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Thursday, 12 December 2002
Page: 7834

Senator FERRIS (10:04 AM) —On behalf of Senator Watson I present the report of the Select Committee on Superannuation on tax arrangements for superannuation and related policy, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

Senator FERRIS —I seek leave to move a motion in relation to the report.

Leave granted.

Senator FERRIS —I move:

That the Senate take note of the report.

I seek leave to incorporate a tabling statement in Hansard.

Leave granted.

The statement read as follows—

I present the report of the Senate Select Committee on Superannuation, entitled Superannuation and standards of living in retirement—report on the adequacy of the tax arrangements for superannuation and related policy.

This inquiry has been one of the broadest inquiries yet undertaken by the Committee, canvassing as it does the issues relating to the adequacy of superannuation, under the present taxation regime, and how the super system relates to social security measures.

The inquiry attracted considerable interest in the community, with the Committee receiving over 150 submissions. The Committee conducted eight public hearings in connection with the inquiry, the last of which was held in the form of a roundtable hearing on 8 October 2002. The Committee was particularly appreciative of the standard of contribution made by participants at the roundtable.

One of the main issues arising during the inquiry was the identification of appropriate modelling assumptions to be used when projecting retirement incomes. The Committee was confronted with conflicting modelling advice on what projected retirement incomes could be expected by retirees who have had a full working life with superannuation contributions at the current maximum of nine per cent of wages. The Committee commissioned the Institute of Actuaries of Australia (IAA) to assist with resolving the different modelling outcomes.

A key feature of the IAA report was the identification of replacement rates of pre-retirement income as the most appropriate focus for assessing the adequacy of retirement incomes. Replacement rates are more robust and less subject to distortion by differences in modelling approaches than a dollar level.

The other issues which arose related to:

· The adequacy of superannuation, including:

· the amount of income that would be needed in retirement;

· the expenses likely to be incurred in retirement for health and aged care;

· the levels of superannuation contributions and other measures that could cover expected expenses in retirement;

· The equity of the tax arrangements for superannuation, especially the overall fairness of the taxation regime for superannuation;

· The integration of superannuation with the social security system, including improving the coordination of superannuation with other social security measures; and

· The simplification of the superannuation system, including streamlining the operation of the system and improving member understanding.

In short, the Committee found that:

· The available evidence demonstrates that the current arrangements for superannuation may not provide an adequate income in retirement for most people and that strategies need to be identified to address the shortfall;

· The current taxation treatment of superannuation produces some inequities which need to be addressed;

· The relationship between superannuation and the age pension and other social security measures could be better integrated;

· The superannuation system in Australia is very complex, not easily understood and requires simplification.

Identifying and quantifying adequacy

In particular, the Committee found that there is a need to define the meaning of the term `adequacy' of superannuation and a need to establish clearly articulated objectives for Australia's retirement incomes system, which include targets for representative groups of Australians.

In order to provide an adequate standard of living in retirement, the Committee noted the high degree of consensus expressed by witnesses at the roundtable that the desirable target for a person on average earnings is a replacement rate of 70-80 per cent of pre-retirement expenditure (which equates to approximately 60-65 per cent of gross pre-retirement income), a target which would need to be higher for those on less than average weekly earnings, and lower for those on high incomes.

The Committee found that, should this replacement rate be accepted, the available modelling shows that the current arrangements are unlikely to deliver these outcomes, and that other strategies are required to address the anticipated shortfall.

Closing the adequacy gap

The Committee considers that strategies to close the adequacy gap include:

· Providing more incentives for voluntary contributions;

· expanding the government co-contribution concept by raising the threshold and improving coverage to lower to middle income earners;

· widening access to superannuation as a savings vehicle by removing the work test for making voluntary contributions, providing a cost-effective savings vehicle, and permitting contribution of non superannuation assets to superannuation; and

· lowering front-end taxes in the long term.

The Committee considered the evidence in favour of additional compulsory contributions by either employers or employees, but concluded that these could not be supported in the current economic climate.

Factors inhibiting adequacy

The Committee noted that a number of factors inhibit the effectiveness of the current contributions in delivering adequate retirement incomes, including the impact of front-end taxes, the impact of fees and charges and the impact of rising household debt.

Although the Committee received no compelling suggestions on how the revenue shortfall could be addressed if front-end taxes were removed or reduced, the Committee favours a gradual move away from front-end taxes. The Committee also re-emphasised the importance of transparent disclosure up front of fees and charges, and notes that there is a need to monitor the relationship between the effect of household debt and the ability of people to save for retirement.

Baby boomers

Given that the compulsory superannuation scheme has only been in operation since 1992, the Committee noted that most baby boomers will not have the benefit of a full working life under the compulsory superannuation system and, other savings aside, that their incomes in retirement are likely to fall well short of the consensus target level of 70-80 per cent of pre-retirement expenditure (approximately 60-65 per cent of gross pre-retirement income).

The Committee considers that a number of its recommendations for change which apply to the wider community will also assist baby boomers to achieve an adequate income in retirement.

Other adequacy issues

The Committee notes that there are a number of arrangements which could impact on the adequacy of individuals' or groups' retirement incomes. These include:

· arrangements for the self-employed;

· member protection arrangements; and

· the $450 SG earnings threshold.

The Committee has identified in this report a number of strategies to assist people affected by these measures to improve the adequacy of their income in retirement, including examining the option of extending to the self-employed the same contribution arrangements that apply to employees and examining the removal of the $450 earnings threshold.

The Committee has also identified strategies to assist women and others with broken work patterns, to achieve an adequate income in retirement.


The Committee found that the current taxation arrangements applying to superannuation are not delivering equity to all Australians because of flat rate contributions and earnings taxes and end benefit taxes that encourage lump sums.

The Committee considers that equity in the superannuation system is best achieved through a whole of life approach to taxation concessions. The Committee has suggested that, together with industry, the Government undertake a review of the appropriate benchmark for determining and measuring the impact of superannuation taxation concessions.

The Committee prefers to gradually move the taxation of superannuation away from the accumulation phase, that is at the front-end, in favour of end benefit taxation. However, not all members of the Committee are attracted to the suggestion of providing front-end rebates on individual contributions. Instead, the majority of the Committee prefers phasing out the contributions tax in the long term.

The Committee considers that by implementing the measures outlined in this report, there is scope to improve the ability of individuals, such as women and others with broken working patterns and baby boomers, to increase their retirement incomes.

The Committee considers that the surcharge is an inefficient tax which is costly to administer. It causes serious inequities for members of defined benefit funds. It also imposes costs on all members, irrespective of whether they are liable to pay the surcharge or not. For this reason, the Committee would prefer to transfer the administration of the surcharge to the ATO and to introduce a maximum 15 per cent cap on employer financed benefits in all defined benefit fund schemes.

In the context of the Committee's preference to remove or reduce superannuation taxes during the accumulation phase, the Committee considers that lump sum benefit taxes should be adjusted in order to provide for equity through the progressive tax system and to replace revenue lost through any reduction in front-end taxes.

In addition, the Committee considers that, while the current RBLs should be retained, the annual indexation applicable to the RBL thresholds should be limited.


The Committee found that Australia's public and private health and aged care system is well regarded, but, in the light of projected expenditure identified in the Intergenerational Report and other reports published in the last decade, the system faces significant challenges in the future as Australia's population ages.

The Committee believes that the Government could consider a number of strategies to address these challenges, including:

· identifying ways to make savings in health care costs, through further examination of options such as voluntary heath insurance through superannuation protocols; and

· monitoring community and residential aged care programs to ensure their effectiveness and sustainability.

The Committee notes that Australia has a modest universal age pension system which includes targeting through the assets and incomes tests. The Committee also notes that the costs associated with the system are expected to increase in the future, and that strategies need to be identified to deal with this anticipated development.

To address this, the Committee believes that there are a number of initiatives that the Government could undertake to enhance integration of the three pillars of the retirement income support system in Australia: compulsory employer SG contributions, voluntary superannuation, and social security measures. Specifically, as discussed in this chapter, the Committee believes the Government should:

· continue to strive for universal and adequate superannuation coverage, with a focus on assisting those who face the greatest challenges in achieving an adequate retirement income— the low and middle income earners;

· review current arrangements for access to the Commonwealth Seniors Health Card scheme to ensure that it focuses on those in greatest need of Government support;

· explore options to encourage workers to remain in the workforce beyond the current superannuation preservation age;

· monitor the uptake of complying annuities, to ensure that they offer an attractive investment option for retirees;

· consider the appropriateness of the current minimum draw-down limits for allocated annuities;

· develop a standard set of rules applying to income streams; and

· develop means by which those who wish to could draw an income stream from their owner-occupied housing assets for retirement income purposes, including health and aged care expenses.


The Committee accepts that there are some real and perceived complexities in Australia's superannuation system which need to be addressed in order to streamline the operation of the system and improve individual's understanding of their entitlements.

Some of these complexities include:

· the ongoing amendments to the legislative framework, specifically relating to transitional arrangements for older workers, the preservation age of benefits, and the tax and social security consequences of either cashing out, rolling over or purchasing a retirement income product;

· the `grandfathering' of taxation provisions for superannuation when calculating superannuation entitlements;

· the arrangements governing who could make a contribution to a superannuation fund (i.e. the work test for making voluntary contributions);

· the proliferation and loss of monies in superannuation fund accounts; and

· the lack of understanding of superannuation in the Australian population generally.

The Committee has recommended that the Government consider the matters raised in this report in order to identify ways to make the superannuation system less complex and more comprehensible to the Australian people.

The Committee considers that the implementation of its major recommendations would significantly reduce the complexity of the superannuation system, enhance member understanding, and assist with the efficient administration of superannuation funds.

Other issues

The Committee notes that, in order to improve the safety of superannuation, the Government has recently announced the requirement for all trustees of APRA regulated superannuation funds to obtain a superannuation trustee licence and has proposed a number of other measures designed to provide greater protection of employee retirement savings.

While the Government's initiative is to be commended, the Committee considers that there are some other issues which the Government should consider in a timely manner to ensure that people have confidence in the superannuation system and that they have adequate savings and incomes in retirement. These include:

· developing alternative savings vehicles, to maximise the potential for increasing national savings and to assist long-term savings for purposes such as health, housing and education;

· considering indexing Commonwealth funds superannuation benefits to the CPI or MTAWE, whichever is the higher, to maintain parity with community living standards for Commonwealth public sector and defence force retirees and considering linking the preserved benefit to the fund earning rate, rather than the CPI.

In its report, the Committee has made a number of recommendations for reform to the superannuation system and related areas. If implemented, the Committee considers that they will assist in improving standards of living in retirement, reduce budget outlays in the longer term, and instil greater confidence in superannuation as a retirement savings vehicle. However, as some of the matters raised in the report have the potential for significant impacts on the budget, the recommendations would have to be viewed in the light of the budget position at the time.

I place on record my appreciation to all those who participated in the inquiry, by making submissions and appearing as witnesses. It is only by the high standard of evidence received that the Committee can make informed judgements about future policy directions. I also wish to record my appreciation to the secretariat which assisted the Committee during the inquiry—in particular, the Committee Secretary, Sue Morton, Peter Downes, Stephen Frappell and Dianne Warhurst and the other staff who contributed in so many ways to the inquiry.

I commend the report to the Senate.

Senator FERRIS —I seek leave to continue my remarks later.

Leave granted; debate adjourned.