers in the system.
110. Generally, the response from industry has been very positive and
constructive consultation occurred before the Bill was finalised.
111. I am aware that industry groups such as ASFA, IFSA and the Australian
Institute of Superannuation Trustees are working with their members to
ensure that all parties transition into the new arrangements as smoothly
as possible.
112. Clearly the Government has raised the bar on safety in the superannuation
system and the industry, recognising the importance of these measures,
is doing its part.
Conclusion
113. In the lead up to the Budget and the next election, the Government
will be considering what further steps need to be taken to ensure that
our superannuation system generates a greater level of voluntary savings
in the context of an ageing population and an increasingly flexible workforce.
114. We welcome soundly based suggestions for how to improve the system.
We will be examining proposals that produce value for money for all workers
to make sure that at the end of the day when it comes to retirement savings,
the whole community gets bang for its buck.
115. I have often referred to building the superannuation system as `nation
building' - it is nation building on a grand scale as we meet the changing
needs of Australians in retirement and equip Australians with the knowledge
and power to make decisions about where they put their savings.
116. It is not a journey for Government to make alone. It is essential
that during this journey the Government has the support and input of
the superannuation industry.
117. Necessarily there may be some `creative tension' but just look at
what we can achieve when we work together!
118. The superannuation co-contribution package is a significant achievement
and could not have eventuated without the support of the industry.
119. That cooperation must continue. We still have much to do.
120. We are, after all, the custodians of an Australian institution -
our superannuation. Future generations will judge us by what we achieve.
We must not let them down. I will be looking forward to your continued
support for ongoing reform.
121. Thank you.