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A Retirement Incomes Policy: address to the Australian Graduate School of Management, Sydney

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SUrrE 17, CGPrrAL CENTRE 41-45 RICKARD ROAD BANKSTOWN, N.S.W. 2200 TEL (02) 709 4998










It's a very long way off for most of you here, but what I want

to talk to you about today is an issue that is going to be of critical importance to Australia over the next few decades.

This is the issue of retirement, and how we pay for it. You

might say the issue is retirement, how we pay for it, and a

clear national direction - because what we need is not only

recognition of the problem, and agreement on a solution. We

also need decisive action to put the solution into effect.

Most students now working towards their MBAs won't be retiring for another three or four decades. But even if it's a long way away you won't be able to escape the consequences of other people retiring. This is because under our present

system, you'll be paying for it.

When my generation begins to retire after the year 2010, you

will be the taxpayers who will have to provide for us.

And let me tell you, my generation does not have the frugal

habits of our parents, who remembered the depression.

We have lived well.

And there are also a lot of us.

We will want to retire in the style to which we have become


If you have to carry us, you will know it.

People of my generation worry that when people of your generation have kids coming and the mortgage is beginning to

drag, you might want to peg us back.

You may be reluctant to pay our bills.

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We might then see in Australia a new generational conflict.

Not the conflict between the depression era parents of my generation, and our revolt in the sixties - but a generational conflict between the retiring rebels of the sixties and the hard pressed middle aged tax payers whom the

students of today will become in the next few decades.

Even today 10 cents of every dollar spent by the Federal

Government goes on social security for the aged.

Our pension system was devised as a great reform when people had large families, retired relatively late, and died relatively young. Today increasing numbers retire early and

expect to live a long, healthy, active and well funded


Public policy has to keep up with changing demography, and

changing preferences.

It's a conflict we can and should avoid and in a way that benefits all generations of Australians and leaves us all

better off.

But we can only avoid it if we act soon.

As a nation we have gone part way to an important reform of of

our retirement incomes system, but now we are stalled.

Unless we can move - and move rapidly - we will put the

Commonwealth Government age pension system under unbearable stress and condemn an entire generation of elderly people to

an unsatisfactory and poorly provided retirement.


There has been a debate recently about my years as Treasurer.

It's not something I want to get into today - I think it's


best left to others to judge the record. In any case, at age 48 I am reluctant to think that the legacy is yet complete.

But I do want to say that one of the changes in my time as Treasurer of which I am most proud, and which will I think will be most enduring, is a reform often mentioned only in


This was the beginning of a national retirement incomes scheme

based on private superannuation.

A big element of it was the extension of superannuation

beyond upper management in private business and beyond the public service to all employees in Australia, through its incorporation in Federal and State Awards. Now 85 per cent of awards have a minimum 3 per cent superannuation provision.

I don't claim sole credit by any means. The building and transport industries led the way, the ACTU pushed for it, many employers saw the wisdom of it, my Cabinet colleagues supported it and, of course, the Industrial Relations

Commission - a braver show then - implemented it.

Other changes made while I was Treasurer included for the first time rules on preservation, vesting, portability, and the security of superannuation funds, if they were to qualify

for tax concessions.

We changed the tax concessions themselves to give greater preference to annuities over lump sums, and to genuine

retirement provision as opposed to deferred pay schemes. A change that met stiff opposition including, and especially, by


We extended concessions to the self employed and unsupported


We provided particular concessions to women, long


disadvantaged as part time or temporary employees.

We increased the tax advantages of modest superannuation provision and, at the same time, limited the amount that could be sheltered from tax to what was a reasonable benefit.

These reforms have changed superannuation from an income tax avoidance scheme for the affluent to an equitable and attractive retirement income arrangement for ordinary


We ended the rorts we inherited, under which superannuation

tax concessions were often no more than disguised means of

minimising tax on deferred income.

They were all big changes, particularly the tax on lump sums.

But they were worth doing because they established the

framework of a national retirement incomes scheme.

As a result of these changes superannuation coverage for

employed people in the private and public sectors has risen from 40 per cent in 1987 to 64 per cent by the end of 1990.

The change is particularly apparent in the private sector, which was the least covered. In 1987 less than one third of

employed people in the private sector were covered by

employer financed schemes and a good part of that third were covered by schemes more apparent than real, since they were not universally vested. Today half the workforce is covered,

under legislation which requires vesting.

Most importantly, superannuation is now recognised as the appropriate vehicle for retirement planning by ordinary


But as important as those reforms were, they are no more than


a framework, no more than the building blocks of a much greater reform which we must make if we are to avert a crisis

in coming decades.


One reason we need to move on is simply that 3 per cent of most incomes is not going to buy a lot of superannuation.

It is a start, but it is certainly not complete.

If that is all most people have, they must and will continue to rely on the pension for most of their retirement income.

we need a greater level of contribution, but progress has

been stalled by the April decision of the Industrial Relations Commission to defer awarding another three one per cent

components until it sees the results of a national conference

on superannuation.

It is not only because current provisions are nowhere near sufficient to make a viable complement to the pension that we

need to move on super.

Another equally pressing need -- some would say more pressing -is to raise domestic saving.

The current account deficit will remain a problem in Australia

for some years yet. We are beginning to pay our way with exports, but for many years we will be paying interest on our

foreign debt.

The current account deficit is the same thing as the excess of

domestic investment over domestic saving.

It follows that if we can get Australian savings up, we will

get the current account deficit down.

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We managed to increase public saving by creating a large Budget surplus. I hope that within a few years we can return to surplus and, in the meantime, minimise the inevitable


But increasing private saving is much more difficult.

One of the few ways available to us to increase private saving is to increase the superannuation component of wages and


As our foreign debt has grown, the case for increased superannuation has become more urgent.

And a final reason we need to move quickly on a national

retirement incomes scheme is that the population is rapidly


The ABS estimates that the Australian population of pensionable age will be 4 million in thirty years time, double the number of the mid eighties.

Today there are five working age Australians to every

Australian over 65. In forty years there will be only three of working age to each over 65.

As I said, I fear this changing proportion of those eligible for pensions to those paying taxes will create strains in Australian society which we can well do without.

There is already distrust over provision for the aged.

One of the reasons for this distrust and rupture between the public and the political process has been the paternal relationship between the political parties and the aged.

People in this country have gone about their daily lives with


dignity and independence until they have retired. From then on they have found themselves caught in this absurd relationship with politics, with the political system deciding how they

will live and under what conditions.

The political expediency and exploitation now has a long

history. Menzies chided pensioners with his 5/- increase in the pension, Bill McMahon with his $1, and subsequent governments with debate over pension adjustment.

And not only that, the incentives the process has cemented

into place have encouraged many aged people to arrange only meagre additional private income while living in large houses

where their capital is often under employed.

A system of more adequate private provision of retirement income sympathetically interfaced with the public pensions system will not only better provide for the aged, but is more likely to preserve the dignity and independence each have

enjoyed in their pre-retirement years.

It will make Australia a more equal place, a more egalitarian

place and, hence, a more cohesive and happier place.

The ageing of our population and the need to build domestic savings come together at a time when the movement towards a

retirement income scheme has faltered and stalled.


So today I wish to propose the creation of a comprehensive

National Retirement Income Scheme.

Such a scheme should be based on the Aged Pension and be augmented by a privately funded and employment related

National Superannuation Scheme fuelled by a fully mature level

of contributions.


Such a scheme would maintain the Age and Service Pensions as the foundation of equity and adequacy in retirement income arrangements, but be complemented by the income of private superannuation with the dual systems integrated through to tax

and social security systems.

in the transition to both a higher level of retirement income and to the larger numbers of future retirees, support will have to be provided to those who have already retired or are

near retirement and who have not had the chance or the means

to save during their working lives.

The indexation of the pension, the indexation of the income free area and increases in the rate of pension over time will

maintain that support.

But that support can and should be supplemented by sensible

and affordable arrangements which will materially improve the

quality of life in retirement by enhanced saving during the

years of work.

A sympathetic interface constructed around the social security (and veterans) income test and the tax system can provide a real incentive to save and generate private income additional

to pension, or for somebody with private income beyond the income test, to save in the context of an effective marginal

tax rate which encourages that private provision.

But a comprehensive income scheme incorporating privately

funded superannuation benefits cannot be provided with 3 per

cent of Award contributions or indeed even 6 per cent.

For an adequate and mature level of contribution to be established I suggest that by the year 2000 we reach a national benchmark where each and every employee has a contribution to superannuation equal to 12 per cent of wage

and salary income paid into his or her superannuation account.


This will provide a level of benefit exceeding even the most

optimistic expectation of the future level of the age pension.

For those workers who stay on to age 65 the level of benefit will reach towards 50 per cent of pre-retirement income on an annuity basis, with full indexation to inflation, and 70 per

cent reversion to the surviving spouse.

For most Australians this level of income will be at least double the retirement income they can now expect to receive if they rely upon the age pension.

It is the difference between a full, active life and a life governed by budgetary exigencies and the vagaries of politics.

The difference between being able to enjoy the free time at the end of one's working life and wanting the means to enjoy it.

To build up to 12 per cent of wage income over a decade is no easy task, but it can be accomplished if we are creative and careful.

We already have 3 per cent of award superannuation from the

productivity trade off negotiated under the Accord and awarded during the late 1980s, though with poor coverage.

Accord Mark VI provided for the second 3 per cent of superannuation to be paid on a phased basis flowing from the wage restraint of the past few years.

This is the first six per cent and we are half way there.

The second six per cent can come from a combination of

employee contributions paid as tax cuts, and from employer contributions shared equitably over the decade.

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During most years under this Government fiscal policy has been strong enough to accommodate tax cuts. So long as we have rising nominal earnings and a fair income tax system, tax cuts

will periodically be necessary to avoid a higher real

incidence of tax.

I propose that we fill out half of the second six per cent

with tax cuts paid by the Commonwealth on behalf of an employee into their superannuation fund. This will be a discipline on the government, but it is more than manageable.

The sum total of the amount of revenue loss is around half of the tax cuts anyway required to prevent "fiscal drag" - that

is income tax rising as a proportion of income.

if we look at the whole scheme over a decade, and making a conservative assumption of 2 per cent annual average productivity, what I am advocating is that around half of the productivity increase over the period be chanelled to savings

in the form of preserved superannuation benefits.


The first problem that suggests itself with this proposal is that the IRC has already refused to award the next three one per cent increases. In its April decision it instead called

for a conference. We must reckon upon the IRC continuing to baulk, just as it at first refused to extend enterprise

bargaining, and look for other means.

We also need to recognise that IRC decisions may not be the

best foundation for a national retirement incomes policy. As I said, around half of employees have missed out on the award

provision to date - some because they are not covered by awards, but many because the awards are not observed by some

small businesses.

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In any case, the issue of retirement is fundamental to social policy and must therefore be governed by a permanent regime.

We do not want it subject to the changing whims of the full

bench of the Commission.

I propose that we back up the award super by a levy based

system similar to the successful training levy introduced by

my colleague John Dawkins.

Over the course of the decade employers could be required to build up to a contribution of a minimum of 9 per cent of wages and salaries to a super fund. Any existing employer

contributions would of course be absorbed against the

legislated minimum.

The IRC would be asked to take account of this super contribution in its wages decisions.

Those employers who meet their obligation will record this in their tax returns, and make the appropriate deduction as with

any labor cost.

For the overwhelming majority of employers, this will be the

end of the matter.

But those employers who do not meet their obligation will be assessed with a tax levy equal to the superannuation payments they would otherwise make.

The levy proceeds will then be distributed by tax file number

to superannuation accounts in the names of the employees.

I do not think many employers will choose the levy option, because the superannuation payments by complying employers will be deductible, but the levy will not be.

The personal income tax cuts administered by the Commonwealth

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will work in much the same way. The tax cut will be built up to 3 per cent of wage or salary income over a decade. It will be allocated by tax file number, and credited to an employee's

superannuation account.


There are two great advantages in this scheme.

The first is that over time it will replace more of the increasingly onerous tax burden of age pensions with privately funded annuity incomes. It will do so with a retirement income much higher than that today provided by the pension.

And it will do so in a way that allows the aged to be more

financially independent of the government.

Arid finally it will do so -in a way which is privately based, competitive, and so completely responsive to changing market


According to a May 1969 study by LIFA, if the pension take up rate is reduced from the current 77 per cent to 65 per cent of

aged population by 2020, the saving to the Commonwealth

budget would be of the order of nearly $2 billion 1991

dollars. This is around 2 per cent of current Commonwealth outlays, or one fifth of total estimated spending on aged

social security assistance.

This is a very great advance indeed, but the really attractive advantage is that a much more generous retirement incomes scheme will not be at the expense of the Australian economy.

It will be to its immense benefit.

Superannuation contributions of the level I am suggesting can

become the single biggest source of increased private saving

in the community.

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In the end we can only reduce our current account deficit and, therefore, the build-up of foreign debt if we increase our savings or reduce our investment. It is obviously far more

preferable to increase saving.

Superannuation will substitute for other forms of retirement

saving to some extent, so that not all the additional superannuation contributions will be a net addition to

household saving.

But even if only half is a net addition to current saving, we will have gone a long way to eliminating the current account


And while saving has been highly volatile, this form of saving will necessarily be stable from year to year, since the contributions are preserved until genuine retirement.

So here are two important advantages flowing from a single

bold policy. We can obtain them if we act soon; they will elude us if we don't have the courage and the vision to move



Now I am very reluctant to introduce politics into my

speeches, but on this issue I just can't help myself.

Here we are looking at two of the great policy issues facing Australia - insufficient savings, and an ageing population.

The need to deal with both is startlingly apparent.

What do we hear from the Opposition? What do we hear from the party which now claims to be leading the public policy

debate? What do we hear from your former professor here at

the University of N.S.W, now a visiting professor at large,

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who confidently expects to form a government in eighteen

months or so?

The Liberal and National parties opposed the first 3 per

cent of award based superannuation.

They opposed the second 3 per cent.

They now oppose a national legislated scheme of the kind I

have been describing.

It is not always easy to say what the Opposition's alternative policies are, but in this case it is pretty clear. According to the Australian Financial Review (April 29, 1991) the

coalition parties are looking to provide bigger tax concessions than those that already exist for one of the most heavily subsidised forms of savings and investment". This is

their alternative to the extension of required occupational


We already know how this system works. It doesn't. It is the

same tax concession system we found when we came to office nearly 9 years ago.

In the 13 years from 1974 to 1987, private sector superannuation coverage of its employees increased by just 10

per cent - from 21 per cent to 31 per cent.

For the workforce as a whole the increase was just 8 per

cent - from 32 per cent in 1974 to 40 per cent in 1987.

Billions upon billions of dollars in concessions, to win

another 8 per cent of the workforce in superannuation schemes.

In just the last three years, with award based schemes,

coverage has jumped to 64 per cent. Three times the

increase, in less than one third of the time.

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A system that relies on tax concessions is fine for the well

off and for those who already have superannuation.

It's fine for sheltering large amounts of deferred income and

for reducing tax on current income.

But it does nothing for the twin problems of an ageing population needing retirement provision, and insufficient

national saving.

in fact if extra superannuation is brought at the cost of decreased tax revenue, there is no increased national saving.

If there is no extension of superannuation to the vast majority of people whose incomes are so constrained or so low that tax concessions are an insufficiently powerful tool,

there will be no effect on the national reliance on age


What the Opposition is now suggesting is the system we relied upon for decades and which left us with a heavy reliance on

the government provided pension.

Far from being at the forefront of the public policy debate of the nineties, Dr Hewson is stuck in the late seventies.

Strangely, there doesn't seem to be any link between this

promise to increase income tax concessions for superannuation and Dr Hewson's promise to radically reduce income tax - to

the point, presumably, where concessions would be no


In fact a goods and services tax is a direct attack on

superannuation nest egg. A goods and services tax raises the consumer price index, and to the extent it goes up, the value of savings goes down. A 15 per cent goods and services tax,

for example, would overnight confiscate around 10 per cent of

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the value of a lifetime's savings.

Dr Hewson hopes to win office on the promise of introducing this goods and services tax to replace part of the income tax

we now pay.

I once looked down that road myself, and I can tell you it's now a lot less attractive than it was six years ago.

Reforms to the income tax system have broadened its base to include capital gains and fringe benefits, while virtually eliminating personal income tax on tax paid dividends.

It is no longer possible to bring in sufficient new revenue from a goods and services tax to compensate those who will lose by the switch.

Even Dr Hewson concedes that the effect of his proposed tax switch on national saving will be minimal, whereas the effect

of a minimum superannuation scheme on household saving will be immense.

We certainly need to rationalise our existing sales taxes, and

I hope we will be able to use the review I announced last year to reform sales tax. But the goods and services tax,

like extension of superannuation tax concessions, is far from the leading edge of public policy. It is a return to the past.

So my final proposition is this: let's put the issue of a National Retirement Incomes Scheme to the Australian people.

Let them decide whether they want to return to the super tax

rorts of the seventies, or go on to a national, privately based superannuation scheme for the nineties.

Let's legislate now - in this forthcoming Budget session of

Parliament - and get the first stage of the scheme up and


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running well before the next election.

An acceptable legislative alternative to the proposed second 3 per cent of award superannuation negotiated under Accord Mark VI and refused by the IF(C would be for a minimum contribution

of 5 per cent to be paid by mid to late 1992.

obviously with the recession, small business may have difficulty meeting this figure, particularly if the first 3 per cent has not been complied with.

It may be prudent to consider phasing arrangements for individual employers and companies in this category.

Let me conclude by endorsing the comments of a prominent Australian businessman, Sir James Balderstone. He said in

April that time was running out for Australia to develop a national strategy and time table on superannuation.

Unless there was some progress on this and acceptance of superannuation as the preferred way of saving for retirement,

he said, the next century could prove to be one of deprivation and hardship both for those in retirement and those whose taxes would be needed to meet the pensions.

I quote: "Superannuation can no longer be seen as some form

of employment incentive or lump sum bonus: it is the safety net most Australians will need when they retire."