The government is stuck in a conundrum. We have been told that the tax payer will not fund all our retirement, so we must save for ourselves. However, governments cannot resist the temptation to increase superannuation taxes or wind back contribution limits.
The superannuation era is relatively new. In previous generations, the first investment people made was usually in their own home. This is no longer true. The day someone enters the workforce, often their first investment is the percentage of their salary that goes into super.
We used to be told by our grandparents that in order to retire with the same lifestyle as when you were working, you needed to put away 10% of what you earned. It is little wonder that compulsory super will soon be at that level.
So do we need super? What really is a retirement asset?
For every person on the age pension, we currently have about 6 people employed, but this number will fall significantly over coming decades, reaching about 3 people by 2045. After that, it is not expected to fall substantially more because the Baby Boomers will have passed away in large numbers, and the Gen Xers experienced a birth rate of less than two (i.e. there were fewer children than parents).
Life expectancy depends on many factors such as the extent of further advances in medical science or rising obesity. However, we know we will have a significant retirement funding problem for at least the next 30 years.
To put the outlay into perspective, the age pension for a male retiring at age 65 until normal life expectancy has a net present value cost of $400,000. In addition, it costs $440,000 for health benefits, giving a total of $840,000. This is our current age pension which we are told meets only subsistence living standards. Women are more expensive (no, not shoes!) because they typically longer.
We need super to reduce the future tax burden on those employed. Incentives must be provided to help us finance the next 30 years, targeted towards the retirees who this period directly affects. Otherwise, the remaining people who are in the work force will not be able to afford the increased tax required to fund the support system.
Do we really want to create a nation where taxes are so high that there is no incentive to succeed, prosper and develop? We must be careful to maintain the balance between overtaxing and taxation which creates value. This is a fine line.
Tax is inevitable; however, our administrators seem to have forgotten that our superannuation system should be there to build a retirement asset. As such, shouldn’t our retirement asset be earning enough money for our pensioners to be supported?
At present , our age pension system needs to change to ensure people exhaust their own resources before drawing on tax-financed benefits. This is a tough call but change is needed.
There is no doubt that a larger tax base will be required over the next 30 years, but where from is the key. There are clear political problems in most alternative revenue raisers, such as an increase in the GST. For example, a 3% change in GST would fund the large majority of the current expenditure proposals.
The face of super is changing and will continue to do so. The expectation by 2030 is that we will have $2 trillion in super. Superannuation investments will change. We are likely have access to assets that we did not have before, such as an efficient mechanism for all super funds to invest in government or corporate bonds, or infrastructure projects, or investments that provide natural income streams.
We might have the ability through super to fund all of our banks’ home loans without foreign borrowing. Everyone needs to learn how collaboratively we can work together to ensure an effective investment and retirement system benefits all.
So do we need super? Yes, absolutely. We can fund, grow and build a better nation together. We can better provide for the retirement of our people and reduce the burden on workers to support their forebears. Encouraging people to look after themselves, then taxing them for doing so is not the appropriate answer.
The next five years of superannuation will be the most important of the coming 30 year conundrum. Can our legislators listen to all sides and create a balanced view?
