Forget super caps, try purpose

By Elizabeth Fry

Mercer senior partner, David Knox has welcomed Canberra's push to legislate an objective for the $3.3 trillion super system ahead of new policy priorities and tax reform but said the word 'purpose ' should replace the word "objective".

The government's consultation paper released Monday highlighted the importance of equity, preservation, sustainability, and dignity in retirement.

Knox acknowledged its focus on retirement income saying the government has finally recognised that superannuation is one part of an entire retirement income system.

The pension specialist has long criticised the government for its narrow focus on the accumulation phase of superannuation rather than looking at the entire retirement system.

"Looking at super is a bit narrow since super works with the age pension, and most retirees get at least a part or age pension," he says. "The proposed objective now clearly acknowledges the link between super and the age pension."

Still, Knox is not completely satisfied with the paper warning that the word purpose must be embedded in the law, not the word objective.

"It's a bit nuanced, but a purpose is the reason for which something is done or created. A purpose has a longer-term vision. Here, the purpose of super is to deliver retirement income," he argues.

"When you start to talk about the objective, that can be a short-term objective, or an immediate goal, which this is not. It is not an objective of where we want to land with particular income levels or goals."

Not crazy about the wording

Nor is he crazy about words like adequate, comfortable or dignified when it comes to describing the amount of income to support a decent living in post-work life.

Knox concedes that the draft allows that dignified is a qualitative measure, that will require interpretation and may change over time. It recognises that individuals deserve a high-quality standard of living in retirement, as served by both the superannuation system and age pension.

Interestingly, the 2014 Financial Systems Inquiry says people deserve a comfortable retirement.

"These words are very fuzzy," he says.

"I'm just concerned that if we end up using subjective terms, like adequate comfortable or dignified, I'm not sure what that means."

He would like to see the government nail down the details and the timetable soon.

"Until the objective is sorted out properly and definitively with a direction, the government cannot do much about tax reform."

Knox says the policy goal should be to enable most Australians to maintain the standard of living that they've had during the last 10 or 15 years of their career.

"It's this period before retirement that government should scrutinise in calculating what people should have in retirement - that is, after the time of financial struggles with young children or mortgages has passed.

"It's the living standard they achieved in their 50s that they want to keep going."

So the question is does superannuation plus the age pension deliver that?

The superannuation expert says the taxation treatment of superannuation contributions and investment income is part of that answer.

He argues that Australia is not alone in not having a clear objective of what its compulsory system is designed to do.

"Most countries develop their pension systems in a fairly ad hoc way. They very rarely sit back and say, what's the system designed to do?

The other issue bubbling away is that retirees don't spend their money because they are worried about running out.

Add into the mix their worries about health and aged care costs.

The upshot? Many retirees are fairly cautious, about spending but it means they're not living at the standard they can probably afford.

Many equitable solutions

Knox urges the government to resolve this by reassuring everybody that the age pension will always be there.

"You get some rumourmongers and the media banging on about Australia not being able to afford the age pension? Well, that's a load of codswallop. The cost of the age pension in Australia is about two and a half per cent of the GDP. "

This is in stark contrast to the cost of the French public pension which is about 14 per cent of the GDP, Germany at 11 per cent and UK with 8 per cent.

The published paper is the first time we have seen some real meat on the bone of a policy agenda that we've heard so much about for years.

And by stating that super exists to support delivering retirement income Canberra has a rationale for driving tax reform.

There are many equitable solutions to outstanding pension issues, says Knox.

For example, the Mercer partner notes that the Retirement Income Review found 11,000 people with more than $5 million in super who are paying a tax rate of 15 per cent on investment income.

Yet at the same time, the government says it doesn't have the money in the budget to pay SG on government-paid parental leave.

"If individuals are forced to take their money out of super above a certain level to invest elsewhere, many will end up paying a higher tax rate on their investment income," he notes.

Although Canberra increased the income retirees are allowed to generate from employment to $11,800, Knox is keen to see greater flexibility.

"I'm not talking about people earning $100,000 but $11,800 a year is not a lot of money. Their salary could be capped at well under $100,000 -

He is not talking about building a universal pension.

Universal pension

While the retirement specialist has advocated universal pensions in the past, he does not think it will fly in the current economic climate.

A few years ago, Knox held that a universal age pension - where all eligible individuals receive the pension regardless of wealth - had enormous benefits for retirees, the economy and the super sector.

Mercer reckons that the government has moved on from the concept of a universal age pension to a more flexible  approach to employment in retirement years.

Even now, in recommending greater flexibility, Knox is talking about maybe removing some employment income  from the means test - not investment income.

"So there does seem to be an interaction between employment and pension that needs reviewing."