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Economics Legislation Committee
06/02/2017
Superannuation (Objective) Bill 2016

DALEY, Professor John, Chief Executive Officer, Grattan Institute

Committee met at 09:04

CHAIR ( Senator Hume ): I declare open this public hearing of the Senate Economics Legislation Committee. The committee is hearing evidence on the committee's inquiry into the Superannuation (Objective) Bill 2016 The Senate referred this inquiry to the committee on 10 November 2016 for report by 14 February 2017. I welcome you all here today. The committee has received 42 submissions, which are available on the committee's website. This is a public hearing and a Hansard transcript of the proceedings is being made.

Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public but under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera.

If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time. Finally, on behalf of the committee, I would like to thank all those who have made submissions and sent representatives here today for their cooperation in this inquiry.

Professor Daley, thank you for appearing before the committee today. I invite you to make a brief opening statement should you wish to do so and then the committee will ask you some questions. Do you wish to make an opening statement?

Prof. Daley : If I may, thank you very much. Thank you for the opportunity to appear today. As is I hope clear from our submission, we support the bill as drafted and in particular that the purpose of superannuation should be to provide income and retirement to substitute or supplement the age pension. I note that this bill has attracted a great deal of interest and, indeed, submissions running to a length a great deal longer than its seemingly innocuous four pages. I wonder if this is because over 20 years of superannuation we have somewhat glossed over the contradictions and the ideas that various people have about what this entire exercise is for. That does seem somewhat surprising for a system with $2 trillion in assets—that is a lot more than Australia's GDP in any one year; that costs some $21 billion a year to run—that is well over one per cent of Australia's GDP; and which provides tax concessions, depending on exactly how you count them, that are worth somewhere between $15 billion and $30 billion a year.

I suspect the reason that this bill has caused such discussion is that it has crystallised a number of attitudes and assumptions that people have that may not be accurate. Let me characterise those as follows. Firstly, there is an idea that super is, or at least should be, at the centre of retirement incomes policy. Secondly, there is an idea that retirement incomes should be at the centre of lifetime income policy. Thirdly, there is the idea that retirement incomes should be at the centre of budgetary planning. Finally, there is the idea that people should have a very straightforward view of how they organise their life. Clearly none of those things are in fact true.

Firstly, super is not at the centre of retirement incomes. I can understand why those in the superannuation industry find this a difficult message. It is clearly true that for the foreseeable future the age pension will be worth more than super, in effect, for most households. The value of their owner-occupied housing will, on any view of life, be worth substantially more than their super and, indeed, as we have pointed out in some of the work we have done, savings outside of superannuation are material in the overall scheme of things. We can argue about exactly how many people are involved; we can argue about exactly what percentage it is. But any way that you cut the numbers, and we have cut them in our submission, they are material. So super is not the only game in town for retirement incomes; indeed, it is not even the most important game. Of course what that means is that people who draft an objective for superannuation that says super should deliver an adequate retirement income, or however it is characterised, are fundamentally mistaken because super by itself is not going to do that unless we have a radically different system and make radically different trade-offs, which we suggest are inappropriate.

Secondly, there is the idea that retirement incomes should essentially trump lifetime incomes. Some say, 'We would like everyone to have a comfortable income and retirement.' I note when that standard was originally developed for ASFA, the academics who did so characterised it as an affluent standard of retirement, a characterisation which ASFA has deliberately chosen over the years not to reiterate. And, of course, precisely because it is an affluent standard of retirement, it is not a standard of living that most Australian households achieve during their working lives. So, not surprisingly, the only way that Australian households could achieve that level of standard of living during their retirement is to live a life during their working life that is materially less than comfortable. Super is not a magic pudding. If you are going to have a lot more money after retirement, then, by definition, you are going to have to have less money before retirement. So we would suggest that ideas that super should deliver or aim to deliver a comfortable standard of living are not helpful, because, by definition, they are asking for something which will require a very large number of Australian households to live less than comfortably before retirement.

Thirdly, there is an idea that retirement incomes should essentially trump other budgetary aims. In particular, many of the submissions have argued for super to deliver an adequate standard of living, 'adequate' defined by reference to some kind of replacement rate, and in many of the submissions a replacement rate for people of a wide variety of incomes. The implication of that is that essentially the Australian government, the Commonwealth government, will collect materially less in the way of income tax so that those who are already living very comfortably can live even more comfortably in retirement because they then can get to a replacement rate. We would suggest that it is appropriate for super to aim to help people to live a reasonable life in retirement, but beyond a reasonable level it is ultimately something that people should have to pay for themselves.

We therefore would suggest that the bill as drafted is appropriate. Super can help to increase incomes in retirement, but it is inappropriate to expect that super by itself can deliver adequate incomes. It is inappropriate for super to try to deliver comfortable incomes because indeed pretty much any policy settings will fail to do so. And it is inappropriate to aim for it to deliver an adequate standard of living for all people. Firstly, it will not succeed in doing so for those who have very low incomes, and, secondly, it will deliver excessive tax concessions to those with very high incomes.

Finally, many of the submissions have suggested that there is no consensus and so have talked about statements made in the financial services inquiry that, in the absence of that consensus, this bill should not proceed. With respect, the vast majority of submissions are made by those who represent either the superannuation industry or people who work for them. It is not surprising that a bill which says that super is in fact not the centre of the universe is not meeting with their approval. But, if we are to hold up a bill simply because it does not serve the vested interests of the superannuation industry, then I would suggest that our system is fundamentally broken. The system has to think, 'What is in the best interests of Australians?' rather than, 'What is in the best interests of the superannuation industry?' Consequently, we think that the bill as drafted should receive the support of the Senate. Thank you.

CHAIR: Thank you, Professor Daley. I might kick off the questioning. I think what you are essentially implying is that the three-pillar system upon which we have based all discussions in the past is essentially inadequate and that in fact there is a four-pillared retirement income system, and that fourth pillar is income from assets or voluntary savings outside of the superannuation retirement income system. Is that correct?

Prof. Daley : We are not suggesting that the system is inadequate. We are just suggesting that a fact based analysis of the system would acknowledge that there is a fourth pillar which, for a material number of households, is material to their retirement. You can well understand why the average 45-year-old household choose to save some of their money outside of superannuation. Firstly, they may well want to have access to it before they retire. Secondly, they do not entirely trust the Commonwealth parliament not to change the rules at some stage over the next 20-odd years before they retire—and, given the track record, you might be able to see their point of view. So we are not suggesting that it is an inadequate system. We are just suggesting that appropriate analysis of that system would acknowledge that there is an age pension; there are homes; there are savings outside of superannuation; and all of those things are relevant in terms of thinking through: do we have appropriate retirement incomes policy?

CHAIR: I am interested in your analysis that suggests that, in all age groups, savings outside of superannuation exceed those inside superannuation. Can you expand on that a little bit for us please.

Prof. Daley : That is summarised in our submission in graphs on page 5. Some of those savings, as you say, in all age groups, typically are larger than the value of their super. Some of those savings are other wealth, so that includes cars, household effects and so on. Those assets are material, although, if you turned 65 and you retired without them and you suddenly had to buy them, you would certainly notice that. So they are relevant to understanding household wealth. But, if you look at that graph that we have, figure 2 on page 5, it also shows material savings in other property, other financial business and trusts; in other words, things that do generate income both before and after retirement.

Why is this happening? We think the short answer is that, obviously, for 25- to 34-year-olds, many of them are saving to buy a house. But, beyond that, a lot of those people are saving to keep some of their assets in a place where they can touch them before they turn 60. That strikes us as entirely rational, and indeed you can see that the value of those income-producing assets actually drops as a percentage between 55 and 64 and 65 and 74, we suspect because people basically get to the age of 60 and they tip as many of those assets into super as they can because, given the current tax rules, they have a lot of advantages if they do that. And of course, once they have turned 60, they can essentially take that money out whenever they want to. So that is why we think that this is happening for people of all age groups and indeed all levels of wealth. One of the things that come through that analysis is that this is not just about the top 10 per cent. People with fewer assets than the top 10 per cent are also often—by no means always, but often—saving outside of super, and that needs to be taken into account when thinking through retirement incomes.

CHAIR: I want to ask you a little bit about something else that you mentioned in your submission: 'Overstating the role of super can lead to poor policy for middle-income earners'. You mentioned a little bit about that in your opening statement, but I would not mind if you could expand a little bit further on that. Also, does that imply that the 9.5 per cent superannuation guarantee is where we should stop on compulsory superannuation?

Prof. Daley : We have some analysis underway. We have not yet got to the point where we are comfortable to publish it, but we are certainly looking at whether the 9½ per cent will in fact already deliver sufficient retirement incomes for middle-income earners. If it will, that implies that, if you push the super guarantee up to 12 per cent, by definition wages will go up less than they would otherwise, so by definition we will essentially be pushing more people to live a life in retirement substantially more comfortable than they lived before retirement. On any view of life, retirement income policy is supposed to be about smoothing; it is not supposed to be about shoring everything up so that you wind up living more comfortably in retirement than beforehand or indeed—and this is in fact what often happens—so that people live a similar life in retirement, but they just have larger inheritances to pass on. It is very unclear to me why we would have policy which was aimed at increasing inheritances higher than they would be otherwise.

And you can see this. If you have a look at the chart that we have on page 10 of our submission, figure 5, you can see that the current level of expenditure for most retired households across the income distribution is around 70 or 75 per cent of the expenditure of a working household today. So the expenditure of people in retirement today is typically about 70 or 75 per cent of the expenditure of people before retirement who are working today. You look at that as an outcome and think, 'Well, actually, that's probably about where we would like it.' So it is not at all clear that the superannuation guarantee should lift from 9½ per cent to 12 per cent.

In particular, we think that very careful analysis looking at exactly what replacement rates look like, taking into account all factors including assets outside retirement, is appropriate, and in particular the objectives of super should not foreclose that. They might do so. If you, for example, pick an objective, as some of the submissions have suggested, that super should deliver an adequate retirement income, then, yes, you will push a lot of people to saving more than they would otherwise, because we know that people will tend to save often outside of super as well as inside it.

CHAIR: Just finally, I want to ask you about these words that have come up repeatedly in other submissions: 'dignity in retirement' and 'adequacy of income'. You mentioned in your opening statement that many of the submissions have come from organisations that either have vested interests themselves or are advocates of those who have vested interests. Do you believe that, in this trend towards words like 'adequacy' and 'dignity in retirement', they are words that are owned by those vested interest groups only?

Prof. Daley : No, obviously dignity in requirement and adequacy are something that we all would like to have, but the question is, firstly, to what extent should super be expected to deliver that by itself? We would suggest that, no, super can help, which is exactly what the bill says, but we should not expect it to deliver that by itself. Secondly, whatever we do about those kinds of incomes has to be traded off against other things. In particular, if we increase incomes in retirement, we will either have to reduce incomes before retirement, or we will have to essentially reduce tax collections through income tax so that more tax has to be collected somewhere else. There is no free lunch in any of this.

Consequently, for a bill which is going to require, every time a bill comes before the Commonwealth parliament, explaining why this is inconsistent with such-and-such an objective, we think it is inappropriate to set a standard that super will deliver an adequate retirement. We think it is much more appropriate to do exactly what this bill has suggested, which is that super will effectively contribute, so it will provide income in retirement that effectively—to use the words of the bill—supplements the age pension or substitutes for the age pension but does not aim to be the only game in town for retirement incomes.

CHAIR: Thank you, Professor Daley.

Senator KETTER: Professor Daley, in relation to the last points you have been raising, are you aware of the fact that the OECD in 2015 found that 33½ per cent of Australians aged 65 and over are in poverty, and we have the second highest relative poverty rate in the OECD? I just ask you to reflect on your comments in terms of the importance of superannuation and perhaps whether or not 9½ per cent should be the end of the progression.

Prof. Daley : I am aware of that OECD study, and I think it is very misleading in the way it applies to Australia. It is misleading for two reasons. Firstly, it is using a relative poverty measure, so it is essentially asking: what is the income of—I think it is—the bottom 20 per cent relative to the bottom 80 per cent? So, in essence, it is not measuring whether or not people have a minimum standard of living in retirement, which is how many people use 'poverty', in an absolute sense; it is simply asking: what does the differential look like? Ironically, I suspect that pushing up the superannuation guarantee levy is not necessarily going to help that at all. It does not change the relativities.

The second thing is that, even in an absolute sense, the OECD work is potentially quite misleading because it does not take into account relative rates of home ownership in Australia compared to many other countries. As you would know, Australia has very high rates of home ownership. For pensioners who own their own home, their effective standard of living in retirement is typically reasonably adequate. How do we know that? If you look at levels of financial stress, whether you use the measures used by the ABS, the Australian Bureau of Statistics, or an academic study that has done this as well with a slightly different methodology that winds up with almost exactly the same answers, the stress on households in retirement that own their own homes is about the same as the level of stress of working-age households who are working and who own their own homes. So they have, relatively speaking, relatively low levels of stress. Indeed, the levels of stress are far higher for working-age households who are dependent on Newstart or other pensions. Whilst I am aware of that, I would suggest that simply increasing superannuation is not necessarily going to help.

Indeed, if you look at calculations of replacement rates, at the moment, many people in the bottom 30 per cent actually wind up with higher levels of income in retirement than they do before retirement. You might ask how that happens, and the answer is that, essentially, they switch from Newstart and relatively low rates of pay—for part-time work, perhaps—onto the age pension, which typically is delivering them more per hour plus a whole series of benefits that may not be available to them otherwise. Particularly for Australian households in the bottom 20 or 30 per cent, many are in fact already in a situation where they are better off after retirement rather than before retirement. If you increase the superannuation guarantee levy, what you are essentially asking them to do is live even lower standards of living before retirement, because there is no free lunch here. If you are going to increase the superannuation guarantee levy, all of the evidence suggests that that will ultimately be absorbed in lower wages.

Senator KETTER: I will turn to that point. The counterargument to that is that, as far as retirement incomes are concerned, there are things that you can do such as efficiency of the system, better targeting of tax breaks and reallocation of existing support to increase those without placing an impost on people. So it is not quite true to say that it is a zero-sum game, is it?

Prof. Daley : It is a zero-sum game in the sense that both things will necessarily come from someone else, but I would agree that all of those things you have just suggested in terms of increasing the efficiency of the system and targeting the tax breaks towards those who need them are things that are worth doing. But I guess that, in the context of increasing the superannuation guarantee levy, that is not quite a zero-sum game but does have substantial trade-offs. The key trade-off is that those on lower incomes—and, frankly, those on higher incomes—will have lower incomes during their working lives than they would have otherwise.

Senator KETTER: Okay, but you would agree that better tax breaks and other things like that can boost retirement income without necessarily tapping individuals to pay more.

Prof. Daley : Absolutely. Indeed, the Grattan Institute has published a number of pieces by my colleague, Jim Minifie, pointing out how we might make the superannuation more efficient; and pieces that I have published such as super tax targeting, looking at how the super tax breaks might better targeted than they are at the moment. We would agree that all of those things should be done. We also think those things are all consistent with adopting a purpose for a superannuation or providing incomes in retirement that will supplement or substitute for the age pension.

Senator KETTER: Okay. In terms of the objective and the fact that there is no adequacy or other measure there to guide us, how does government better allocate resources without that type of yardstick being in the objective?

Prof. Daley : I think that, when government allocates resources like this, it is inevitably making a series of trade-offs. It is making a trade-off on the budget, it is making a trade-off between incomes before retirement and incomes after retirement and it is making trade-offs in terms of where those concessions go, whether they are at the top end or the bottom end. As you would know far better than I, those trade-offs are the business of government. I do not think that there is a simple answer for this. Indeed, I think one of the problems with many of the submissions is that they essentially assume that super or, more accurately, retirement incomes provided by super, should trump all of those other considerations. That is why we think a more modest purpose for super, which is exactly what this bill proposes—essentially something that says super should help, and we agree super should help. The idea that it should trump all of those other considerations is something that we disagree with.

I quite understand the desire for something nice and simple that says, 'Here's a lodestar and, so long as we do that, everything will be fine.' I understand why that is attractive, but I think the problem with it is that it conceals the fact that there are trade-offs here. I think something that is much more honest about those trade-offs would be helpful.

Senator KETTER: Okay. I would like to turn to figure 1 on page 4 of your submission, which shows the bar chart of the relative contribution of the different household assets for different age groups near retirement. Is it true that the assets that you are looking at there are the average of households of that age?

Prof. Daley : Yes. If you want to see how that breaks up, we break that up precisely in figure 2, which is on the following page. I will walk you through this because it is quite a mess. You say you have given us the average and it is okay. If you do not want the average, let me show you in more detail, and then it gets gory. Across the page we look at this by different age groups. We divide each age group into wealth deciles from the highest wealth to the lowest decile. Then we look at, for a given age group, what percentage of the wealth of each of those wealth deciles is in super. That is the black stuff down at the bottom. What percentage is in their home? That is the dark red stuff. What percentage is in other assets? As you can see, we break that up between different asset classes. As I flagged, the yellow ones are 'other wealth'. That is household effects, cars and so on. The other ones, in slightly darker colours, are a series of assets which typically do produce income.

Senator KETTER: Okay. As you say, wealth is very skewed within those age groups, isn't it? One needs to look at the different deciles. Isn't there a risk that averaging the assets provides a misleading picture?

Prof. Daley : Any average can conceal all of the detail that is underneath it. On the other hand, averaging—particularly as we have here, where we have broken it up between different age groups and between different levels of wealth and provided you with a precise distribution in figure 3—illustrates that, for a material number of households, their assets outside of superannuation matter. I know this has become something of a pie fight in this bill, which is ostensibly about the purposes of superannuation. If you are setting retirement incomes policy, it is relevant to acknowledge that there are these assets outside of retirement and think, 'Well, how does that change what I want to do?' We are not suggesting that superannuation should not contribute. We are not suggesting that superannuation should be done away with so that it is all private savings. What we are suggesting is that superannuation policy should acknowledge the fact that a very large number of households have material savings outside of super which they have every intention of using for their retirement.

Senator KETTER: Is your analysis there with the figures for the assets only for the person nearing retirement, or does it include their spouse as well?

Prof. Daley : This is a household-level analysis, so these do include all of the people in the household. It is possible to do this analysis at an individual level. Of course, that often leads to a very misleading picture because you wind up with a lot of people who look like they have got nothing or very little when the reality is most households in fact do pool their assets in retirement. That is why we have looked at it at a household level; the reality is that that is how most people in fact live their lives.

Senator KETTER: And the category of 'other assets' includes household contents?

Prof. Daley : As I have flagged, yes.

Senator KETTER: That suggests that perhaps people are expected to use the value of those household contents to find their retirement. Should people be expected to sell their furniture to fund their retirement income?

Prof. Daley : That is certainly not how we are presenting it. I think it would be quite misleading to characterise us as saying that. What we are saying is that, if you did not own those assets, you would need to buy them. If you imagine a 65-year-old household that for whatever reason did not own a fridge, did not own its car and did not own any of the household furniture, that would be a whole series of things they would have to go and buy. They would be in a much less affluent position than you might imagine otherwise. So it is relevant to look at the value of those assets, because it gives you an understanding of what has already been accumulated that they are not going to have to buy now.

Senator KETTER: And that category also includes investment properties?

Prof. Daley : If you are looking at other assets in figure 1, that includes investment properties and it includes other financial assets—things like shares, investments in managed funds, businesses such as small businesses, which obviously have an asset value, and trusts. It also includes these household effects. We break that down in figure 2 on page 5.

Senator KETTER: Do you have any figures as to the proportion of households near retirement that have investment properties?

Prof. Daley : From memory, it is about one in five. I have obviously seen the analysis, certainly in the submission from Dixon Advisory, pointing out that only a minority have an investment property, only a minority have shares and only a minority have this. Of course, that is not necessarily the right way to think about this. The most useful way to think about it is to ask, 'What percentage of households have something outside of super and what percentage of them have something which is an income-producing asset?' The answer is: 'It's material.' The other thing you have to be careful of is that it is misleading to look at it just before retirement, because the rational thing to do—and, indeed, I am sure Dixon Advisory and many other financial planners advise their clients to do exactly this—is to move those assets into their superannuation fund to the extent that they can, within the limits that apply, shortly before retirement. The major reason for holding them outside of superannuation is precisely so that you have access to them and so, not surprisingly, once you get close to 60, when you will be allowed to take them out at any time you like, people tend to move more of them into super. You can look particularly at 55- to 64-year-old households and say, 'Not so many of them have assets outside of superannuation,' and our answer is, 'That's not surprising, given the tax set-up.' It is more interesting to look at 45- to 54-year-old households. There you do see even larger quantities of assets being held outside of super, precisely because people want to have access to them before retirement.

Senator KETTER: In relation to the superannuation assets, is it fair to say that the figures that you have there represent the fact that a lot of people have not received superannuation over the course of their whole life because of the relative immaturity of our superannuation system? If that is the case, to what extent is it a somewhat misleading analysis?

Prof. Daley : It cuts both ways. That is certainly true for 75-plus-year-olds. For 65- to 74-year-olds, it is true that they have had compulsory superannuation for less time. On the other hand, they have also lived through a period in which there were very generous opportunities to put money into superannuation in ways that were very tax advantaged and at a point in their life when they probably had assets with which they could do so. For households that are 35- to 44-year-olds, they have been putting nine or 9½ per cent—that order of magnitude—into super for their entire working life, so it is not at all misleading to look at them. When you look at the percentages for the younger households, their non-super assets are very material. Again, I stress: we are not arguing that this suggests that super is irrelevant or should not be part of retirement incomes. We are just suggesting that, when you set retirement incomes policy, you should acknowledge that there is this saving going on outside super as well.

Senator KETTER: Finally, there are the charts that you have included in your submission. Do they capture only those people who are entitled to the superannuation guarantee or everyone, whether they are entitled to the SG or not?

Prof. Daley : In particular, what do they do about the self-employed? The short answer is, yes, they pick up the self-employed, many of whom are not necessarily contributing to super. The flipside of that is that many of the analyses that are presented otherwise pick up the people and say, 'Look, they don't have enough super,' and then ignore all of their non-super assets. We think it is fair enough to look across the population at both their super and their non-super assets in terms of trying to figure out: are we likely to be delivering a reasonable standard of living in retirement across the population? That is the right question. Yes, absolutely, people who are self-employed will tend to have more in the way of business assets and more in the way of non-super assets. People who have an employer are more likely to have more in the way of super but less in the way of non-super assets. Of course, when you look at the population as a whole, you essentially average across those two groups.

Senator KETTER: Thank you.

Senator McALLISTER: Thank you, Professor Daley, for your submission. I note in your testimony a reluctance to overburden the super objective with decision-making responsibility. You alluded to trade-offs, the fact that these will continue to be a feature of policymaking around retirement income, whether it is super or the age pension or anything else, and that we ought not overburden the objective. This of course is raised as an objection to the objective as currently drafted—that it provides little guidance for any kind of decision-making because it is so general in nature. What function do you think an objective of this kind would perform? What kinds of policy options would it rule out? And what policy options would it leave in the domain of parliamentary decision-making?

Prof. Daley : As we read the objective, it certainly suggests that super should not do something that will result in a large number of households, if you like, achieving higher than their replacement rates. By saying it should substitute or supplement for the age pension, it is firstly implying, 'Don't go too far.' The second thing it is implying is essentially a limit to the superannuation tax concessions. It is saying that, at a point that you are no longer even substituting for the age pension—in other words, your income in retirement is likely to be so high that you will not qualify for even a part pension—the superannuation system should stop providing support or at least should stop providing more support than it provides to everybody else. We discussed this objective in our super tax targeting paper, saying, 'If the purpose of super is to at most substitute for the age pension, why are we providing a tax concession through super for people who are never going to qualify for the age pension—a tax concession which is materially larger than we provide to basically everybody else?' So I think it does provide limits.

Although there are some submissions that say nothing about adequacy, I note that certainly one of the submissions argues that the objective does not guarantee that super will provide an adequate standard of living in retirement, which we argue is dead right. The whole point is that it is really the age pension that will guarantee a minimum standard of living in retirement. With respect to those OECD poverty rates, the analysis suggests that, by and large, it does exactly that.

Senator McALLISTER: I am very conscious of time, so I am sorry to jump in. One of the big questions over the last few years—particularly in the discussion we have had around the pension assets test and when it ought to cut out—is the very idea of whether super is supposed to be substituting or supplementing. There is the test of when we begin to substitute instead of supplement. That is one of the very big questions for superannuation. It goes to all of the questions of tax. Do you think that without any kind of benchmark idea of adequacy, dignity, comfort—whatever word you would like to use, and it would inevitably be qualitative—the objective simply describes the tension without providing us with any guidance to resolve it?

Prof. Daley : I would suggest that that tension is fundamentally a question for age-pension policy as opposed to superannuation policy. The extent to which super in fact substitutes as opposed to supplements the age pension fundamentally depends on exactly the level of pension you set in the first place, the kind of taper rate you set on the pension and how that taper rate works. As we have seen recently with changes to the taper rate, that can really make a difference. Of course, that is the one thing that the purpose of superannuation is not going to set. We would suggest that, whilst the trade-off as to exactly how much we want it to substitute as opposed to supplement is an important and difficult policy question, it is not one which, by and large, would sit inside superannuation policy at all. Most of it will be determined by how the age pension works and so, not surprisingly, we think it is an inappropriate purpose for superannuation to try and define.

Senator McALLISTER: This committee has previously recommended that women's interests would be best served by ensuring that any objective for super made explicit reference to the interaction between what we called 'the three pillars of the retirement system', although I do not think we would quibble with the conception of a four-pillar system. You obviously do not feel that the super objective is the right place for that description. Is there any other place where a policy objective ought to be established for retirement policy?

Prof. Daley : As our submission points out in the summary, we do think it is appropriate to set objectives for the retirement income system as a whole, but they should be for the retirement income system as a whole. This bill purports to set an objective for superannuation, and we think that is a worthwhile exercise. We do have this enormous system called superannuation with lots of money involved, and we think it is appropriate to have some view as to 'What is that bit for?' And then it is probably also appropriate to ask, 'What do we think the entire system is supposed to be doing?' As I have indicated, we think it is appropriate for the super system—that particular bit—to essentially contribute to retirement incomes, to supplement or substitute for the age pension.

Indeed, on that issue around women, I think one of the advantages of the objective as drafted is that in effect it picks up exactly that issue. It says that it is there to supplement or substitute for the age pension. It is not suggesting that it is going to get rid of the age pension any time soon, and it acknowledges the fact that for a large number of households, particularly those who have had lower lifetime incomes—and that is disproportionately women—the age pension is an important part and probably the most important part of their retirement income.

CHAIR: Thank you, Professor Daley, for your contribution to the hearing today. I now welcome Mr Ian Yates from COTA Australia.