I welcome the opportunity to speak with the Australian Institute of Superannuation Trustees, and I'm delighted to address your post-Budget Breakfast Briefing.
I would like to take this opportunity to thank the Institute for your invaluable contributions to Government policy. In particular, your input to the Communiqué of Principles on the Australian superannuation system, which I'll discuss in a few minutes.
I also value the role your organisation plays in promoting and protecting Australia's not-for-profit superannuation sector. And I'm sure your members appreciate your hard work to help them meet the challenges of managing superannuation funds while advancing the interests of their fund members.
Economic outlook for Australia and key Budget measures
Ladies and gentlemen, we all know that we are facing the most challenging global economic conditions since the Great Depression. With almost all major economies now in recession, it was inevitable that Australia would be dragged into recession too.
Our gross domestic product is forecast to fall by 0.5 per cent in 2009‑10. And our unemployment rate is expected to rise to 8.5 per cent by June 2011.
These forecasts will put us in a far better position than that of other advanced economies. But they show that not even Australia, with our strong public finances and robust financial system, can escape the impact of this global downturn.
That's why the 2009 Budget is a forward-looking Budget. One that supports jobs today by investing in the infrastructure Australia needs for tomorrow.
This strategy will position us to capitalise on the global recovery which lies ahead.
The 2009 Budget has at its core the biggest plan for nation building investment in infrastructure Australia has seen since the Snowy Mountains scheme.
Its focus is on an unprecedented push for jobs and productivity, built on the roads, rail, ports and broadband that are the building blocks for sustainable growth.
The economic stimulus in this Budget raises the level of GDP by 0.75 per cent in 2009‑10, when the economy is expected to be at its weakest.
And the measures in this Budget build on the decisive action the Government has taken since the extent of the global recession became clear. Action that has cushioned Australia from the worst effects of this major economic downturn.
It is now clear that, had we sat back and done nothing, the contraction in our economy would be four times bigger. Our economy would be 2.75 per cent smaller in 2009‑10 and 1.5 per cent smaller in 2010‑11.
The action the Government is taking now is expected to support up to 210,000 jobs, and reduce the peak in the unemployment rate by 1.5 percentage points below the double‑digit peak it would reach had we listened to those who said we should wait out the storm.
Key retirement incomes measures and impacts
In developing the 2009 Budget, we needed to be responsive to the needs of the most vulnerable members of our community, while still maintaining stability over the long term.
This is why the Government has focused on improving equity... building integrity... and helping out those people most affected by the global downturn.
I want to run through three key areas of action that stem from last Tuesday's Budget, they are on pensions, on reform pathways suggested by the Henry Review, and on superannuation measures.
First, to pension reform.
The Government's has announced new secure and sustainable pension reforms in the 2009-10 Budget.
These reforms are designed to give pensioners increased financial security whilst also making the pension system more sustainable in the face of an ageing population and the fiscal constraints brought about by the global recession.
From 20 September 2009, some 3.3 million age pensioners, disability pensioners, carers, wife pensioners and veteran income support recipients will be receiving increased assistance thanks to these reforms.
The pension increase will be delivered via:
- For full rate singles: an increase of $30.00 a week in the base pension, and $2.49 a week in a new fortnightly supplement; and
- For full rate couples: an increase of $10.14 a week in a new fortnightly supplement.
This is a total increase in permanent annual payments of $1,689.40 for singles, and $527.20 to couples combined.
The reforms deliver on the Government's promise of long-term pension reform and will ensure that pensioners have a pension that provides them with an adequate and secure income.
The Henry Retirement Incomes Review was made public with the 2009 budget papers, and I will say more on that in a moment.
But one of its key recommendations was that the Age Pension age be gradually increased to 67.
The Government has decided to adopt the Review's recommendation on the Age Pension age with an appropriate transition period.
This is because Australia's retirement income system should reflect increasing life expectancies.
The transition period begins in 2017 where the pension age will gradually increase from age 65 at 6 monthly intervals until it reaches 67 by 2023.
The oldest person affected by this change will be 57 on 1 July 2009 – their pension age will increase to 65.5.
The full impact of the increase applies to those aged 52.5 and younger on 1 July 2009.
The Government's decision to gradually phase-in its plan for increasing the age pension age is in order to give people time to plan for their future, as well as allow women's eligibility age to catch-up with men's.
In developing these reforms, the Government has endeavoured to strike a balance between addressing the inadequacy of the single age pension, as well as improving support for couples.
Many other developed economies have made the decision to increase their pension age.
The United States, Germany, Norway and Iceland are progressively increasing their pension age to 67, and the United Kingdom is increasing its pension age to 68.
According to the United Nations, Australia has the fourth-highest life expectancy in the world. Life expectance at birth is now 83.7 for females and 79.0 for males.
When the age pension was introduced in 1909 the corresponding ages were 58.8 for females and 55.2 for males – an increase of 24.9 and 23.8 years respectively.
The Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for retirees.
That's why the Government established a review into Australia's future tax system. The review has an independent panel chaired by Dr Ken Henry, the Secretary of the Treasury.
We need long-term reform to achieve this ambitious goal and to position Australia to deal with the challenges it faces into the future.
The superannuation and retirement income system are under the microscope of the review.
As I've mentioned, the Review has delivered its report to the Government on the retirement income system which was released on Budget night.
The report supports the current architecture of the retirement income system known as the "three pillars". These are mandatory private superannuation saving, voluntary saving, and the age pension.
However, the Review found that there is both the need and the opportunity to calibrate the current arrangements to better meet future challenges and to reform some structural weaknesses within the system.
The Review made recommendations on increasing the Age Pension age and questioned whether the current cap on the concessions was appropriate. These recommendations have been incorporated into the Budget measures I've outlined today.
In addition, the Review Panel has made several in-principle recommendations.
- improving the fairness and coherence of the existing pension means tests, possibly through a single test, and improving incentives to work beyond retirement age;
- reducing the complexities resulting from the interactions between the tax transfer system and the aged care sector;
- maintaining tax assistance to superannuation but improving the fairness of concessions for contributions;,
- improving the ability to use superannuation to manage longevity risk; and
- improving the public's awareness and engagement with the retirement income system.
As I mentioned, these are in-principle recommendations. The Government will thoroughly access the findings of the Henry Review when they are fully delivered at the end of 2009.
I would again stress for everyone here, and for all of our friends in the media: there will be no consideration by the Government of the issue of increasing the superannuation preservation age until that time.
The Henry Tax Review will carve out a pathway for reform.
But of course, the Government is well aware that reform will need to be carefully and strategically planned. As the Review Panel states in its report:
"Retirement arrangements involve very long term planning horizons and there is considerable merit in avoiding inessential large changes."
Now to superannuation-specific issues.
As part of the Budget, I announced a package of superannuation measures which is consistent with these objectives while preserving our ongoing commitment to maintain the safety, stability and efficiency of our superannuation system.
Changes in the concessional and non-concessional contributions caps
From 1 July 2009, we will introduce greater equity into the system by reducing the disproportionate benefits received by high income earners who can afford to make large concessional contributions. The average income of those involved would be over $220,000 a year.
To reduce the superannuation tax breaks received by these people, the concessional contributions cap will be lowered from its current level of $50,000 to $25,000. The transitional contributions cap for those aged 50 and over will be reduced from $100,000 to $50,000.
The average account balance for a person over age 50 currently contributing more than $50,000 is a very large $890,000. Another way to look at this is that less than 2% of the community will be affected by this change in any way – that is less than 2% at the very top, making a major contribution to equity, sustainability and the future of our retirement incomes system.
Temporary reduction in Government co-contribution
As I'm sure you can appreciate, developing the 2009 Budget meant taking some tough decisions.
To deliver budgetary savings, we will temporarily reduce the co‑contribution matching rate and maximum amount payable for eligible contributions made between 1 July 2009 and 30 June 2014.
The matching rates and maximum co-contributions announced in the Budget were:
- 100 per cent for 2009-10, 2010-11 and 2011-12, with a maximum co‑contribution of up to $1,000.
- 125 per cent for 2012-13 and 2013-14, with a maximum co-contribution of up to $1,250.
In 2014-15, the Government co-contribution scheme will revert back to the current matching rate of 150 per cent, and maximum co‑contribution of $1,500.
I note that only about 20% of those eligible actually make personal contributions to attract the Government co-contribution.
Payment of small and insoluble accounts to unclaimed monies
An issue I have been concerned with for some time is the continued growth in the amount of lost superannuation reported on the Lost Members' Register. Lost monies are currently held by superannuation funds on behalf of lost members.
To enhance the efficiency of our superannuation system, the Government will require superannuation funds to pay small and insoluble accounts to unclaimed monies. This change will take effect from 1 July 2010.
Under this measure, superannuation funds will be required to transfer a lost member's account to unclaimed monies where the balance of the account is less than $200.
Superannuation funds will also be required to transfer accounts which have been inactive for five years and have insufficient records to identify the account owner.
This measure will rationalise the Lost Members' Register in a way that is cost effective for superannuation funds. It will have an immediate effect on the number of lost accounts, potentially reducing that number by 40 per cent.
The measure should provide long-term benefits for funds as they will no longer need to administer or apply member protection to dormant accounts transferred to unclaimed monies.
This will also improve equity for other fund members where costs are currently apportioned to apply the member protection rules.
Former holders of these accounts are unlikely to be disadvantaged, as they will still be able to reclaim their monies from the ATO at any time in the future. As well, amounts held in unclaimed monies will not be subject to fees and charges.
Account-based pensions – reduction in minimum drawdown amounts for 2009-10
The Government is also mindful of the effects of the global economic downturn on the account-based pension portfolios of self-funded retirees.
To assist these self‑funded retirees, the Government will reduce the minimum payment amounts for account‑based pensions by 50 per cent for 2009-10.
This measure extends the drawdown relief which the Government provided in February this year for 2008-09.
Reducing the minimum drawdown amounts will help pension account balances to recover from capital losses associated with the global economic downturn. It will also benefit account-based pension holders by reducing the need to sell assets at a loss in order to meet the minimum payment amount for 2009‑10.
The 50 per cent reduction in the minimum payment amounts will apply to account‑based, allocated and market-linked pensions.
Trans-Tasman retirement savings portability scheme
As part of the Budget, the Government has agreed in-principle to sign a Memorandum of Understanding with New Zealand to establish a trans‑Tasman retirement savings portability scheme.
We are currently settling the final details of the scheme with New Zealand.
The trans‑Tasman portability scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds. Currently, members of Australian superannuation funds may only transfer their retirement savings within the Australian superannuation system.
This scheme will facilitate the free movement of people across the Tasman, potentially removing an impediment to labour market mobility.
It will also enable individuals to streamline and consolidate their personal retirement savings, where they are split across the two countries. This will reduce their exposure to multiple sets of fees and charges.
The scheme aligns with the movement toward a single economic market between Australia and New Zealand.
Employer's superannuation guarantee obligations in respect of paid parental leave and other leave
And finally, to provide employers with clarity about their superannuation guarantee obligations, the Government will exclude paid parental leave and other ancillary leave payments from ordinary time earnings.
This means that employers will not have to make superannuation guarantee contributions for these amounts.
The superannuation guarantee arrangements in relation to paid parental leave will be reviewed in 2013 when the new statutory paid parental leave scheme is scheduled for review.
The measures I have just outlined are only one aspect of the Government's broader response to the global recession. They support the Government's objectives of improving equity, building integrity and providing assistance to those most affected by the downturn.
Optional CGT Loss Roll-over
I'd like to say a few words about the capital gains tax roll‑over for capital losses for mergers of complying superannuation funds.
In the current financial climate, it's vital that we minimise any potential barriers to a robust and efficient superannuation industry. Fund mergers can improve economies of scale and enable funds to provide services to members more efficiently.
That's why, in December last year, I announced the optional capital gains tax roll‑over for capital losses for mergers of complying superannuation funds with APRA-regulated superannuation funds with at least five members.
This measure applies from 24 December 2008. By removing certain tax law impediments to superannuation fund mergers, it will help the superannuation industry at this difficult time.
Late last month, I announced that the Government has decided to expand the optional CGT loss roll‑over. This decision was made after careful consideration of the issues raised in consultations with industry.
We will extend the period of application of the roll‑over by one year to 30 June 2011.
By allowing superannuation funds more time to use the roll‑over, this will provide better support for mergers of superannuation funds.
The measure will now apply to mergers involving pooled superannuation trusts where the continuing entity has at least five members. It will also apply to mergers involving the complying superannuation business of life insurance companies.
To reduce compliance costs, the measure will now permit superannuation entities in a net capital loss position to roll over assets with both capital gains and capital losses realised on transfer under the merger, rather than just capital losses. Funds can still transfer losses on an asset-by-asset basis as originally announced.
As well, we have expanded the roll‑over to permit previously realised net capital losses held in the transferring superannuation entity to be transferred to the continuing superannuation entity, and the roll‑over or transfer of any revenue losses to the continuing entity.
This change will further reduce impediments to mergers by ensuring that the taxation value of previously realised capital losses and revenue losses is not lost when the transferring superannuation entity is wound up.
The Government is currently drafting legislation for this measure. I expect to release an exposure draft for public consultation soon.
Again, I would like to thank the superannuation industry for your input on these measures. And I would welcome your further contributions to the consultation on the draft legislation.
Communiqué of Principles for Superannuation
As I am sure you are all aware, on 28 April this year I released, together with the Australian Institute of Superannuation Trustees and other peak superannuation industry bodies, the Communiqué of Principles on the Australian superannuation system.
Once again, I'd like to thank the Australian Institute of Superannuation Trustees for your invaluable contribution to developing this groundbreaking document.
I'd also like to add that all parts of the superannuation sector have come on board. This is a mature decision by everyone concerned. One I'm confident will help to maintain community confidence in our world-class superannuation system.
The Communiqué included a resolution to examine our superannuation system, including its structure, operations and efficiency.
After 20 years of compulsory superannuation, and the introduction of many new features, it's time we examined our superannuation system.
With over $1 trillion under management on behalf of hard-working Australians, both the Government and the superannuation industry want to ensure that the system operates as efficiently and sustainably as possible.
Now, more than ever, Australians need a superannuation system which will serve them well into the future.
The review of our superannuation system will complement the work underway in the Henry Review of Taxation to strengthen the financial security of Australians in retirement.
Ladies and gentlemen, as you can see from my words this morning, the 2009 Budget provides the immediate solutions Australia needs right now.
And it also lays a strong foundation for sustainable growth so that we can capitalise on the future global recovery.