Sunday, 22 April 2012

Incentivising Super

A report in the Australian yesterday detailed looming government plans to weaken superannuation related tax breaks in next month's federal budget.  The existing arrangements were designed to incentivise voluntary saving, particularly among higher earners, so as to reduce the pressure on government finances in future decades.

The finance sector has reacted swiftly to the news, with a number of industry leaders warning of potential damage to the budget bottom line in the future.  The measures currently under consideration by the expenditure review committee would aim to increase revenue by several billion dollars in the short term, undoubtedly in an effort to achieve Labor's promised budget surplus for the coming financial year.

Financial Services Council chief executive John Brogden had this to say:

"It would be very short-sighted for the government to try and pull out more tax now," Mr. Brogden said last night.  "All they'd be doing is leaving future governments with a bigger bill for pensions, healthcare and aged care."

Mr. Brogden has hit the nail on the head.  The objective of these tax breaks has always been to increase the number of self-funded retirees, thereby lowering the financial burden on future governments as the population ages.

Without unambiguous incentives to contribute voluntarily to their super, more Australians will elect to keep their wages in full.  This will inevitably mean more retired individuals on the pension, unable to fund their own care and draining money from other government services.

One could even make the argument that existing incentives for super contributions should be boosted, rather than weakened.  For example, the current system includes a cap on annual concessional contributions - the lower tax rate for voluntary super only applies until a certain point.

If you are fifty years or older, the current cap on annual concessional contributions is $50,000 ($25,000 for younger workers).  It had previously been double that, prior to changes enacted by the current government in the 2009-10 financial year.  So once you have invested $50,000 in your super for the year, the tax incentive disappears and any further contributions are taxed at the regular wage rate.

Why is this?  Surely a government with true foresight would implement policy settings with the intention of maximising voluntary superannuation investment.  All politicians seem to enjoy a good whinge about the difficulties of Australia's ageing population - well, here is a chance to do something intelligent about the situation.

This government has previously demonstrated that it does not quite understand the power of tax incentives, particularly as they apply to wealthier individuals - think of the private health insurance rebate.

David Crowe reports:

Shaping the government strategy is the belief that the investment industry will gain greatly from the increase in the super guarantee levy from 9 per cent to 12 per cent by 2020, letting all workers save more for retirement.

The increase in the levy, incidentally, is funded by employers, which means that it will be subtracted from workers' future wage growth.  But leaving that aside, this increase in the guarantee, coupled with decreased tax incentives, can only lead to greater complacency and a reduction in voluntary contributions.

In reality, the compulsory level of super investment is vastly insufficient to fund anyone's retirement, particularly as the average life expectancy continues to increase.  It is of crucial importance that workers take the initiative and save aggressively for their autumn years, even as that means sacrificing some of their take home pay in the present.

This will not happen if they see no clear, unambiguous incentive.  The tax system should therefore prompt individuals to contribute as much to their own retirement as possible.

Governments should remain eternally mindful of the fact that when they tax super contributions, they are effectively taking money from future retirees.  The less they take now, the less they will be required to fork out in the future.

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