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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

7 April 2013

Treasurer's economic note

Australia's superannuation system is one of Labor's proudest and most enduring achievements. Our $1.5 trillion national pool of superannuation savings puts Australia at a unique national advantage. It was a critical factor in helping Australia avoid the worst of the GFC, by ensuring that business had access to capital to keep our economy going, while others faltered. But more importantly than that, our superannuation system gives millions of Australians the peace of mind that they'll have the savings for their retirement.

The Superannuation Story

Hundreds of newspaper pages and hours of TV have been filled discussing superannuation in recent weeks so it's worth reflecting on how our remarkable system of national retirement savings came about and why its history is so intertwined with Labor's story. The first steps and the fiercest battles for universal superannuation were in the 1980s, when Bob Hawke was PM and Paul Keating was Treasurer. In those days, only about 40 per cent of workers had any super savings, and they were in the public sector or the top tiers of industry. Hawke and Keating saw not only the inequity of the system, but also its inadequacy in the face of the big demographic shift that was on the way. Prime Minister Hawke and Treasurer Keating signed an accord with the ACTU, led by Bill Kelty, out of which grew an agreement on superannuation. The unions had shown willingness to act on wage restraint, and the Government wanted to ensure that workers received a lasting benefit in return. Under the agreement, wage increases would be split between cash for workers, and superannuation. The agreement was met with intense opposition, inside and outside the Parliament, but it was an agreement worth fighting for. Keating and Kelty fought for it all the way to the High Court, and they won. The result was a clear path towards universal superannuation and it was a new PM Paul Keating who introduced mandated superannuation contributions 21 years ago.

It's hard to imagine an Australia where workers aren't guaranteed a minimum level of superannuation on their wages. But in those days, many strenuously protested against the Government's vision of creating a national retirement savings system, just as they opposed other big long-term Labor reforms like Medicare, floating of the dollar, and pricing carbon.

But today, we can be proud that between 1992 and 2012, our national pool of super savings grew more than tenfold, from $140 billion to $1.5 trillion – the equivalent of our GDP, and is the fifth largest superannuation pool in the world. Not bad for a country with the 12th largest economy, and the 51st largest population. Treasury experts expect the pool of super savings to grow to $6 trillion by 2037. This pool of assets contributes to Australia's economic growth, and is also a key component of our financial sector, adding depth and liquidity to financial markets, providing an alternate source of funding for other sectors in the economy, and creating a buffer against external shocks, as well as its main purpose – to provide a nest egg for millions of Australians, giving them the assurance of savings for a good retirement after their years of hard work.

Strengthening Superannuation

This Labor Government has been committed to further strengthening superannuation. In 2010, the Government announced a package of tax reforms which put increasing the Super Guarantee from 9 to 12 per cent in the front and centre, boosting the superannuation savings of 8.4 million Australians. It means a 30-year-old on average full-time wages who retires at age 67 will have around $118,000 extra in their superannuation account when they retire. On July 1 this year, we'll see the first increase in the rate – from 9 to 9.25 per cent – and it will continue to gradually increase each year until 1 July 2019, when it reaches 12 per cent. The cost of the SG increase to the Government in foregone tax revenue will be $3.6 billion in 2019-20 – an investment well worth making in better standards of living in retirement for millions and millions of Australians, and reduced Age Pension outlays.

At the same time, the Government also announced a new measure to support 3.6 million Australians on low and modest incomes, including 2.1 million women. The measure – known as the Low Income Superannuation Contribution – refunds up to $500 of contributions tax for people with income up to $37,000, so they don't get hit with any tax on their compulsory contributions. Around 30 per cent of workers will benefit from this measure, which costs around $1 billion a year. It's hard to see how any reasonable person could argue against a measure like this.

Last week the Government announced a number of measures to make our superannuation system even stronger and fairer. Any Australian, regardless of their income level, should receive favourable tax treatment as an incentive to save for their retirement. But the current rules were allowing a tiny proportion of retirees with millions of dollars in super to receive more government support than Australia's Age Pensioners. That wasn't the original intention of the superannuation system. The changes announced during the week will help restore some of the principles of the superannuation system Paul Keating created 20 years ago, so that millions of Australian workers can enjoy an even better standard of living in their retirement.

The main measure the Government announced on Friday is designed to ensure the concessions for superannuation remain fair. It's not well known that earnings on assets supporting income streams for the retired are tax exempt. Combined with other changes made to super in 2007, this means many retirees with millions of dollars in super can now get more government support through tax concessions than someone on the maximum Single Age Pension. To most people, it doesn't seem fair that someone with millions in their super account pays no tax on their earnings while someone earning a salary of $80,000 pays a marginal tax rate of 37 per cent.

To make the system fairer and sustainable, we will cap the tax exemption at $100,000 of future earnings for each individual each year – while payments from super accounts for those over 60 remain tax-free. Earnings over and above that $100,000 threshold will be taxed at the reduced rate of 15 per cent so the 16,000 Australians who will be affected by this measure will still be receiving significant concessional tax treatment.

Friday's announcement also included other changes which will make super fairer:

  • We're making the treatment of excess concessional contributions fairer. Around 41,000 Australians will no longer be hit with unfair penalties and will save around $1,300 on average. And around 100,000 Australians will get the option of deciding whether they want to withdraw their excess concessional contributions from super.
  • We're providing a higher concessional contributions cap of $35,000 to people aged 60 and over from July 1 this year. This is expected to be taken up by around 160,000 Australians in 2013-14, and will be extended to people aged 50 and over from 1 July 2014.
  • We're expanding superannuation options for retired Australians by providing the same concessional tax treatment to assets supporting deferred lifetime annuities that applies to income streams.
  • We are also putting in place a Council of Superannuation Custodians and a Charter of Superannuation Adequacy and Sustainability to ensure that super stays strong for all Australians, just as was intended.

These are responsible and balanced changes to ensure our superannuation system is sustainable as it matures and strengthens for the decades ahead.

Benefits of lower rates

On Tuesday, the RBA kept the cash rate at its current low level of 3.0 per cent. We've already seen a big boost to family finances over the last 18 months as interest rates have come down, with an Australian family on a $300,000 mortgage paying around $5,000 a year or $100 a week less in repayments than when Labor came to office. A family with a $300,000 mortgage which kept their payments at the same level is now able to repay their mortgage around eight years faster than they could in 2007. That same family has saved over $15,000 on their mortgage since Labor came to office.

Data released this week also provided further evidence that lower interest rates are gaining traction in the economy, with a surge in retail sales, a lift in residential building construction and an improvement in services activity. Retail sales have now experienced the strongest start to a calendar year in over a decade, increasing by 2.5 per cent over January and February. The strong retail result in February was broad-based, with gains across all industry groups, and we've seen annual growth in retail sales double in the past two months.

While the transition towards non-mining sources of growth over the next year or two may not be seamless, we need to remember that Australia starts this transition with some of the strongest economic fundamentals in the world. We have an economy that is more than 13 per cent bigger than when the Government came to office. More than 900,000 jobs have been created since Labor was elected, while tens of millions have been lost elsewhere around the world. We have low unemployment, contained inflation and low debt levels. The contrast between our own prospects and many other advanced countries could not be more stark. In Europe, the unemployment rate has just reached a new record high at 12.0 per cent – more than double what we have here in Australia – with the euro area still firmly in recession. It's facts like this that really speak to our own country's resilience, foresight, and ability to make the tough decisions when they really count.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia

www.treasurer.gov.au
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