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Reduce super taxes now to prepare for the baby boomers' retirement

By Philippa Smith - posted Saturday, 15 June 2002


In five years time we will see the start of a significant social change. The first wave of baby-boomers will begin to retire and about 700 will be leaving the workforce each day.

As a result of this, a picture of population distribution in Australia in 2021 will look like an inverse triangle, with the working taxpayers straining to support the burgeoning retired generation. The ratio of taxpayers to retirees will drop from more than 5:1 to below 3:1.

Increased longevity will mean that retirement for many could span at least 20 years. The number of Australians aged over 85 is expected to double in less than 20 years from now, reaching nearly half a million in 2021. By 2051 this age group is projected to reach 1.3 million, around 5 per cent of the population, compared to only 1.3 per cent now.

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The big question is, can we AFFORD to live for the 20 years or so after we retire?

The Federal Treasurer’s Intergenerational Report notes that over the next forty years, the proportion of GDP devoted to Commonwealth spending on health and aged care is projected to more than double, from 4.7 per cent of GDP to 9.9 per cent. Spending on Age and Service Pensions is projected to increase by around 50 per cent over the same period, from the current 2.9 per cent to 4.6 per cent.

Both the current and projected levels of expenditure on government income support to the aged are relatively modest by international standards. The Intergenerational Report notes that age pension spending is contained because our Age Pension is means tested and targets poverty alleviation compared to other countries which typically pay pension according to previous individual earnings.

However, low, flat rate social security payments mean that additional private retirement income is needed if even minimum retirement expectations and needs are to be met.

Compulsory and voluntary superannuation arrangements therefore have an important role to play in making the Australian system sustainable, both in the sense of containing Commonwealth government expenditures and meeting the most basic expectations of retirees. Surprisingly, the Intergenerational Report makes little reference to superannuation, or to the cost savings to government that will be delivered by compulsory and voluntary super.

We baby-boomers – and I am one myself – have higher expectations than our parents and grandparents and will not accept the ageing process gracefully. We’ll want the wherewithal to do things. Many hope that the new age of retirement – the third age – will bring other opportunities and rewards – study, travel, volunteer work to name a few, not to mention health and access to the latest medical advances.

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But as individuals and as a community we are largely living in massive self-delusion. For the most part we are individually unprepared for our own retirement. And as a nation we are chronically and myopically ill equipped for the pressures of an ageing population.

We have two ways forward – lower expectations or get prepared.

Let’s crunch the numbers for a moment. The average worker on an income of $40,000 who has saved 9 per cent through compulsory super for 30 years, will receive a retirement income of around $19,000 a year. It’s much higher than the age pension, but a quick calculation on the back of an envelope will tell you that it’s not going to allow many of the activities we might hope for in retirement – travel, entertainment, books and the like.

Research bears this out. Baby-boomers as a group expect they will need a minimum of $30k pa to live on in retirement. That’s almost three times the current age pension. But in terms of the necessary target to maintain their lifestyle, the baby-boomers’ expectations of $30k are probably about right.

But the $19,000 result mentioned above falls far short of this. The Super Guarantee is still a young policy – lots of people have not had the benefit of saving for 30 years, and may have had a broken work history.

ASFA’s research has shown that most people see the task of saving for retirement as a shared responsibility between themselves and government. And most of the people we polled understand and support the need to lift the Super Guarantee to 12-15per cent. The consensus seemed to be that individuals and government need to do more.

While it’s also clearly desirable for individuals to have the option of continuing to work past traditional retirement age if they want to, it’s not – and shouldn’t be – the only retirement income strategy we put into play. It’s important to remember that many people want, or are forced to, retire before age 60.

I’d like to see an indication from government that they are prepared to lift the Super Guarantee – which will rise to its ceiling of 9 per cent in July of this year – and restore confidence that they are a partner in the task of saving for retirement.

And we need to examine the punitive taxation of super. Australia has the unfortunate distinction of being the only country to tax super at the three stages of its life – at contributions, on earnings and at final benefits. Of the 9 per cent to be paid by your employer into your super from July, only a bit over 7 per cent will actually be invested, the rest will go in taxes. If super was taxed only once at the benefits stage, this could actually boost everyone’s retirement savings by nearly 30 per cent or about $55,000 for someone on average weekly earnings.

If government reduced or removed those front-end contribution taxes on super this would help reduce its now mind-blowing complexity. It would also allow the full Super Guarantee contribution from your wages to be invested and grow. It’s not difficult to see that this money would accumulate faster, and would be a clear step towards closing the expectation gap.

We need to move on several fronts. If we don’t sort out our super problems now, within 20 years time, we will be in trouble. Retirees will realise too late that even their modest expectations can’t be met while the government and tax payers of the future will find that super savings have already been raided (and spent)…. leaving a huge black hole for us and for our children and grandchildren.

Time is running out if we want an adequate and sustainable retirement income strategy.

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About the Author

Philippa Smith is CEO of the Association of Superannuation Funds of Australia.

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