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

YATES, Mr Ian, AM, Chief Executive, Council of the Ageing Australia

[09:47]

CHAIR: Thank you, Mr Yates, 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.

Mr Yates : Thank you for the opportunity to follow up on our written submission in a discussion with you today. We share with the Grattan Institute a belief that the objective as set out in the bill is appropriate. We also make the point very early in our submission that we have argued for a long time for a review of how all the parts of the retirement income system fit together. We would agree with the depiction—which we did not make clear enough in our original submission to Treasury—of the four pillars. There is the compulsory aspect of super, then there is the voluntary aspect of super, which importantly is still tax concessional. In our view of super, that issue is quite critical. Obviously, individuals can make whatever decisions they are able to and wish to—and there is an element of both of those at any point of life and where we sit economically—about what provision they have made for their retirement incomes and what level of replacement of their earlier incomes they want to aim at.

The question in terms of a government mandated and enforced superannuation system is: to what degree is the taxpayer subsidising that through forgone tax and through tax expenditures? We have argued for a long time for the tightening of those concessions, which we saw somewhat in last year's package that went through parliament, though not as much as we or the Grattan Institute had argued for. We think that what the objective does do is cement, as was the original intention, that the aged pension remains—and will continue to remain for significant proportions of Australians—as the core building block of their retirement incomes. And then it adds to that, and it does so or needs to do so in a way that is fair and sustainable. We do not think that it in any way constrains what government might decide to do in terms of superannuation policy at any point of time, and we do not think that the setting of any objective in super is, in the end—to be blunt—going to determine that government can only do X. There will and has to be discretion.

When we think about retirement incomes, we think about what people have to pay for in terms of their daily expenses of life, but we also think about what they have to provide for in terms of health and aged-care costs. Similarly, for government to think about those things, policy around retirement incomes clearly affects, for example only, user-pays policies in aged care. For example, if you were to have a system which encouraged people to draw down heavily on the equity of their house—I am not advocating it; I am just saying that if you had that system—our current residential aged care funding arrangements would fall over, because they rely heavily on people—most people—using the house to pay for an accommodation bond to buy into residential aged care. So these things are interrelated, which is why we have argued for an overall look at retirement income policy and have suggested that the objective of that could actually talk about adequacy, but also talk about fair and fiscally sustainable. I might stop there because we do not have a huge amount of time. I am happy to take questions.

CHAIR: Thank you, Mr Yates. I might start with this: the impression that I had from your submission was that COTA has come full circle in this debate; originally, COTA was using words like adequacy. What has been the thinking behind your change in support of this definition of the purpose of superannuation?

Mr Yates : I do not think that we have come full circle. I actually think that we were never that discomfited by the FSI proposal, but we used the word 'adequate' in terms of an objective for a retirement income system as a whole. All words are open to interpretation, but that talks then about adequacy rather than, say, the maximum possible kind of income—as the Grattan Institute says, we would all like to be rich. What we had originally talked about was optimising retirement. And in fact, I think what we are saying is, on reflection we do not think that has as much clarity as we would like. If you look at the projections—the IGR's and everybody else's—they show that a significant proportion of the population is going to use the aged pension as the base of their retirement income for a long time; for the foreseeable future. And what super does is actually stretch that capacity in retirement beyond the aged pension—which, from government's perspective, takes some of the pressure off. And, from the individual's perspective, ends up with them having more income in retirement. In a related context, of course, government is looking at one of the aspects of last year's superannuation package, which is comprehensive retirement income products, so-called CIPRs, which have the objective of even further optimising what level of income people might have, but through tools that they are not used to using in that context. So we support all of that. But we do not support a motion that says: 'Actually, we just ought to really push this as much as we can, so that people can have as big a retirement income as possible.' I think we have said that for a long time, and that is why, for example, we took the position we did around the assets test but also at the same time pushed the government to do a review of the superannuation tax arrangements—which it then did do—because we thought one without the other was not equitable. So we emphasise equity and being fiscally sustainable. Why do we emphasise being fiscally sustainable? Because every dollar that government does not raise—for example, in tax concessions around super—is not available to it to provide health and aged care, and those are the big-ticket items in terms of population if you go and look at the IGR.

CHAIR: Thank you. Some have suggested that the word 'substitute' in the objective of superannuation is a threat to the age pension, but COTA does not believe this according to your submission. Can you expand on that for me, please.

Mr Yates : As I said, we understood that people feel that there is a basic threat to the pension's existence, something which, I might say, has been encouraged by many financial advisers over the last few decades—that is, they say you must do all sorts of things through them, because the pension will not exist. I think that is highly unlikely, but we understand why people feel that threat. But we think that actually this links the pension and super together as part of a package. In fact, it assumes the continuation of the pension. I do not see it as a replacement for the pension. Indeed, one of the issues is clearly that, if you did away with the pension and just had a super system, the actual cost to government might be more. Our pension is highly targeted, and there is an argument about its adequacy. Again, if you look at what I thought was an excellent submission from Grattan, who have more resources for this than we do, they underline the importance of the age pension. If you wanted to increase people's retirement incomes in an equitable way, actually you would increase the pension.

CHAIR: You mentioned your desire for an integrated retirement incomes review. Should income from assets outside the superannuation system be included in that review, as per the Grattan submission, and do you think that aged care and health care should also be part of that integrated retirement incomes review, as per your earlier statements?

Mr Yates : Yes, we do. In fact, I have kind of mentioned that already. We think that these are significant issues—not necessarily in terms of this particular bill but more broadly in super. One of the features we have at the moment is the number of people who do not actually utilise the asset—that is, run down the asset to pay for their retirement income. Why didn't they do that? Because they are self-insuring against longevity risk: what if they live longer than their super—say, their account-based pension—is designed to achieve but, also, what if they encounter aged care? We think about aged care as residential aged care in particular, when in fact most people receiving aged care are receiving nonresidential aged care, and that is costing more. Government and opposition policy is to have a range of user charges around that. Also, if you need residential care, it is clear that, if you have resources, you will have more choice than if you do not have resources. Government will provide, but your capacity to choose the kinds of support you would like will be enhanced if you have an asset. So people keep the asset to protect themselves. We think only about six or seven per cent of people are in residential aged care at any point of time, but the actuarial work that we have seen done by the department shows that, from the age of 65 until about the age of 94, your chance of entering residential aged care is actually one in two. It is fifty-fifty until you get to the middle of your 90s, when the very resilient people's chance actually drops, but only to about a third. So people are conscious of this as a challenge for them. How all that fits together, and certainly how you utilise other assets—for example, what should be the tax treatment of investment properties—which was on the agenda, seems to have wandered off, but we think that is part of it as well.

Senator KETTER: Mr Yates, thank you for your submission. I just want to explore, firstly, the point that the chair was asking about in terms of what appears to be a change in your position on the level of detail in the objective. You said you reflected on your position, but I note that in your Treasury consultation submission you did go to the issue of the definition. You talked about adequate income through all years of retirement, and I think that was around April of 2016. Obviously between April and now we have seen a change. I just wanted to ask for a bit more detail on what specifically has caused you to reflect on your previous position.

Mr Yates : The objective which we had to deliver adequate incomes for the use of retirement for all Australians on a fair and fiscally sustainable basis, which I think you have referred to, was actually our preferred objective for the retirement income system as a whole. Our objective that we proposed for discussion back in April last year for super was to optimise income and retirement for as many people as possible through a system of compulsory, fair or equitable and fiscally sustainable government supported savings. One of the things that we have said in this submission is that on reflection we realised, of course, that that leaves out the pillar of voluntary super, which, in many ways, is quite critical because it is that question that then goes to the fiscal sustainability.

I think there are also some interesting points in the Grattan Institute's reflections, which are that if you assume that at least some of any increase in compulsory super over time will come from wage growth—that is, it is a substitution as it was originally—that actually has the effect over time of decreasing the pension or the pension being less than it would have been given that the pension index is wage related but does not include super. What I would say is that we do not see that the objective that the FSI proposed, and that the government decided to go with, constrains the system in any way, except for people who have a significant investment in growing super as much as possible. What we have an investment in is as many people as possible having as good a retirement income as the country as a whole can afford.

Senator KETTER: On the word 'adequacy', and in relation to living standards, how would you say that that should be set?

Mr Yates : Again, our view would be—and this was just put to you by John Daley from the Grattan Institute—that adequacy ought to be a discussion about the level of the aged pension. Otherwise we are saying that we deliver an aged pension to older Australians that is inadequate.

Senator KETTER: If I could just get a bit more detail: would you agree that adequacy of living standards should be pinned to ASFA's comfortable standard?

Mr Yates : We work closely with ASFA and others, and there is the notion that we would adopt the objective of the trade union of superannuation organisations, if I can describe ASFA in those terms, as what we should be achieving in retirement incomes. 'Adequacy' in terms of what government will support has to be defined by the government by its measures. I just do not see government of either side deciding that they will put that in the hands of some other body. We have held the view for a long time that the aged pension borders on the adequacy/inadequacy guidelines, and on many occasions we have drawn attention to groups of pensioners. Clearly those in private rental who do not have an adequate income for what they need are the worst off. We are not the only people to do that. I note again that the Grattan Institute suggested that, if you wanted the best value to do something about aged pension at the moment, you would put more money into rent assistance. There is some debate about that in terms of its potential flowthrough for increasing rents.

Senator KETTER: Do you remain committed to the social and economic goal of maximising comfort and dignity in retirement?

Mr Yates : Absolutely, and we think that that is what the government should be looking at when it is setting the levels of the aged pension. I remind you that after the 2014 budget we led a very forceful campaign called Hands Off The Pension, which was designed to make sure that we did not get the significant reduction in indexation that had been proposed in that budget.

Senator KETTER: If you support the concept of dignity in retirement, bearing in mind that superannuation is a significant pillar—one can argue to what extent it is significant, but we are here discussing it because it is a significant pillar—I am curious and I just want to tease this out further from you: how can you endorse the government's proposed objective if it does not make reference to these overall objectives which you say you support?

Mr Yates : We start from the basis that when you talk about dignity and fairness in retirement that is what the age pension should provide. People who have had a lifetime of income considerably higher than that will have a different view of whether they want to live on the age pension and need to make provision. So the question, I guess, is: at what point does the public purse—that means the taxpayer—subsidise people? Even with the superannuation changes that went through last year, the people who benefit most from tax forgone—from tax expenditures on super—remain in the top quintiles of income earners in Australia. Our primary concern is with people in the middle and at the bottom, and it remains so. The No. 1 public policy concern for us about retirement incomes is ensuring that we have an adequate and robustly indexed age pension system. Then you top up on that, and if you are well-off then you completely move beyond the aged pension into your own self-funding. But there cannot be a limitless amount of public expenditure to support that.

Senator KETTER: Bearing in mind that you are concerned about low income households, are you familiar with the analysis that people on, say, decile 3 and decile 4 of non-home total wealth are looking at superannuation representing in excess of 80 per cent of their total non-home wealth. So for those people, superannuation is a fairly important part of it.

Mr Yates : Absolutely, it is very important. But it does not remove the need for government of any flavour to, in a budgetary context, make that test: how much are we forgiving in revenue in our subsidy of this? To put it a different way, the Henry review recommended that what we should do is essentially give everybody the same financial incentive. We would support that, but the Henry review emphasised that the pension has to be maintained as a cornerstone of policy. As I said, we did not think the superannuation reform package last year went far enough. The opposition has put forward something that goes further. None have picked up the Henry proposal, which is somewhere we would go. That gives you other options because that actually says that if you are going to use the same amount of tax expenditures you could put more of them into those quintiles.

Senator KETTER: Bearing in mind your concern about pensions, and I think quite rightly your view about the current government's attitude as evidenced in your campaign, is there a danger that if you tie the pension into the superannuation objective there is a danger that you could have poor policy outcomes or that it would be perhaps inconsistent with widely-held community views—for example, things like supporting the alignment of the preservation age and the age pension age?

Mr Yates : Are you suggesting that aligning them would be a bad thing?

Senator KETTER: Wouldn't it significantly reduce the financial resources and options available to a person who, say, prematurely retires due to health, disability or inability to find employment?

Mr Yates : We actually support a greater alignment between those two. We do not necessarily think it has to be exactly the same, but we would like to see it closer. But all of those kinds of things need to be proper exemptions. It needs to be a sensible and humane policy. In terms of the notion that you ought to be able to access your super, then run that down and then fall back on the age pension system by retiring earlier than people who are only eligible for the pension, we think there needs to be a much greater alignment. But with those exemptions for the kind of categories you point out.

Senator KETTER: What about the tendency to support the removal of life and TPD insurance, if you are including the pension in that definition?

Mr Yates : You mean from super?

Senator KETTER: From super, yes.

Mr Yates : What I would say is that is why we think we need a much more comprehensive look at the whole system and what it is providing for. Is super the best place to do those? There are arguments both ways. The argument in part, as I understand it, is it that some people who would not take out life insurance get it cheaper and as part of their package. There are other arguments about people having more control over that themselves and not necessarily doing what their funds arrange. There is a whole range of issues under debate about the efficiency of the arrangements in some funds. Clearly, we point to the market leaders and these are good things, but there are many funds out there who are not as efficient. Just in this morning's media, I noticed further discussion about the need for looking at amalgamations of superannuation funds to increase efficiencies and liquidity. I do not see that this objective has any bearing on the decisions about whether insurance is in and out of compulsory super.

Senator KETTER: On the current proposed objective, how would you said it informs a proposal to, say, halve the $100,000 per annum non-concessional contribution cap or halve the $500 per annum low-income superannuation tax offset?

Mr Yates : In terms of our overall retirement income objective, which neither government nor opposition has at the moment, we would argue that we actually ought to be doing much more than we have done in terms of lower income people. All we have really done with lower income people is neutralise the negative. It is actually costing people money to put—

Senator KETTER: Both of those options that I put to you could still result in superannuation supplementing or substituting the pension.

Mr Yates : They could. I just do not think that any objective is going to stop different governments having different policy settings. I just do not think that an objective of super in legislation is going to stop governments from having different policy settings.

Senator KETTER: So we are wasting our time having an objective?

Mr Yates : No, I do not think we are wasting our time, because I think one of the things that was very much part of the FSI's thinking was that we should not allow the use of superannuation for estate claiming and tax minimisation—and, frankly, it has been rife. I do not mean that everybody in super does that, but I mean that people who have the resources to do tax minimisation and large-scale estate planning have been using super as the softest vehicle around to do that. That was one of the things that the FSI was pointing to. We object to that.

Senator McALLISTER: I will take up a similar line of discussion. You accept the position put by our earlier witness that there is only so much that the objective can do and that there is going to be a series of political decisions made by the government of the day in the legislature, so we should not overburdened the objective with trying to resolve these questions about what is a fair balance between individual contribution and government contribution to retirement incomes. I do not necessarily agree with that position, but let us accept that this is your evidence. On the question of trying to restrict estate planning, the objective is currently drafted as providing constraints on that.

Mr Yates : Because we see that it focuses the objective of super on retirement income and does not give any indication that it is there to enable tax minimisation and capital accumulation.

Senator McALLISTER: But what if I would like my retirement income to be exorbitantly large? I just do not see how it draws any distinction between grandiose ambitions for retirement income that we might not think are supportable from government resources or modest ambitions for retirement income. By not setting any kind of external standard on what retirement income we are seeking, I wonder how the objective really functions in restricting this estate planning and tax minimisation objective.

Mr Yates : As I said in my opening remarks, individuals, according to capacity, will set their own objectives as to what they want for retirement incomes. Both anecdotally and in the data, we see huge variations in that. What we are talking about here really is what taxpayer money is being used to fund.

Senator McALLISTER: Correct.

Mr Yates : That, from our point of view, means that predominantly we will see people either still receiving the age pension or receiving the age pension and having an amount of superannuation that enables them to live beyond that, but that is a pretty fair amount of money for the government to subsidise. If we had an overall view of the retirement income system, for example—we have said it in our submission—we do not really see why it is that government should be funding, in terms of tax concessions, more than it would be paying that person to have an age pension.

Senator McALLISTER: I think we have hit our time limit.

CHAIR: Thank you very much for appearing before the committee today, Mr Yates. This committee will break now for 15 minutes and return at 10.30.

Proceedings suspended from 10:16 to 10 : 29