Why legislate an objective for Australia’s super system?

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast, brought to you by CPA Australia.

Dr Jane Rennie:
Now in Australia when the issue of retirement policy does hit the newspapers, usually political parties of all persuasions just start snapping at each other. It is an incredibly political topic. What I'm wondering is realistically, can this activity, that being nailing down an objective for super, be decoupled from the political cycle? Or is this just going to be another super bun fight?

Michael Davison:
Oh look, I think it's going to be another super bun fight. I mean, it's a nice aspiration that it gets depoliticized and it's something we've always argued for. But the reality is, as I said, there's $3.4 trillion in the super system, it's a lot of money, there's a lot of people, a lot of interested parties want to tap into that. And each government has their own views. The Labour Party essentially started the super system in Australia. The Liberals criticise it, some governments lean towards one type of fund, one lean to the other. It's like, well, how do you pull that together? When you think about the common interest is how do we support Australians to save the retirements that reduces the pressure on governments to fund retirement, to fund the age pension?

Dr Jane Rennie:
Michael, in the consultation paper, I'm wondering if you can tell us a little bit more about this because I know the government has provided a main objective or suggested a main objective and then two alternate wordings on this. What are they? Can you walk us through the key elements of those three options?

Michael Davison:
Look, the government has said the objective of super is to preserve savings, to deliver income for a dignified retirement alongside government support in an equitable and sustainable way. Look, and we support, we agree with the spirit of that. We feel it's come up a bit short because it talks about preserving savings. It doesn't talk about how do we encourage people to save, what incentives do we provide and how do we compensate them for the fact it's being preserved? We are locking our money away for 30, 40 years, should we be compensated for that? Talks about delivering income. Retirement is about having that income in retirement, having a steady stream whilst having some scope for those one-off lump sum payments and paying for aged care, et cetera. That's reasonable. Equitable and sustainable. You cannot argue about that. It needs to be equitable and the government has to be able to pay for it. One of the big issues it talks about alongside government support, it's sort of saying is it super? Is it the age pension? Whereas back to our earlier point, it's about both of those, but it's alongside your non-super savings, the family home, et cetera. They've had some alternative wording which sort of tweaks that a bit, it's around delivering income for retirement, so it removes that preservation bit, and the one with said we'd support is the objective of super is to support savings to deliver income for a dignified retirement. It's supporting that broader savings model as opposed to just focusing on protecting superannuation.

Dr Jane Rennie:
And what would CPA Australia propose doing to make that definition better?

Michael Davison:
Look, it comes back to before we can define the purpose of super, we need to define how the retirement savings system works and agree where the super system fits into that. Only then can we really define the objective or the purpose of superannuation itself.

Dr Jane Rennie:
You mentioned that the proposed definition talks about savings to deliver income for a dignified retirement. That seems to go to the question of adequacy whether people have enough. But I wanted to ask you about that because what is that concept of dignified retirement? How much is that? And doesn't it depend a lot on where you're standing? I mean, if you ask someone who owns their house and you mentioned that before as a critical factor to security and retirement, you're in a very different position financially to someone who doesn't. What's your take on the factors that influence how much is enough and whether the government should weigh in on that question of adequacy?

Michael Davison:
Yeah, Jane, the question of adequacy is really how long is that piece of string? It's a piece of string. Adequacy is about the expectation you maintain your standard of living or reasonable standard living in retirement. The standard of living we are used to now, we forego some of our income knowing that if we're saving it, we can sort of maintain that standard of living when we retire. That's the main thing. The system's there. Look, the age pension will support those who don't have the ability to save. The super system is really directed at the middle group of Australians, to support them to save and have a little bit more. Those who high income earners have other means to save, they don't need the incentives as much as middle Australia. The family home is really important. The system is predicated on owning your own home and the fact that your housing costs disappear in retirement, so you don't need as much to live on as you do while you're working. And we're seeing home ownership drop in Australia, so it's going to be much harder for people to retire with their own home. And then you're going to have to sufficient retirement savings to be able to continue paying rent. And that's one of the biggies is that the system has to be able to support those people.

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Dr Jane Rennie:
You mentioned that in Australia it is a system that does force people to put aside that money into superannuation for say 40 or more years depending on how young you are when you start working. And I'm just curious, in order to achieve a sufficient level of retirement savings, does a superannuation system need to be mandatory? Could you ever get there to adequacy if it wasn't mandatory?

Michael Davison:
Look, I think there's been various systems around the world that demonstrate, and even our pre mandatory system demonstrate that we're not that good at saving. We'll save some money, we save for a house deposit, but we have numerous other expenses, we get distracted. The reality is we're not good at saving. There needs to be a bit of a push that we can save. It's not everything but has to be something, and most people accept it and are comfortable with it as long as it's set at the right level and it's not onerous.

Dr Jane Rennie:
There's another element I wanted to ask you about and that was that concept of sustainability, which I guess in a nutshell is making sure the government, the economy and future generations can afford to support the superannuation system. Super does have a lot of concessions built in and special tax treatment and those concessions are very costly for governments. Why do we build them in and is it necessary to do that?

Michael Davison:
It's interesting, the government's measure of the concessions is probably not particularly accurate because they compare it to ... Yeah, you pay less tax in superannuation and they compare that to the tax you'd pay on other savings or investments at your top marginal rate. The reality is other investments have concessional tax treatment, as well. The main reason of tax concessions is one to encourage you and reward you for saving, but it's also compensating for the fact that it is locked away. If we didn't have those incentives, those rewards, we're not very good savers, why would we do it?

Dr Jane Rennie:
Presumably though there needs to be a cap on that level of government support, otherwise the system won't be sustainable. And how do we determine what the right level is?

Michael Davison:
Look, that comes back to my earlier point that the high income earners will find other ways to save. They have the means to save. We totally support there should be a limit on the tax concessions aimed at superannuation and savings. I don't know what the right limit is. The government has been proposing an extra tax on earnings for if you have more than $3 million in your super. To us it seems a bit low, but it's like how do you determine that when you compare it to housing prices now and you look at the average house in Sydney and Melbourne, or the median price is close to one and a half million dollars how do you set it? It's right if you've got a couple living off one person's super. How do you determine what's right? Like I said, you're not owning your own home and you've got to pay rent, additional housing costs, continuing housing costs in retirement, what's the right number? It's different for everyone.

Dr Jane Rennie:
Michael, when does this consultation actually close and what will happen next in terms of government action?

Michael Davison:
The consultation closed last Friday, the 31st of March. What happens next? There is no firm timetable from the government. They have proposed some other super changes, which we expect to see in the budget and come in effect in July, 2025. I think there's a political imperative to get this sorted pretty quickly, but they haven't actually set a timetable for when the legislation may be introduced into the parliament and passed.

Dr Jane Rennie:
Okay, so it might actually be a year or two away?

Michael Davison:
Absolutely. The fact it's on their agenda at the moment, probably not that long away, but it's certainly not going to be next month.

Dr Jane Rennie:
What would it mean once this objective actually comes in, is legislated, what does that mean for current and future super fund members in a practical sense? Will it actually change anything for them or might it limit any other attempts at introducing new ways for people to access their super early?

Michael Davison:
I think for the average super member, I don't think it's going to change much. It provides a guiding light or some guardrails as to how the system works. And I think what it'll do will sort of refocus that it is about retirement, saving for retirement and just clearly articulate that super is for retirement, it's not for that early release around housing or COVID payments or medical procedures, et cetera. It's just that refocusing to guide super funds, super fund advisors and this government, future governments.

Dr Jane Rennie:
Well, just to that point, this government and future governments, how would a future government be held accountable to it? I mean, couldn't they just change it if they didn't like the objective as legislated?

Michael Davison:
Jane, that's the big risk. There is nothing stopping this government or future governments from changing the objective or not complying with it. In our submission, we've suggested this needs to be reviewed regularly as part of the intergenerational report, which is done every five years and projects forward 40 years as to what the system's going to look like, and possibly the government needs to be held to account from say, the Productivity Commission or the Australian National Audit Office to look at how they are complying to it and complying with the spirit of the legislation.

Dr Jane Rennie:
Well, this has been a fascinating discussion and I suspect we're going to hear a great deal more about it in the public domain, but that is all that we've got time for today. Thanks very much to our guest expert, Michael Davison. If you'd like to know more about today's topic, a link to CPA Australia's submission on legislating an objective for the superannuation system is included in the show notes. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe on your favourite podcast app? From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
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