Intro
1. Thank you etc.
2. As we head toward the next Budget and, of course, the next election, proposals about the superannuation system will abound.
3. Retirement incomes policy is vitally important and I'm sure there will be a lot of people talking about it over the next few months - including me! Given speculation about the size of the surplus, an obvious target for further spending will be superannuation.
An exercise in Nation Building
4. Perhaps science fiction writer John Sladek put it best when, speaking of the future, he said:
5. "The future, according to some scientists, will be exactly like the past, only far more expensive."
6. If he is right, the need for Australians to create wealth and save for their retirement should not only be a personal goal - raising current savings levels in the superannuation system must be a national priority.
7. An empirical snapshot of an expensive future indeed was delivered in the Government's first Intergenerational Report released as part of last year's Budget.
8. The Intergenerational report projected that by 2041-42 the proportion of the population aged over 65 would be double the current level.
9. As a result, Commonwealth Age and Service Pension payments could be expected to rise from 2.9 per cent of GDP in 2001-02 to 4.6 per cent of GDP in 2041-42.
10. Significantly though, the retiring population in 2041-42 will have had a lifetime of accumulating super under the superannuation guarantee regime.
11. The greying of Australia presents the Government with twin challenges - how to provide for baby-boomers teetering on the edge of retirement and how to encourage Generation X and Y to put away money for their own retirement.
12. It has become the veritable thorn in the side of young people as they come to realise that not only will they have to fund their own retirement, they will be the ones helping to fund the baby-boomers' twilight years.
13. Meeting the imminent retirement needs of an army of baby boomers and enhancing the prospects of future generations of Australians are just some of the challenges of building a responsive superannuation system.
14. Financial security and independence in retirement is every bit as important to Australians as our national security and our personal safety.
15. It is directly underpinned by our economic strength and is definitely necessary for our social cohesion.
16. I suggest that our superannuation savings and retirement incomes infrastructure is as important to our national wellbeing as the building of physical infrastructure - roads, bridges and telecommunications.
17. And as our superannuation system matures there are opportunities for us to build the nation's nest egg together.
18. Each of us can share the twin goals of securing our own financial independence while building the nation's wealth - it is a shared endeavour between Government and those of us saving for our retirement, with the common objective of our personal financial security and our national prosperity.
19. This is all part of nation building - all part of building a stronger Australia.
Vision
20. If that is the objective, what is the vision?
21. To engage the wider Australian population in superannuation then people must feel part of it. The keys to making this happen are giving workers ownership of their superannuation as well as education and information.
22. We must have an environment in which people are motivated to plan and save with confidence and we must work to increase simplicity, security and choice in our superannuation system.
23. There must be incentives for people to save for their retirement; people must be given ownership of what is, after home ownership, probably the largest savings vehicle they have; and we must demystify the superannuation system, make it simpler, instead of its workings only being known by the fortunate few.
24. And finally, the system must be flexible and safe to meet the demands of a changing population.
25. So how might this vision be achieved?
Adequacy
26. First of all, people need to feel confident that by saving for their retirement they will be financially independent. This in turn raises the question - will they have enough?
27. Regrettably, many Australians do not think about their retirement until quite late in their working lives.
28. And, anecdotal evidence suggests that even if they do, they may struggle to come to grips with what they will need to meet their reasonable expectations of a comfortable retirement.
29. Much media attention was given earlier this year to the so-called retirement `savings gap' loosely estimated to be more than $600 billion.
30. The `gap' is the difference between the retirement people expect to have and the retirement that current compulsory and voluntary superannuation contributions, combined with the Age Pension, will likely produce.
31. Undeniably, the ageing of Australia presents us with challenges but the current raft of retirees may be the last who face a retirement totally reliant on the Age Pension.
32. ASFA research has indicated the average net replacement rate from public income maintenance schemes in nine OECD countries is 53 per cent.
33. Treasury analysis indicates that the fully implemented Super Guarantee arrangements, in conjunction with the improved Age Pension after tax reform, will make the average Australian's financial independence in retirement more secure than at any other time in Australia's history.
34. The Superannuation Guarantee with the Age Pension, could produce replacement rates in excess of 60 per cent for Australians on median earnings working for 25, 30 or 40 years.
35. This also holds true for Australians on median earnings with interrupted working lives, as so often happens with women in the workforce.
36. Whether or not a particular replacement rate is optimal is a matter of judgement, and to a large extent the capacity of, the individuals involved, but it is generally accepted that most people are not likely to need as much money in retirement as they do during their working lives.
37. By and large they may no longer face life's two largest expenses - their mortgage and, of course, their children!
38. Having turned our focus to the issues of an ageing population relatively early in comparison with some other nations, the Government is well placed to ensure our retirement income system is structured to meet these challenges.
39. The Government has also delivered low interest rates, low inflation, higher incomes, essential tax reform and exposure to global competition.
40. It is fair to say we have levels of prosperity Australians only dreamed of 30 years ago and this gives us the capacity to continue to reform our superannuation system.
41. Although it might sound trite, I believe it is necessary to reaffirm that superannuation is a long term savings vehicle. It is there to meet the retirement needs of Australians.
42. It should not be diverted to meet other spending priorities such as housing, health and aged care, education or agriculture.
43. Which brings me to the issue of how Australians can be motivated to plan and save more for their retirement and what incentives would better secure a savings culture.
Incentives
44. As all of you would know substantial concessions make superannuation a very attractive and tax effective way of saving for retirement.
45. The total value of the Government's existing tax concessions in the super arena will be around $11.2 billion in 2003-04. It is the Government's largest single tax expenditure.
46. But more needs to be made of policies that motivate Australian workers of all demographics to contribute to their retirement savings. This is an area I am particularly interested in.
47. For example, I am extremely pleased the Government has now delivered on its key election promise to provide the co-contribution for low-income earners and a reduction in the super surcharge - a package worth $1.3 billion over four years.
48. Although for those of you who followed what happened, the final days of debate in the Senate were a bit like the set of TV gameshow - Deal or No Deal!
49. The co-contribution measure provides significant incentives for low-income workers to make personal contributions and rewards those who are prepared to save.
50. It is a direct injection into the retirement savings of workers earning up to $40,000 and for those on incomes of up to $27,500, personal superannuation contributions will be matched by the Government dollar for dollar up to $1000 annually.
51. In the recent package the Government also managed to achieve a reduction in the superannuation surcharge from 15 per cent to 12.5 per cent over three years.
52. Although a smaller reduction than the Government originally proposed, it will help those with the capacity to save more for their retirement to do so and take pressure off the pension system.
53. The Government is also extending a hand to help non-working and low-income spouses build up superannuation savings in their own right, by allowing splitting of super with their working spouse.
54. This is a major step forward, particularly for women, whose accumulated super savings lag behind their male counterparts.
55. But Australians deserve to have flexibility in choosing a retirement income option that best suits their needs.
56. The Government is closely examining whether to allow a new class of market-linked `complying' pensions - growth pensions.
57. This is something that certain parts of the industry are very enthusiastic about.
58. Growth pensions would be similar to existing complying pensions except income payments would not be guaranteed, and that will give rise to issues about consumer disclosure and information about products in the same way as the Choice legislation.
59. We are examining the growth pensions proposal with a particular view to the revenue and social welfare impacts. Clearly it is only worth doing if it produces better retirement incomes for workers with acceptable risks and costs to Government.
60. Other suggestions have been put forward that, quite rightly, are aimed at making more of what is already going into the system - such as reducing up front taxation on super and capping of industry fees and charges on funds in the system.
61. The ability of consumers to make judgements about fees and charges, even growth pensions if they were available, would be greatly improved by a choice environment and industry-wide agreement about disclosure. Competition and a sound market will put downward pressure on fees and charges.
62. Not surprisingly, despite having received numerous approaches from industry on reducing taxes, I am yet to receive a proposal from industry on how to reduce the impost of fees and charges. The Government prefers to rely on competition to put downward pressure on fees and charges. Further prescription, regulation and compliance is the last thing the superannuation system needs.
63. On the question of tax treatment of super, a recent OECD Economic Survey on Australia (2003/04) found that even though superannuation is taxed at three stages, the overall result is equivalent to a system that only taxes end benefits.
64. This is consistent with the findings of World Bank research that found that Australian taxes on super over a working lifetime are not high by world standards.
65. Some groups have called inter alia for a reduction or removal of the tax on superannuation contributions. Other commentators would fund superannuation through a bigger tax on end benefits.
66. However, I think the real focus of groups calling for lower contributions tax or a shift towards end-benefits tax is for an increase in the overall concessionality of superannuation. For present purposes let us consider that proposal.
67. Any proposal to increase the concessionality of super must be underpinned by the likelihood that it will produce real economic benefits including significant increases in retirement incomes and an increase in national saving.
68. The benefit of tax concessions depends to a large extent on what behavioural changes follow.
69. Given that few people save at the indexed rate they are already allowed each year, it is a legitimate question to ask whether further reductions will see significantly greater voluntary saving?
70. I am however supportive of policies that can produce significant increases in retirement income, build the nation's wealth and produce better retirement outcomes for Australian workers - policies such as the Government's co-contribution or matched contributions scheme enables better targetting.
71. But it is worth remembering, as the policy debate hots up, to be wary of those bearing gifts or promising pots of gold at the end of the rainbow. The "gold tooth" syndrome has no place in retirement income policies.
72. The fact is, superannuation is a long term investment. And changes to superannuation often come with a long lead time and a large price tag.
73. For that reason, proposals need to be carefully and thoroughly evaluated. Having ideas is one thing but it's necessary to work them through and ensure they are efficient and fair and that they hit their target.
Ownership
74. But how can we expect Australians to take an interest in building up their superannuation when they have no control over it?
75. The Government is committed to handing ownership of their savings to workers with initiatives such as Choice of fund and portability. But we recognise that decisions about superannuation need to be made in an informed way.
76. Choice of fund will give individuals a sense of ownership over their retirement savings. This is vitally important in encouraging people to think about their superannuation and plan for retirement.
77. Australians tell me they want choice. They tell me the fund chosen by their new employer refuses to accept a rollover from a previous super fund and now they're forced to maintain two super accounts.
78. They tell me they don't like the fund chosen by their employer. Some tell me they don't want to pay for insurance but they're forced to do so in their fund.
79. Opposition to Choice is seriously damaging some people's retirement incomes but the Opposition and minor parties in the Senate have been denying a right this Government has wanted to give employees since 1997.
80. The arguments against Choice just don't stack up. We know choice works. Many employers already offer employees choice of fund.
81. Indeed, a recent survey by Business Owner Research of employers with between 20 and 500 workers found that nearly half the employers already offered choice - and choice has been operating successfully in Western Australia for five years.
82. If the scaremongering is true, why is there no evidence of choice being costly for employers or of unscrupulous funds taking advantage of employees?
83. The Business Owner Research survey also found that most people who exercise choice do so to remain with their existing fund when they change employers.
84. A substantial education campaign will support the introduction of Choice. The Government has allocated $14 million to the ATO to run the campaign. It will encourage people to take an interest in their superannuation and carefully consider any decision to change funds.
85. A robust disclosure and consumer protection regime under the Financial Services Reform Act 2001 will also support Choice of fund.
86. I urge all industry bodies to get together and resolve any outstanding issues on a disclosure model. It should not be beyond the wit and will of good people in the industry to agree to a model for disclosure that will provide an adequate level of consumer information.
87. Lack of control over and knowledge about where their super is, has separated some $7 billion of savings from Australian workers.
88. Portability will allow people to move their money when they change jobs. It will help to address the issue of multiple superannuation accounts and fees that can eat away at retirement savings.
89. The ATO has been cooperating on the challenge of lost members accounts and has been working on improving the information available including using tax file numbers to identify lost members. In addition, industry members are utilising an electronic commerce interface called Supermatch to re-connect workers with their lost super savings.
90. On 1 July 2004, portability of superannuation benefits will become a reality for many Australians.
91. Together with choice and portability, a better understanding of how to manage money is critical to better risk management, an improved savings culture and the long-term retirement needs of a greying Australia.
92. The need to improve financial literacy is critical and has not been ignored. Already a diverse range of financial literacy programs are operating in Australia.
93. All Australians can benefit from closing the gaps in their financial knowledge and better manage their money.
94. Both industry groups and the Senate Select Committee on Superannuation recognise education is the key.
95. The Government is giving close attention to an overarching approach to improve national financial literacy especially, but not exclusively, through the prism of financial security in retirement.
Flexibility
96. If education and ownership is the key to understanding, flexibility is the vehicle that will make super more accessible.
97. Workforce participation by older Australians will help maintain living standards and economic growth in the future.
98. The Government wants to give Australians a degree of flexibility and choice as to when to permanently retire from the workforce.
99. We need to extend opportunities for older people to stay in the workforce rather than encourage increasingly early retirements. This may require a better alignment of the superannuation rules with the need for flexible retirement patterns.
100. It may require us to allow people to save outside employment - the decoupling of super and employment.
101. In this context, some people may prefer a gradual transition from work to retirement as an alternative to withdrawing fully from the workforce once they reach a certain age.
102. Others may retire and later wish to return to the workforce. We need flexible ways to meet the varying needs of older Australians who are undoubtedly going to be living to a ripe old, and increasingly active, age.
103. Increased workforce participation can build both SG savings and the capacity of people to make voluntary savings.
104. The Government has already legislated to remove any age discrimination in Australian Government workplaces.
105. The Prime Minister's Community Business Partnership will suggest practical ways the Government can encourage the private sector to employ more mature workers.
106. Recognising that many Australians are choosing to remain in the workforce for longer the Government increased the maximum age limit for personal superannuation contributions from 70 to 75.
Safety
107. But all of these initiatives must be underpinned by a prudential system that provides the necessary safeguards to keep the nation's superannuation nest-egg safe.
108. The Government has also proposed the Superannuation Safety Amendment Bill 2003 which will modernise and strengthen the prudential regulation of superannuation in Australia.
109. Recent experience with investment returns highlights the importance of building public confidence in the super system. These reforms to improve the safety of superannuation cover licensing of trustees of super entities regulated by APRA; registration of regulated super entities; and development and maintenance of risk strategies for trustees and risk management plans. They are an important plank in reinforcing the confidence of Australian workers in the system.
110. Generally, the response from industry has been very positive and constructive consultation occurred before the Bill was finalised.
111. I am aware that industry groups such as ASFA, IFSA and the Australian Institute of Superannuation Trustees are working with their members to ensure that all parties transition into the new arrangements as smoothly as possible.
112. Clearly the Government has raised the bar on safety in the superannuation system and the industry, recognising the importance of these measures, is doing its part.
Conclusion
113. In the lead up to the Budget and the next election, the Government will be considering what further steps need to be taken to ensure that our superannuation system generates a greater level of voluntary savings in the context of an ageing population and an increasingly flexible workforce.
114. We welcome soundly based suggestions for how to improve the system. We will be examining proposals that produce value for money for all workers to make sure that at the end of the day when it comes to retirement savings, the whole community gets bang for its buck.
115. I have often referred to building the superannuation system as `nation building' - it is nation building on a grand scale as we meet the changing needs of Australians in retirement and equip Australians with the knowledge and power to make decisions about where they put their savings.
116. It is not a journey for Government to make alone. It is essential that during this journey the Government has the support and input of the superannuation industry.
117. Necessarily there may be some `creative tension' but just look at what we can achieve when we work together!
118. The superannuation co-contribution package is a significant achievement and could not have eventuated without the support of the industry.
119. That cooperation must continue. We still have much to do.
120. We are, after all, the custodians of an Australian institution - our superannuation. Future generations will judge us by what we achieve. We must not let them down. I will be looking forward to your continued support for ongoing reform.
121. Thank you.