Good morning and thank you David for that kind introduction.
It’s a pleasure to be here today and to have the opportunity to formally acknowledge the establishment of the Committee for Sustainable Retirement Incomes.
This Committee, I know, will be a valued contributor to the retirement income policy debate.
Sitting before me now are many esteemed experts and industry leaders; men and women with ideas and passion, who I know are keen to confront the challenges and opportunities ahead of us.
So before I begin, may I congratulate Patricia [Pascuzzo, Founder and Executive Director] and the other Committee members for their efforts in getting this committee up and running.
For the time I’m here today, I’d like to focus on a topic you all have a great deal of interest in: the retirement phase of superannuation.
As we discovered from the Government’s recent Intergenerational Report, there are expected to be major changes to the structure of Australia’s population over the next 40 years.
- The number of Australians aged 65 and over is projected to more than double by 2055.
- 5 per cent of our population will be aged 85 or over (compared with less than 1 per cent back in 1974-75).
- We will have 40,000 centenarians by 2054-55 (compared with just 122 in 1974‑75).
We will be living longer and enjoying longer periods of active retirement.
This is a good story; a great story.
It’s a reflection of our wonderful Australian lifestyle. And it presents us with many opportunities; opportunities that the Government wants all Australians to enjoy.
But, as you know, there are also going to be some challenges.
It is true that more Australians are projected to remain in the workforce after they reach traditional retirement age, with participation rates among those aged 65 and over projected to rise from 12.9 per cent to 17.3 per cent.
However, the retirement income system will have to deliver income to more people over increasingly long periods of retirement.
And superannuation will be integral to meeting these growing demands.
Total contributions annually into super have increased from $53.5 billion in 2003 to $115.3 billion in 2013.
Over the same period, total superannuation income stream payments have increased from $7.1 billion to $38 billion annually.
Today, around 30 per cent of all superannuation assets are in the retirement phase. This is projected to increase to over 40 per cent in 30 years.
The recent Financial System Inquiry (FSI) questioned whether the current settings for the retirement phase of superannuation meet the risk management needs of many retirees – particularly when it comes to longevity risk – that is, the risk of outliving one’s savings.
The FSI argued that the retirement phase of Australia’s superannuation system is underdeveloped compared with the accumulation phase.
The Committee for Sustainable Retirement Incomes made a similar point in its submission to the Government on the FSI report. You identified the retirement phase of superannuation as a reform priority for the Government.
So today, I would like to talk in more detail about four key areas.
Firstly, I would like to touch on some key issues in the accumulation phase that ultimately affect retirement incomes.
Secondly, I would like to highlight the 2015–16 Budget changes to the Age Pension assets test.
Thirdly, I will talk about some important work that Treasury has been doing as part of their Review of Retirement Income Stream Regulation which I’m pleased to say is nearing completion.
Fourthly and finally, I would like to discuss how this work is related to the Financial System Inquiry report’s recommendation for the retirement phase of superannuation which I know a number of you support.
However, before I do this, I think it is important to address the debate that is taking place on the sustainability of the tax concessions for super.
I have heard a number of commentators cite figures in the annual Tax Expenditures Statement to claim that the tax concessions for superannuation are literally costing the Budget $30 billion every year.
Let me be very clear on this because I think it’s important that we have a well‑informed debate — the numbers in the TES are not budget costings.
The TES is not meant to show how much better off the budget would be if the tax concessions were removed.
The TES is actually quite clear about this. It’s also clear from the TES that it is misleading to add together the tax concessions on contributions and earnings — as some, including the Shadow Treasurer who should know better, frequently do.
What do I mean when I say these numbers aren’t budget costings?
Let me give you an example. Let’s say the tax concessions on super contributions were removed and instead contributions were taxed at marginal tax rates. What would happen?
Well, you would get an increase in tax revenue, but there would also be some behavioural change.
With a higher tax rate you would expect that superannuation contributions would be smaller for many people.
Smaller superannuation balances would translate into higher Age Pension payments for many people. But the TES estimates don’t seek to take into account the broader effect on Age Pension expenditure.
This example highlights why we need to be extremely careful using the TES when debating things like the ‘sustainability’ of the tax concessions.
The accumulation phase of superannuation
Clearly, the efficiency of the accumulation phase of superannuation has a direct bearing on the outcomes enjoyed by Australians in the retirement phase. The amount contributed into superannuation and the fees and returns on those savings are critically important to retirement outcomes.
Currently, employer contributions, covered under the Super Guarantee and enterprise agreements, make up around one half of total contributions to superannuation each year. People wishing to achieve a higher standard of living in retirement, can make additional salary-sacrifice or after-tax contributions.
The Super Guarantee rate is currently 9.5 per cent.
The Government is committed to increasing the rate to 12 per cent. This will significantly boost the savings of Australians who rely on the Superannuation Guarantee and do not make additional voluntary contributions to superannuation.
The Super Guarantee will remain at 9.5 per cent until 30 June 2021, before increasing by 0.5 percentage points each financial year until it reaches 12 per cent in 2025.
Unfortunately, this delay was necessary as the previous Government funded the rise in the Superannuation Guarantee rate from the Minerals Resource Rent Tax which did not raise anywhere near its forecast revenue and which has subsequently been repealed.
Notwithstanding, the Government remains committed to increasing the Superannuation Guarantee and recognises its importance as a key driver of retirement incomes.
The continued increase in the Superannuation Guarantee makes it even more important that the system is operating as efficiently as possible.
The superannuation system already holds $2 trillion in assets and current projections show the sector could grow to $9 trillion by 2040.
All things being equal, the growing size of Australia’s superannuation system and ongoing reforms means fees should be falling broadly in line with this increasing scale.
The Financial System Inquiry shows us that while the size of the average fund increased from $260 million in assets in 2004 to $3.3 billion in 2013, average fees fell by only 20 basis points over the same period.
This is a warning for us all. It tells us that we need to look more carefully at the efficiency of the sector, how we can increase competition and finally, what we can do to encourage more Australians to engage with their super.
As the FSI noted, this involves looking in particular at the default system to ensure that full competitive forces are being brought to bear as well as strengthening governance arrangements so that Trustees are unquestionably acting in the interests of members.
The Government will have more to say about these matters later in the year.
Age Pension reforms
As the Treasurer said on Budget night, the Government wants all Australians to have confidence in their retirement plans.
We believe Australians deserve a better retirement, and the Age Pension is a critically important safety net for many Australians.
In order to ensure the Age Pension remains sustainable and that we are able to continue to support those who most need help, from 1 July 2017, we will tighten the eligibility test for the Age Pension. These changes will deliver $2.4 billion in savings to the Budget over the Forward Estimates. Under these changes, more than 3.7 million pensioners — or 90 per cent of those receiving pension-linked payments — will either be better off, or no worse off.
Those who are adversely impacted by the proposal will be able to maintain their current level of income by drawing down less than 1.84% on their additional assets, in a worst case scenario. It is perhaps a little known fact that many pensioners do not draw down on their assets outside of superannuation whilst receiving the pension.
Research by the Department of Social Services on asset holdings of pensioners revealed that during an individual’s last five years of receiving the pension, 42.5% increased their asset holdings and 24.7% maintained them at the same level. This suggests that many pensioners in these circumstances have the capacity to make a greater personal contribution to their retirement income.
At the same time the Government has confirmed that it will not proceed with the earlier proposal to constrain increases in the pension to the Consumer Price Index (CPI).
And, importantly, all current pensioners — regardless of the changes — will continue to receive a concession card and benefit from cheaper PBS prescription medicines and incentives that encourage bulk billing for Medicare services.
This is a good outcome; a fair outcome and one that will allow the Age Pension to continue to act as a safety net.
These changes help to make the whole retirement income system more sustainable by making sure that those who can afford to self-fund their retirement don’t also receive the Age Pension.
The changes to the Age Pension provide security and certainty for older Australians, and this is what the Government will continue to provide in relation to superannuation.
The more people save for retirement, the more freedom they will have and the less likely they will require the Age Pension and other forms of government income support at the end of their working lives.
So let me take this opportunity to restate the Government’s position on superannuation: we support Australians saving for retirement, and we want them to have a strong incentive to do so.
It should be the aim of every government to encourage people to save for their retirement. And we understand the importance of stability and certainty for achieving that.
Allow me to be a little political for a moment.
When in office, the former Government made 12 adverse and unexpected changes to super. This amounted to increased taxes on superannuation of almost $9 billion. Many of those changes were made on successive Budget nights – without warning and without consultation.
It was this unprecedented period of instability that led to both sides of politics making clear commitments before the last election to provide stability and certainty so that superannuants could again save with confidence.
This is why the Government came to office with a commitment not to make any adverse or unexpected changes to superannuation in this term of Government.
In contrast to the Opposition and after years of constant change, we are providing a period of stability and certainty.
We have instead embarked on a Tax White Paper process, and we’re responding to the recommendations of the Financial System Inquiry.
The Government will of course consider good ideas put forward as part of the Tax White Paper process and any changes recommended by that process will be taken to the Australian people at the next election.
In contrast, the Opposition has announced two new superannuation taxes – one dealing with contributions and the other with tax-free earnings in retirement. These policies have been poorly designed and their impacts grossly misrepresented.
Many of you in the room will recall that the Opposition first proposed their earnings tax measure when in Government back in 2013. Importantly though, at the time, the new tax was to apply to earnings over $100,000 and critically, this amount was to be indexed in order to ensure its value was not eroded over time.
At the time, it was also clear from the feedback provided by many of you in the room that this policy could simply not be implemented.
It was also highlighted that the claim that the policy would only impact those with balances above $2 million was not correct and that in reality it would impact on thousands more with balances well below that level.
It’s therefore no surprise that this measure was ultimately never legislated by the former Government.
Notwithstanding these known flaws, the Opposition has chosen to re-announce this policy in 2015, but this time around is applying the 15% tax to earnings above $75,000. They have also ruled out indexing this threshold. In effect, they have made a bad policy worse.
An independent costing of the current Opposition policy by the Parliamentary Budget Office (requested by Senator Leyonhjelm) has reportedly confirmed that the policy would affect more than 125,000 taxpayers by 2027, more than twice as many people as has been claimed. This is on top of the additional 300,000 that would be affected by their new contributions tax.
The Parliamentary Budget Office also notes that people with superannuation assets of just $800,000 could be affected – again, well below the claimed $1.5 million figure.
Perhaps worst of all, the main rationale for these two new taxes is that superannuation tax concessions are unsustainable and therefore more taxes need to be raised in this area. However, the same Parliamentary Budget Office costing of the Opposition’s policy reportedly states that “[t]hese costings are considered to be of low reliability …”
It is little wonder then that in stark contrast to this knee-jerk policymaking, the Government is sticking firm to its pre-election commitment. Superannuation is a long-term investment that depends on the trust Australians have in the system. Constant speculation about changes to superannuation, no matter how well intentioned, inevitably erodes confidence in the system and in doing so undermines its objective.
This is also why I strongly support the FSI recommendation dealing with the need for a clear and carefully drafted objective for the superannuation system.
Notwithstanding the clear point of difference between the Opposition and ourselves on superannuation tax changes, there would undoubtedly be positive benefits for the stability and accountability of the system and those who play a role in it if a bipartisan objective were able to be enshrined.
In this area I therefore welcome the recent indication from the Shadow Treasurer that he also supports a bipartisan approach to this recommendation.
We will have more to say on this when we respond to the Financial System Inquiry later in the year.
Superannuation retirement income streams
I would like to now turn to an important area of reform, one that is positive for superannuation, which the Government is considering.
In response to an election commitment, the Government has been reviewing the current minimum drawdown rules for account-based pensions and the rules that may be impeding the development of other retirement income products.
The current minimum drawdown rules require superannuation pension products to draw down a minimum of 4 per cent of the capital value a year initially, with this percentage increasing later in life.
Treasury has consulted extensively on this issue, both within the superannuation industry and with other stakeholders.
We have been looking carefully at this issue.
It is worth recalling why we have the minimum drawdown requirement.
Fundamentally it goes back to the whole purpose of superannuation. The Financial System Inquiry has recommended that the primary purpose be made clearer – basically that it is to provide income in retirement.
This may seem like a statement of the obvious, but it is in fact a very important principle.
What it is really getting at is that the tax concessions provided for superannuation are intended to encourage and support an individual’s retirement income – not to accumulate savings that can be passed on to future generations.
Capital is supposed to be depleted over one’s retirement rather than being preserved as a bequest.
At the same time, it would be undesirable to make people draw down too much of their super early in retirement, only to run out of money in their later years.
The Government has heard a range of views on whether the current requirements strike the right balance and how they might be made more flexible without undermining their integrity.
I am hopeful of making an announcement on this in the not too distant future. To be clear, we are not considering increasing the current rates, but rather making sure the system allows for innovative retirement products to be developed. We have also been looking more broadly at the range of post‑retirement products currently available.
While account‑based pensions have many benefits, particularly flexibility to access the capital in the account at any time, the downside is that more of the investment and longevity risk is left with the retiree, than in the case of lifetime annuities for example.
As a consequence, people may be too conservative in drawing down on their account balances.
Being too conservative in how they draw on their super account balances can lead to retirees living frugally and settling for a lower living standard in retirement.
It can also mean that for some, much of the money they worked hard to earn and save is left as a bequest, rather than supporting their retirement, as intended.
The FSI found that exhausting assets in retirement was a major worry for retirees as well as those approaching retirement; and that the majority of retirees with account‑based pensions draw down benefits at the minimum rate.
For a number of years now, stakeholders have been arguing that the current rules governing retirement income products are too inflexible and impede the development of alternatives to account‑based pension products, such as deferred lifetime annuities, which could help retirees achieve more certainty of income in later years.
The Treasury consultation process has looked at whether it would be possible to allow for products that do not pay an immediate or regular pension.
For example, rather than complying with a minimum withdrawal rule, could products instead be allowed to comply with a capital depletion rule.
Such an approach should achieve the same outcome of protecting against estate planning but could better cater for longevity risk products that have more flexible payment structures — including deferral periods.
This is an interesting idea and one that I understand the industry has responded positively to.
We have also been consulting on ways to make it easier for people to purchase longevity insurance incrementally, which could be more attractive to some retirees compared to parting with a lump payment.
While it would be premature of me to announce the outcome of this review today, I am hopeful that we will be able to deliver a package of changes that facilitates the emergence of new and innovative retirement income stream products.
With longer life expectancies, it’s understandable that more and more Australians are looking for options to better manage the financial risks they face over the course of their retirement.
To illustrate this, put yourself in the shoes of a 65-year-old retiree. If you could purchase a guaranteed income commencing from the age of 80 you would be able to enjoy the security of a certain income in very old age, and so the confidence to have a higher standard of living in the intervening period.
The current rules mean that such a product would not qualify for the concessional tax treatment during the deferral period, that is, between age 65 and age 80.
But a rule that allowed for flexibility on drawdowns so long as there is a depletion of the capital over time would be able to cater for such products.
When you think about this example, you can see why there have been calls for greater flexibility in the retirement income rules.
I understand that the work that Treasury has been doing with the industry has been very positive on finding a solution here and look forward to further consultations with you once we have settled our broad policy approach.
While I know many of you have been calling for change for some time, this is a complex area and I’m sure that you will appreciate that we have been carefully working through these issues before finalising our position.
Comprehensive income products for retirement
I’d like to turn now to the recommendation of the FSI on retirement incomes.
The FSI paid considerable attention to the retirement phase of superannuation – reflecting its view that the core objective of superannuation should be to provide income in retirement.
Retirement is a major financial decision for Australians.
For most people at retirement, they will gain access to the largest sum of money they’ve ever received — and they will need to decide how to manage it over an increasingly long period of retirement.
The FSI pointed out that these decisions are highly complex and are often made without the same level of guidance that exists in the accumulation phase.
To address these issues, the FSI recommended that trustees should play a greater role in helping individuals to select appropriate retirement income products.
The Inquiry recommended that members should be offered a combination of underlying products that provide a better trade-off between flexibility, income and risk management. These products would be bundled into a Comprehensive Income Product for Retirement.
The Government would play a role in determining minimum design features for these products. However, their design would vary to accommodate different types of retirees. This would avoid a ‘one size fits all approach’, and provide flexibility to meet the needs of individual members.
Submissions to the Government on the FSI have supported this recommendation.
The Government is currently considering its position on this recommendation, together with the rest of the FSI’s recommendations.
If we do agree to go down this path, implementation would need to proceed on a measured timeframe.
At present, there are very few products available to supplement or replace account-based pensions.
As I’ve just outlined, however, we have a review nearing completion that has the potential to remove some of the regulatory and tax barriers that have limited the development of new and innovative retirement products.
A key aim of the retirement income streams review is therefore to facilitate the development of new products. Given the interaction between these two reviews it will likely take longer to develop a framework to implement the FSI recommendation to allow Comprehensive Income Products for Retirement to be offered routinely to retirees.
To wrap up, it’s clear that the Government has a lot on its plate with regard to superannuation, and the retirement phase.
As I have outlined today, we’re working on increasing flexibility in the design of retirement income stream products and we’ve got some big recommendations to deal with from the Financial System Inquiry.
Our approach will be to continue to work through the issues methodically, and in consultation with relevant stakeholders.
I’d like to thank the Committee for Sustainable Retirement Incomes for inviting me today, and I look forward to hearing the views of your many new and enthusiastic members as we go forward.