A planned increase in the Australian compulsory superannuation contribution rate to 12 per cent could be scrapped if government follows a key recommendation included in an independent report published last week.
According to the Retirement Income Review (RIR) final report, lifting the superannuation guarantee (SG) contribution rate to the target 12 per cent rate would be counterproductive for most Australians.
“A rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower‑income earners,” the report says. “This is based on the view, supported by the weight of evidence that increases in the SG rate result in lower wages growth, and would affect living standards in working life.”
The SG contribution rate is primed to rise to 12 per cent from the current 9.5 per cent under a gradual phase-in process enshrined in legislation.
However, the RIR found the majority of Australians would maintain a recommended income replacement rate of between 65-75 per cent it the “SG remained at 9.5 per cent, and retirement savings were used more efficiently”.
“Most would also achieve higher replacement rates than with the SG at 12 per cent and drawing down balances at the legislated minimum rate,” the report says.
The recommendation to halt the SG increase will trigger a vigorous debate in Australia as well as cast doubt on calls to lift locked-in retirement savings contribution rates in other jurisdictions such as NZ.
But the RIR report also recommends reining in generous superannuation tax concessions that have mostly accrued among wealthy Australians.
Assuming the SG contribution rate hits 12 per cent, the super tax concessions will cost the Australian government more than the state pension by 2050.
“There are areas where superannuation tax concessions are not a cost‑effective way to help people achieve adequate retirement incomes. In particular, the cost of the earnings tax exemption in retirement will grow faster than the growth in the economy as the system matures and provides the greatest boost to retirement incomes of higher‑income earners,” the report says.
“Many very large superannuation balances were built up under previous high contributions caps and are expected to stay in the system for several decades. At June 2018, there were over 11,000 people with a balance in excess of $5 million. People with very large superannuation balances receive very large tax concessions on their earnings.”
Overall, the RIR found the mix of super, voluntary savings and the government pension would see most Australians receive an adequate retirement income.
In a release, Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, said the RIR findings confirmed the “importance of increasing the efficiency of the superannuation system and lifting home ownership rates – both identified as key drivers of an adequate retirement income”.
Hume said the ‘Your Future, Your Super’ reforms recently introduced by the Australian government would also improve the superannuation system.
She said in the statement that the new rules would “simplify and enhance member engagement with their superannuation and increase the efficiency of the superannuation system through lowering fees and improving returns, benefiting Australians by $17.9 billion over the next 10 years”.
Among a raft of new rules, the ‘Your Future, Your Super’ changes include a contentious plan to stop Australian default superannuation funds (MySuper) suffering poor investment performance from accepting new members.
“Funds that fail two consecutive annual underperformance tests will not be permitted to accept new members. These funds will not be able to re-open to new members unless their performance improves,” the Australian government said in October.
“By 1 July 2022, annual performance tests will be extended to other superannuation products.”
MySuper accounts for about a quarter of the current A$2.9 trillion of funds under management but almost 60 per cent of all superannuation members.
By contrast, KiwiSaver default funds held about 13 per cent of all members and just 6 per cent of assets under management as at March 31 this year. A number of KiwiSaver providers are currently pitching for appointment as default schemes next year under revised terms that include moving from the current conservative to a balanced investment setting, applying tight fossil fuel exclusions to shares and cutting fees.
The KiwiSaver default scheme application process closes late in December with appointments confirmed by next May. Successful bidders assume default KiwiSaver duties in December 2021.