Introduction
Ladies and Gentlemen, it is a pleasure to be here today to launch the Association of Superannuation Funds of Australia 'Blue Skies' Blueprint for National Retirement Incomes Policy.
The Government welcomes contributions such as this to the development of superannuation policy. While it will not surprise you that I would not necessarily agree with all that is contained in 'Blue Skies', I found much of it of interest and let me assure you that I will be giving it further attention in the period ahead.
In this address I would like to talk broadly about the Government's retirement income policy approach. A number of the issues I will discuss are also considered in "Blue Skies".
Let me start by making an observation about the growth of the superannuation sector and some comments I hear from time to time about government policy in this area. There is no doubt that superannuation is one of the very high growth sectors of the Australian economy.
Superannuation contributions grew by around 20 per cent last financial year, with assets growing by around the same amount. This is not a flash in the pan: superannuation assets have grown around 12 per cent a year on average over the last 5 years.
Superannuation assets total over $330 billion. And the prospects for continued solid growth are very high. New projections by the Retirement Income Modelling Unit, to be published shortly, suggest superannuation assets will grow to around $595 billion by 2005 and around $1.5 trillion by 2020, with superannuation assets higher than annual GDP. Some private sector researchers project even higher growth.
Despite this virtual boom, I am aware of comments, including sometimes by individuals in the superannuation industry itself - and even sometimes expressed directly to me - that there is a lack of confidence in superannuation.
I find such comments extraordinary. No industry could have achieved such strong growth, and could expect such strong prospective growth, unless consumers were confident that superannuation was in their best interests.
Thankfully, serious financial advisers and newspaper columnists continue to tell people that superannuation is a highly attractive investment. And this is true. No matter how you look at it, superannuation remains highly tax concessional.
Now I won't pretend that Australia has adopted a simple system of taxing superannuation. But as an industry I suggest you not to lose sight of a key message that, despite this complexity, superannuation remains highly attractive.
Returning to superannuation policy, Australia has a "three pillar" approach to retirement income policy. The Government agrees with ASFA on the appropriateness of this approach. The three pillars are:
- a government-funded age pension safety net for those who have not been able, for whatever reason, to accumulate sufficient savings to fund their own retirement;
- compulsory savings via the Superannuation Guarantee arrangements, with the SG level set to rise to 7 per cent on 1 July this year and to 9 per cent by 2002-03; and
- voluntary savings, supported in part by tax concessions.
Australia's three pillar system is a model system internationally. The core framework has been supported by, among others, the World Bank in its research on how countries should establish appropriate retirement income systems.
It is surprising that a system which attracts criticism at home is often applauded abroad. When one looks at the retirement income systems in place in the US, Japan and elsewhere, the core strengths of the Australian system shine through.
That is not to say that the system cannot be improved. Indeed, the Government has taken major steps to improve Australia's retirement income system, and broader savings performance, since coming to office.
Before turning to policies directed at private saving, I would briefly like to address public saving issues. I do this because the issues are, in important senses, interrelated. There is little point in designing policies to raise private saving if at the same time policy is acting to drain public saving.
Policies to raise private retirement income are likely to provide little benefit if those incomes will be eroded by higher taxes imposed to meet the servicing costs of higher public debt.
Governments which run up large deficits to finance current consumption are not providing a free lunch, they are mandating a delayed hangover.
This Government has taken the decisions necessary to turn around Labor's legacy of deficit and debt. By eliminating the Budget deficit and pursuing major reductions in public debt, the bogey man of higher future taxes, which would have occurred had Labor continued in office, has been removed. This gives workers greater confidence in planning their financial futures.
The Government has also improved older persons' confidence in the age pension system by legislating to maintain the single rate of Age Pension at no less than 25 per cent of Male Total Average Weekly Earnings. In practical terms, this means that age pensions have increased recently despite very low inflation. What makes this achievement all the more remarkable is that it has occurred during a period of major fiscal consolidation, emphasising the very high priority this Government places on ensuring the adequacy of pension payments.
The age pension, together with other social security arrangements, will continue to be an essential safety net, particularly for those who, for various reasons, have had limited opportunity to save for retirement during their working lives.
In terms of the compulsory pillar, the Government has supported and will continue to support the existing Superannuation Guarantee arrangements. The SG rate increases to 7 per cent from 1 July this year and will rise to 9 per cent by 2002-03.
In terms of the voluntary pillar, the Government will continue to support key aspects of the current superannuation framework, including significant tax concessions to encourage superannuation contributions. Additionally, to encourage voluntary savings the Government has introduced measures including the superannuation spouse rebate and the savings rebate.
Government Initiatives in Savings Policy
I have already mentioned the Government's initiative to legislate the age pension with respect to average weekly earnings. The Government has taken a number of other steps to improve the flexibility and integrity of retirement income and broader savings policy.
Choice of Fund
The 'Blue Skies' document rightly points out that an important part of Australia's retirement income system is that compulsory superannuation contributions are managed by the private sector, rather than the Government. Management of these contributions by the private sector is seen as a good thing, and I certainly agree with that. What the Government does not agree with is the current constraints on employees choosing their own superannuation fund.
I believe that the present system of compulsory saving, where individuals have no guarantee of choice, is simply unsustainable and I would ask the industry to get behind the Government's effort to deliver a workable and effective choice model.
The Government sees it as quite undemocratic and unfair that many employees have no opportunity to choose a different superannuation fund.
Lack of choice also blunts the competitive mechanism, risking employees being stuck in relatively poorly performing funds or funds that are not particularly suitable for their individual circumstances.
It is also true that many employees appear to have relatively limited knowledge of their superannuation arrangements.
I suspect this is due, to some extent, to the lack of control that many employees have over those arrangements.
Providing choice of fund will give employees a greater sense of ownership, and thus a greater interest in, their superannuation. This must be to the good of the industry as a whole.
Many participants in the industry, including ASFA, are concerned that inappropriate choices could be made by employees in a choice environment. Let me be absolutely clear that the Government recognises the importance of an appropriate disclosure regime and an effective information campaign to support the move to choice.
To this end, the Government has worked hard to develop a comprehensive information campaign and a disclosure regime to facilitate meaningful comparisons across funds in as straightforward a manner as possible.
We also appreciate the work that the industry itself has said it will do in helping inform employees and clearly the industry will have an important role in this regard.
Of course, if notwithstanding the information put forward by government and the industry, a particular employee feels they need further advice on their superannuation options, there are independent, professional advisers they can turn to.
Savings Rebate
Recent studies have highlighted that a significant proportion of Australians have little or no savings beyond possibly the equity in their homes and the superannuation contributions required to be made on their behalf by employers.
The Government believes it is in the best interests of our nation, and for our continued economic growth, to assist household saving.
To this end, the Government announced in the 1997-98 Budget that it would introduce a broadly based savings rebate through the tax system. I am pleased to report that the measure has now been enacted by the Parliament.
The savings rebate will assist current savers and investors and provide encouragement for potential savers or investors.
Once fully implemented from 1 July 1999, the savings rebate will deliver a maximum benefit of $450 per annum into the hands of each Australian taxpayer who makes the effort to save or invest.
The rebate will be at a rate of 15 per cent up to an annual cap of $3,000 of undeducted member superannuation contributions or net savings or investment income.
In 1998-99 the rebate will apply on a transitional basis, providing an initial rebate of up to $225.
The savings rebate not only recognises the importance of enhancing superannuation savings, but also provides assistance for individuals who are saving for other life cycle purposes such as for education, health care and the like.
Spouse Rebate
In line with its election commitment, the Government introduced in the 1996-97 Budget a spouse rebate to encourage persons to provide superannuation for spouses on low incomes. The rebate is 18 per cent for contributions up to $3000 per annum, but persons can contribute in excess of $3000 if they so choose. The rebate broadens superannuation coverage, particularly assisting persons whose work experiences would not otherwise allow them access to their own superannuation plan.
Interaction with the Age pension: Helping self-funded employees
Since coming to office the Government has taken various decisions with the aim of either better integrating the age pension with the superannuation system or helping self-funded retirees.
These include:
- a tax rebate for low income aged persons;
- a financial incentive to encourage older Australians to defer their pension;
- improvements to the social security means test and reasonable benefit treatment of retirement income streams to make them more equitable and to provide simple and consistent treatment for similar retirement income stream products; and
- as announced in the recent Budget, an increased income test threshold for the Commonwealth Seniors Health Card from 1 January 1999.
Generally these changes will make the retirement income system simpler, more consistent and more equitable. They also offer a reward to those self-funded retirees who have been prudent enough to save for retirement.
Superannuation and Family Law
It has long been recognised that family law does not satisfactorily deal with superannuation assets in the event of marriage breakdown. In particular, the current law does not provide for superannuation interests to be divided.
This can result in unfair outcomes, such as where superannuation is worth considerably more than other available property. It can also lead to inflexible outcomes, such as where one party retains the superannuation intact but inaccessible for many years, while the other is awarded a larger share of other property but foregoes an asset that provides an income in retirement.
In order to address these problems, the Government intends to legislate to allow superannuation interests to be divided. To that end, the Government has released a position paper and has invited public comment on that paper.
Preservation
The Government considers that those superannuation amounts which have received concessional tax treatment or assistance should be available to provide income in retirement, and should generally not be withdrawn prior to retirement. I am pleased that ASFA shares this view.
Unfortunately, when the Government came to office, the rules relating to preservation of superannuation benefits did not fully reflect this principle.
They were complex and extremely difficult for superannuation funds to administer adequately.
For these reasons the Government has announced a range of initiatives impacting on the preservation of superannuation benefits.
In particular, the Government has decided to:
- ensure that from 1 July 1999, all future superannuation contributions (including member contributions) and earnings will be preserved until preservation age, except in limited circumstances;
- improve the arrangements for early release of superannuation benefits; and
- legislate a phased increase in the preservation age from 55 to 60.
These reforms will ultimately reduce the fiscal cost of the age pension, as people will accumulate larger superannuation benefits for retirement.
Self-Managed Superannuation Funds
Finally, I would like to briefly mention changes made in the 1998-99 Budget affecting small superannuation funds, or self-managed superannuation funds.
The Government believes self-managed superannuation funds are a worthwhile competitive option for superannuation investment.
Indeed the Government's choice of fund policy will allow many people the opportunity to choose to place their Superannuation Guarantee contributions into a self-managed fund.
However, while wanting to encourage the development of such funds the Government has seen a need to alter some of the rules applying to these funds.
The Government has agreed to changes recommended by the Financial System Inquiry. Self-managed superannuation funds will be defined as superannuation funds with less than five members, where all members are trustees and there are no other trustees.
Where there are two or more members they must either be partners, directors or trustees of the employer-sponsor or family relatives.
Additionally, the Government has agreed with another recommendation of the report; that the Australian Taxation Office should regulate such funds and this will occur from 1 July 1999.
At the same time the Government has announced other changes affecting all superannuation funds. These include a tightening in investment rules and the introduction of a new penalty structure for superannuation funds that breach the rules.
The tightening in investment rules followed in the footsteps of an Insurance and Superannuation Commission survey that showed many self-managed funds were circumventing the policy intent of the existing rules.
The rule changes are designed to ensure that concessionally taxed superannuation contributions are used for retirement income generation and not present day use for consumption or business investment.
The Government recently announced that the new rules will not apply to investments held by superannuation funds on Budget night.
The Government believes these and other changes, for example, a sizeable decrease in the superannuation supervisory levy, will be of benefit to the ongoing development of self-managed funds.
Conclusion
To conclude, I would like to thank you again for the opportunity to be with you today. I feel privileged, as a Minister, to have a role in the development of one of Australia's great growth sectors, and one which plays such an important role, not only in the lives of millions of Australians, but in the future of our whole country.
I hope I have indicated how the Government sees its reforms as improving the superannuation policy and broader private saving framework.
A framework in which superannuation remains at the heart of retirement income policy. A framework in which superannuation contributions are not dissipated before retirement. And a savings framework which provides choice, flexibility and a recognition of life cycle requirements and differing family circumstances.
On that note I would like to formally launch ASFA's 'Blue Skies' Blueprint for National Retirement Income Policy.
Thank you.