This blog has published several posts on superannuation in the last three years some suggesting consideration of the Canadian system of provision for retirement.
A Mercer Consulting Report was quoted in the Australian, and referred to in my post August 27, 2013, showing that the average Canadian worker is almost 20% or $72,905 better off in net retirement benefits than Australian counterparts, with an average of $369,905. Further Australia lags Canada also in terms of home ownership.
Prime Minister Tony Abbott, and Treasurer Joe Hockey have called for a public debate into superannuation. The issues to be considered include how to fund the likely growth in demand for social security services in the next 40 years, and whether the saved funds could be accessed to meet other financial needs such as home acquisition and self-education. This post is my contribution to this debate.
Do the Canadian Plans have aspects that Australia could copy?
1. Their basic pension is referred to as the Canada Pension Plan (CPP). Residents are required to contribute to be eligible. The timing of retirement can be varied. Delaying retirement, and continuing contributions allows for a larger retirement benefit. Earlier retirement is possible by accepting a reduced benefit.
To maximize the end superannuation benefit, Australians are denied access to their own money even for situations is which they can no longer work through unemployment, serious illness or accident. They may however qualify for other pension payments. Australia generously provides a range of pensions to 3.6 million Australians already.
The date of pension and super entitlement are inflexible, soon to be 67 to 70 years of age.
2. In Canada many employers set up superannuation policies for the benefit of their employees.
Australia has a compulsory employer funded scheme, the Superannuation Guarantee Levy, paying 9.5% of salary into superannuation. This was introduced by former Prime Minister Paul Keating, and it adds an extra income stream to the pension in retirement for workers who do not have super policies of their own.
3. It is the Registered Retirement Savings Plan (RRSP) that probably advantages Canadians most. They are privately negotiated savings arrangements that are registered with the government and are based on employee contributions. Unlike contributions to superannuation in Australia there are no permanent tax concessions. The incentive to save is provided as a deferral in the payment of tax until it is withdrawn, or the plan exited. The limited but helpful access to your savings to buy a house or to pay for self-education expenses is a big attraction and probably why Canadians have a higher level of home ownership. The flexibility in making contributions and the immediate reduction of one’s tax obligation are other attractions
A big plus for Australia’s superannuation provisions is due to the government’s tax-concessions for contributions, and exemption from capital gains tax in the withdrawal phase. It is probable that these concessions will be reduced in the coming years however, reducing its attractiveness.
This Canadian plan could be replicated in Australia as an additional or alternative system for building retirement savings. It need not be a replacement. It would add flexibility in retirement savings for those who want it.
Why make changes?
The demographic changes envisaged in the next 40 years demand reappraisal of how to manage our social security needs.
The Executive Summary of the 2015 Intergenerational Report predicts that by 2054-5 Australia’s population will be nearly 40 million, with 4.9% of the population or 2 million Australians aged 85 and over. The life expectancy at birth is estimated to be 95.1 years for men, and 96.6 for women and there are projected to be 40,000 Australians over 100-year-old.
It is suggested that improvements in health will enable the elderly to stay active for longer, and hopefully remaining in the work-force. In 1974-5 there were 7.3 people of working age for every person over 65. Now it is 4.5 and in 40 years it is likely to be 2.7. Such a ratio would put an unacceptable burden on the work-force to meet the social security needs. The obvious solution is for more workers to remain gainfully employed into old age. The difficulty with this is that although we may be living longer, the ageing process continues unabated, and reduces our capacity to compete in the work-place.
What changes should be made?
Any changes should be carefully considered before being implemented.
- The architect of Australia’s compulsory superannuation scheme, former Prime Minister Paul Keating, has pointed out that the savings in his scheme are mostly too small to be plundered for a house deposit for first home buyers, and that the grants could inflate the purchase prices, whilst greatly reducing the compounding effect of contributions to the fund.
- This argument is less less valid when applied to the superannuation policies of those who wish to save to support a higher standard of living in retirement. The ability to use super to affect quicker repayment of a home mortgage would result in a much higher investment return for them. However it would most advantage the more affluent. If introduced in all fairness the value of the home should then be included in the means test for eligibility for the pension.
- In my opinion, it would be most helpful if a scheme similar to the RRSP could be introduced in association with the compulsory Superannuation Guarantee Levy to benefit those who can not afford to have their own superannuation savings plan. It would encourage the less affluent to save for retirement, and might increase home ownership.
- The objection that this arrangement would just push up house prices could be overcome by using the money to pay down an existing mortgage (after say 12 months) rather than to provide a deposit.
- It is not unreasonable for the government to seek access to the near $2 trillion in superannuation reserves to fund infrastructure projects. It would be a cheaper source of long-term funding, would ease the pressure on the budget, build national assets, and boost the economy.
It is fair to say that governments faced with an ageing population and difficulty balancing the budget, are looking at reducing pensions and healthcare benefits, whilst at the same time increasing the taxation take. The government should consider the consequences of making the elderly who benefit most from social security expenditure, absorb most of the cost of future budget changes, rather than increasing the income tax burden for all the population. Targeting the elderly may prove counter productive.
Are present lump-sum super benefits too generous? How much is enough to live on?
When we retired in 2000 there was a Reasonable Benefit Limit (RBL) cap on the capital of about $600,000. At the time this seemed a huge sum. Today the RBL requirement has been abolished, and the amounts of $1 – $2 million that can be accumulated seem an excessively generous benefit for the almost obscenely rich. The tax concessions that facilitate such balances create what just seems to be a tax dodge for the rich. There is another side of the story to consider.
Within 10 years the GFC had wiped 40-50% off our capital, making us eligible for a part-pension. Now after 14 years our self managed super fund has been closed to terminate administration costs. About 90% of those who retired at about the same time, with apparently generous superannuation benefits, are now reliant on part pension payments.
Few retirees take into account the erosive effects of inflation on their buying power once they retire. Their large lump sums can be quickly reduced by the costs of financial management, higher costs of living, and unexpected market corrections. A truer guide to how much capital is required is likely to emerge in the second decade of retirement, after the draw-downs created by market cycles.
How do superannuation lump sum benefits compare with Old Age Pension benefits?
The maximum benefit for a couple living together at present is $1288 per fortnight. This equates to an annual income of $33,488. The lump sum that could generate this benefit at 5% return p.a. is a staggering $669,760.
Those who are critical of the present superannuation concessions should also consider that pension benefits for the disadvantaged are largely funded by the more affluent.
Those who wish to provide for their retirement will now face doing so for an extra decade of life, and in the latter years they may need to fund expensive nursing home care. Any legislative changes that limit lump sum accumulation will increase the dependence of the seriously old on the state. Removal of incentives are likely to increase the cost of providing the pension. It will simply increase their dependence on the state.
The growing cost of delivering aged care, and healthcare, should be met by an income-tax on the whole population. It should not single out the elderly on a user pays basis.