Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
A Stronger and Fairer Superannuation System
Statement by the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP
26 May 2010
Mr Speaker, the Government is committed to providing better superannuation for Australians.
On 2 May 2010, the Government announced its long-term plan to deliver on this objective.
The Government's reforms will deliver substantial improvements in retirement savings and a fairer distribution of superannuation tax concessions, ensuring more Australians can enjoy a comfortable retirement. The Government's reforms will bring broader economic benefits as well.
Addressing the challenges of an ageing population
Mr Speaker, one thing we can count on is that Australians approaching retirement will spend more time in retirement than any generation in our nation's history. This trend will only deepen as future generations approach retirement.
In 1960 a male could expect to live another 12 years after reaching age 65. Today they can expect to live another 19 years. In 2050 they can expect to live 24 years after reaching age 65.
In 1960 a female could expect to live another 16 years after age 65. Today they can expect to live another 22 years. In 2050 they can expect to live another 26 years.
Our ageing population is reflected in the estimate that the number of Australians aged over 65 is projected to grow from 3 million now to 8.1 million by 2050.
Over the next 40 years, the ratio of working age Australians to those aged over 65 will decrease from 5-to-1 to just 2.7-to-1.
These facts illustrate the necessity of acting now to boost retirement incomes for the current generation of Australians approaching retirement, as well as future generations. This is the responsible thing for a Government to do.
Reforming superannuation to deliver higher retirement incomes and a fairer system
The Government is introducing superannuation reforms that will deliver substantial improvements in retirement incomes for Australian workers, boost national savings and enhance the fairness of the superannuation system.
The Superannuation Guarantee - boosting retirement incomes
Increasing the superannuation guarantee (SG) rate from 9 to 12 per cent will directly address issues raised by our ageing population and boost private and national savings, bringing broader benefits to the community and the nation.
This reform will significantly increase the future retirement incomes for 8.4 million employees, improving the adequacy of their retirement incomes.
Raising the superannuation guarantee age limit from 70 to 75
In addition to raising the SG rate, the SG age limit will be raised from 70 to 75 from 1 July 2013, coinciding with the increase in the rate of the SG.
Currently, the SG only applies to people aged up to 70. In contrast, employers can make voluntary deductible superannuation contributions for employees under 75 and self-employed people can make deductible contributions until they turn 75. Individuals aged 70 to 74 are less likely to be able to negotiate voluntary superannuation contributions with their employers.
This measure will mean that workers aged under 75 will be eligible to for compulsory SG contributions to be made on their behalf for the first time.
This measure will align the age limit for SG with that for voluntary and self-employed contributions.
Around 33,000 employees are expected to benefit from this measure which will improve the adequacy and equity of the SG system.
This will provide an incentive for mature workers to remain in the workforce and improve the equity of the system and correct a long-standing anomaly that will ensure these workers are remunerated on an equal footing with their younger co-workers.
The new low income earners Government contribution - delivering equity and increased retirement incomes
Mr Speaker, currently, all concessional superannuation contributions (such as employer SG contributions) are taxable in the fund at a flat rate of 15 per cent.
As a result around 3.5 million Australians, currently get no or next to next to no concession on their superannuation guarantee contributions or, worse still, have these contributions taxed more heavily than their normal income, due to the 15% superannuation contribution tax being at or below their marginal income tax rate.
The low income earners Government contribution tax refund will provide an annual contribution of up to $500 for individuals on incomes up to $37,000.
This will improve the fairness of the superannuation system by effectively returning all of the tax payable on compulsory superannuation guarantee contributions made for low-income earners in 2012-13.
The amount payable under this measure will be calculated by applying a 15 per cent rate to the concessional contributions made by or for individuals on adjusted taxable incomes of up to $37,000 (not indexed), with an annual maximum amount payable of $500 (not indexed).
The amount will be paid into a superannuation account of an individual to directly boost their retirement savings.
Concessional superannuation contributions made from the 2012-13 income year onwards will be eligible with the first Government contribution paid in the 2013-14 financial year.
The superannuation savings of 3.5 million low-income earners will be boosted in total by $830 million per annum in 2012-13.
And these reforms build on earlier reforms by the Government. In particular, these reforms build on measures to increase the Age Pension which were announced in the 2009-10 Budget.
Helping older workers make catch up contributions
Mr Speaker, the Government recognises that many workers want to make larger catch-up superannuation contributions as they approach retirement.
Under the reforms, individuals aged 50 or over with superannuation balances below $500,000 will be able to make $50,000 in concessional superannuation contributions annually. This doubles the cap of $25,000 which is scheduled to apply from 1 July 2012.
This will allow these individuals to 'catch up' on their superannuation contributions when most able.
By targeting this higher cap at those with lower balances better equity is delivered.
This measure will particularly benefit those who have spent time out of the workforce or had a later start to their working life, including many Australian women.
Helping women build larger superannuation balances
Mr Speaker, women's ability to build retirement savings can be affected by periods spent out of the workforce for family reasons and periods of part-time work. The Government wants to help Australian women build larger retirement balances.
In 2012-13 around 2.1 million women will be eligible for the up to $500 low income earners superannuation rebate. They will represent 60 per cent of all recipients.
In 2013-14, around 4.1 million women will have increased Super Guarantee contributions as a result of this policy: almost half of all people estimated to benefit from increased Super Guarantee contributions in that year.
As I indicated earlier, the new provisions which will provide concessions to allow people to 'catch up' on their superannuation contributions, will also particularly benefit people who have had periods outside the workforce, the majority of whom are women.
The Treasury estimates that as a result of the Government's superannuation reform, a woman aged 30 now on full‑time average weekly earnings with a broken work pattern will have an extra $78,000 in retirement savings, while it is estimated to be an extra $108,000 in retirement savings for the same female without broken work patterns.
Implementation of the changes
The Government recognises that when such significant reforms are implemented, it is prudent to ensure that the nation's employers and their employees, particularly those in small business, have the opportunity to plan for change. The implementation of the increases in the SG has been very carefully thought through by the Government.
Small business will benefit from a 2 percentage point cut in the company tax rate a full 12 months before changes to the SG commence. An average small business will save $100 a week, or $5200 a year, as a result of the Rudd Government's early reductions in the company tax rate to 28 per cent in 2012-13. There is also a three year lead time before the increase in the SG commences.
The initial increases in the SG will be are modest, with a 0.25 percentage point increase occurring in 2013-14 and 2014-15. For a worker on full‑time average earnings, a 0.25 percentage point increase in the SG amounts to around $3 week, or $150 a year, that will be directed into superannuation savings.
If this money was not directed towards superannuation, for most full-time workers the tax paid would be double, because as I outlined earlier, superannuation contributions are taxed at 15 per cent. This contrasts with income tax rates of up to 45 per cent.
Therefore, when you increase the size of superannuation savings, you increase the cost of superannuation tax concessions to the Government.
Those who suggest that the changes to superannuation won't cost the Government any money don't understand this simple fact, or worse still, choose to wilfully misrepresent it.
Increasing the SG, refunding the tax paid on superannuation for low income earners and raising concessional contributions for those aged 50 or over with lower superannuation savings, reduces the tax burden on working Australians. As such, these measures will cost around $2.4 billion over the next four years.
The Government believes the right thing to do is to bank the benefits of the mining boom in reforms that will have a lasting and significant impact on the retirements savings of current and future generations of Australians and ensure that as a nation we are well placed to deal with the challenges of an ageing population.
Feedback on these reforms
Mr Speaker, the Government's reforms to superannuation have been welcomed by a broad range of stakeholders, who recognise the significant benefits of increased national savings for working Australians and the economy as a whole.
On 2 May 2010, the Combined Pensioner and Superannuants Association of NSW had this to say
"Pensioners and superannuants welcome the Australian Government's response to the Henry Review, as it will make the superannuation system fairer for low-income earners, and boost retirement incomes. We call on all MPs to pass these reforms, which are too important to be subject to the political wrangling that has resulted in the demise of other policies,"
On 3 May 2010, Mercer Australia, a respected global provider of investment services, noted:
"The tax changes to the superannuation system announced in the Government's response to the Henry Review will help to increase the adequacy of retirement savings for Australians and reduce the overall cost of Government support for retirement income."
We can only hope that those who claim to be interested in "Rebuilding Sustainable Prosperity" will come to understand the value that higher retirement savings provides to the nation.
The beneficiaries of these reforms
Mr Speaker, the Government's changes to the superannuation system will make a significant contribution to helping Australians enjoy a better retirement
- The reforms announced on 2 May this year will bring significant benefits.
- The people who will benefit from the Government's reforms include:
- Around 8.4 million employees who are expected to benefit from the increased superannuation guarantee;
- Around 33,000 Australians from the increase in the superannuation guarantee age limit to 75;
- Around 3.5 million low-income earners from the low-income earners Government contribution tax refund - with their superannuation savings increasing in total by over $830 million per annum; and
- Around 275,000 individuals aged 50 or over who will be able to make higher 'catch up' contributions.
Our reforms will deliver significant increases in retirement incomes:
- The average superannuation balance today for men aged 60-64 is $245,000 and for women is $170,000. By 2036 these amounts are expected to be $485,000 and $345,000 in real terms.
- And a significant part of this growth can be attributed to the Government's reforms. An average worker now aged 30 can be expected to have an additional $108,000 in superannuation at retirement as a result of our reforms.
- A low income earner who would benefit from the new contribution tax refund, and who is also able to save under the existing co-contribution scheme can achieve an effective contribution rate of 19 per cent after these reforms are implemented without using salary sacrifice.
- The increase in the SG age limit alone can potentially increase the superannuation balance of a worker on average earnings by $36,000.
- The increase in the contribution caps for older workers can potentially increase the superannuation balance of a worker on average earnings by $139,000 if working full-time. If the worker had a broken work pattern and thus a lower balance at age 50, they could potentially increase their balance by $188,000 (reflecting the greater scope to contribute up to the $500,000 balance limit).
Mr Speaker, these reforms will deliver broader benefits as well.
Australian superannuation funds are already significant investors in the Australian economy and having the fourth largest pool of funds under management in the world at $1.2 trillion in value, has enabled Australia to develop a world class wealth management industry.
These funds have been at the disposal of the Australian economy, which is one of the reasons why Australia has weathered the global financial crisis so well.
In the 2009 financial year, at a time when liquidity was being rapidly withdrawn from markets around the world, Australia remained an attractive place to raise capital.
Australian-listed companies raised $90 billion of equity. Investor support, including from Australian institutional investors, helped to restore the capital base of companies that together employ over 1.6 million Australians.
To put this in context, at the height of the financial and liquidity crisis, a greater proportion of the total market capitalisation of listed companies was raised in Australia than in any other major economy.
Australia's total superannuation savings are projected to increase by $500 billion by 2035 as a result of the Government's reforms.
National savings are expected to increase by around 0.4 per cent of GDP by 2035.
A stronger and fairer retirement income system
Barely 20 years ago, only 46 per cent of full-time workers and 7 per cent of part-time workers had any superannuation arrangements. But, for the past decade, 96 per cent of full-time workers - and at least three-quarters of part-time workers - have been making regular contributions to their superannuation funds.
Labor introduced superannuation, Labor is strengthening superannuation. The Opposition's rejection of these measures and the rejection of the Resources Super Profits Tax that funds a significant improvement in Australian's retirement savings, is a deep disappointment.
Mr Speaker, these initiatives deliver significant benefits to Australians and the economy more generally.
Benefits for a more comfortable retirement for Australians. Benefits for our push for Australia to be a significant financial centre. Benefits for the availability of funds for nation-building infrastructure. Benefits for the availability of funds to develop and grow Australian businesses
They directly address issues raised by our ageing population and boost private and national savings, bringing broader benefits to the community and nation.
Mr Speaker, these reforms build on our earlier reforms to the Age Pension and deliver a stronger and fairer retirement income system for all Australians.