The former master of party polemic, Paul Keating, made an unexpected return to the political stage he once dominated, two weeks ago. It only took what seemed an inoffensive call by Treasurer Joe Hockey to debate dipping into superannuation savings to acquire a home, to stir him into literary action in the Australian Financial Review. His greatest political legacy as Prime Minister, the compulsory employer-provided Superannuation Guarantee Scheme for all employees, was under scrutiny, and its benefits at risk.
Keating has reason to be proud and protective of his brain-child. Before the compulsory Superannuation Guarantee Scheme, less than 40% of workers had any superannuation. Today the Union created Industry Funds invest over $165 million for more than five million Australians.
The Industry Super Website outlines the benefits:
- All workers can now benefit from mandated employer contributions, instead of a few key workers, to the extent of 9.5% of salary, rising to 12 % in by 2022 .
- Employees can nominate the Fund of the choice with the employer nominating a default provider.
- Benefits are portable between Funds when changing jobs.
- To the best of my knowledge the Industry Fund Investments have avoided the scams that have bedeviled many private Super Funds.
- Their focus is on providing a broad range of financial services, not just superannuation e.g. Life assurance, particularly for workers in high risk occupations, disability insurance and income protection.
- They seek to make available unbiased commission-free general investment and retirement planning advice.
- Employees have a representative voice on the Trustee boards appointed by the ACTU, Union and employer associations.
- They adopt conservative investment strategies with a preference for long-term infra-structure projects.
- With lower over-heads they have been able to consistently outperform most retail super-funds.
- It is a convenient vehicle to accumulate a larger lump sum through personal tax-concessional contributions, or by salary sacrifice, with a cap of $30,000 before 50, and $35,000 after 55. The concessional tax rate for these contributions and earnings within the fund is 15%
- The benefits are preserved for retirement. But a transition to retirement scheme enables workers to work part-time, without loss of income. This is achieved by draw-downs from their super to supplement their salary. Their super balance can be preserved by making salary sacrifice contributions from their wage.
It was a political imperative that prompted Paul Keating and Union Leader Bill Kelty to introduce the Superannuation Guarantee Scheme in 1992. Workers were due a 3% wage increase, which would have been inflationary and eroded its value. Instead, in lieu of the wage rise, workers received a superannuation benefit they could not immediately spend.
Australia has led the way in creating compulsory superannuation benefits. Other countries have relied more on public pensions, with government, employers, and employees all contributing to the cost. Australia spends less than half the OECD average on pensions out of general revenue. Hence the importance of superannuation.
It is likely that governments of the future will depend more, not less, on employer funded superannuation income to sustain retirement benefits, as demands on the pension increase.
What are the changes to which Paul Keating is objecting?
No particular plan has yet been mooted. Arguments are still in principle only, but would allow workers to draw a loan on their superannuation savings to pay down a house mortgage, or to defray education expenses, such as the HECS debt. This escalates every year with the CPI. This is permitted in Canada under their Registered Retirement Savings Plan. Contributions are not taxable until drawn-down, or the Plan is exited. Such a scheme encourages voluntary savings, but still results in a higher retirement benefit, and an increase in home ownership compared to Australia.
His arguments against allowing superannuation to be used for any other reason.
His objections applying to the Superannuation Guarantee Scheme are two-fold:
- In the early years when Australians are looking to enter the housing market, their superannuation balances would be too small to advance a sufficient loan deposit. The compounding of interest payments would be lost and the end benefit at retirement would be diminished.
- The other objection is one that is commonly advanced. Auction bidders with a super-supplied deposit would have an unfair advantage over other buyers, lifting the purchase price. Then too the heightened demand for housing would logically be a further stimulus to house prices. This would negate the benefit of the super-loan. Furthermore overall family indebtedness would be increased by the addition of a house mortgage.
Why then would anyone wish to risk endanger the end retirement benefits by allowing super savings to be used for home acquisition, and education expenses? Two quite different goals that should be kept separate.
There are other aspects worth examining to reach a workable policy that might better meet the needs for home ownership, and a retirement income to supplement the pension.
1. The first and perhaps most important consideration was advanced by respected Economic journalist Peter Martin, writing in the Sydney Morning Herald on the 17th March 2015. He supported the concept of being able to dip into super-savings for home ownership.
His central argument is that “Ä house is far more useful in retirement than superannuation”
The savings from not having to pay rent, are likely to be greater than the income from superannuation in retirement. Superannuation income is assessable for pension eligibility.
Home owners can borrow from their home equity until they die without fear of eviction, through Centrelink or Bank provided Reverse Mortgages. Superannuation income frequently does not last until death.
2. There is also an equity consideration. In the interest of fairness, benefits should be available to both the more and the less affluent workers.
Those with retail superannuation are able at or near retirement to use lump-sum superannuation savings to increase their home equity often increasing their eligibility for a part pension. Armed with super money, they are in a position to upgrade their home, to secure a home more appropriate for their retirement needs, or in a more agreeable location. It is they, not new home buyers, who are more likely to inflate the price of houses.
3. Home ownership is a safer and a far more effective measure for wealth creation than superannuation. Superannuation benefits are greatly diminished in purchasing power over the years of saving, whereas the ability to meet mortgage repayment is easier following each wage increase, and with reduction in the principle. The asset acquired is an appreciating one, exempt in retirement from the pension asset test. So marked is the saving benefit from home acquisition that the home value above an acceptable threshold should be perhaps included in the Asset Test for the Pension.
A possible solution advocated
The compulsory Superannuation Guarantee employer payments make sure every worker receives a benefit that will accumulate with time. But the Scheme lacks flexibility for individual needs. Income in the years between 18 and 40-45 should be spent towards other financial goals, such as the re-payment of a HECS debt, caring for the needs of a young family, or aged parent, and desirably acquiring and furnishing a home. Why give them money they can neither use to defray existing debt, nor spend for such important needs, when they might never reach the age of retirement?
In principle, why not defer compulsory employer payments quarantined for superannuation, until 40- 45? Before this, encourage voluntary savings by offering deferral of taxation until withdrawals to pay down a house mortgage or repay a HECS debt. Employer contributions dedicated to superannuation might then start at a higher rate, perhaps 12% of salary to last through a 30 year work span until retirement at 70.
The architects of a more versatile superannuation program should be able to structure a plan that better serves the needs of Australians when they most need it, in addition to achieving a retirement income when old. But will the changes be compatible with the government of the day’s political agenda?