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Super Pooper |
Superannuation is back in the news. Our respite was but brief.
This time however it looks as though it may even become a major election issue, which shows just how important it is becoming. People are getting worried - and with due cause.
Both the Government and the Opposition have recently made forays into the area and have made a few statements about an ageing population, promised a few minor changes and set a few goals.
The Government is talking about us working longer so we delay the time when we access our super. It has also promised to make lifetime annuities a little more attractive.
For its part the Opposition has promised to cut the contributions tax over the next few decades. Mark Latham is also talking about a 65/65 scenario where we all retire at age 65 on 65 per cent of our pre-retirement earnings. This though is only a goal with no real specific measures on how to reach it.
But there remain three major problems in the super area that have not yet been properly addressed: the level of contributions, taxes and fees.
Contributions: Super only became an issue when politicians finally realised that we had a population bulge called the baby boomers who were approaching retirement.
Just to pay this group the old age pension and look after their basic health care needs would mean a huge increase in taxes such as doubling the GST hence the focus on super. But the truth is that for baby boomers in particular, a better super deal is too late. Any baby boomer thinking of relying on compulsory super for a comfortable retirement is delusional.
The nine per cent compulsory contribution made by employers would be insufficient to fund a reasonable retirement even if an employee received it for 40 years (it needs to be at least 15 per cent).
For baby boomers, who have been contributing for only about ten years, compulsory super will only fund a retirement lifestyle similar to the old age pension. Delaying retirement as Mr Howard suggests, will only delay the inevitable.
It could have been different. In the early 1970s the Whitlam government, for all its faults, at least raised the issue of a national superannuation scheme but was kicked from office before it could do anything about it. It took another 20 years before the compulsory super scheme, as we now know it, was introduced. Even then it was only phased in over ten years.
Taxes: The Government currently taxes superannuation contributions, super earnings within the fund and slaps on a tax or two on the way out. It also has a ridiculous tax called the super surcharge that is levelled on contributions made by high-income earners.
A more sensible approach would be to tax it once on the way out - as if it was normal income.
There have been some proposals however.
The Government has made a small reduction to the super surcharge. As mentioned earlier the Opposition has promised to reduce and eventually phase out the tax on contributions over a few decades.
Dont bet on it. In 20 years there will be so many baby-boom retirees that the Government will be looking at increasing taxes rather than reducing them.
Fees: This has been a sleeping issue but will become a major one when people realise how much it costs.
This year alone the managers of our superannuation funds will pull out $7.6 billion in fees a rise of 13.6 per cent on the year before. Many charge two per cent of the funds under management and some charge even more.
With super being compulsory, this is a licence to print money. But why should managers be paid a percentage of the funds they administer? Doctors, lawyers and accountants work on a fee for service basis. Why not fund managers?
It takes virtually no more work to administer a $1 billion fund than it does to administer a $1.5 billion fund. You invest in the same companies just larger amounts. These fees, coming out year after year, can take hundreds of thousands of dollars off an average super payout.
Even a reduction in the fee charged by a fund manager from two per cent to one per cent makes a big difference. For example someone placing $5000 a year into super, which earns five per cent after fees, will end up with $604,000 after 40 years. If the return is six percent then the final sum is $773,000.
These issues need to be addressed.
Unfortunately the Government is hooked on the tax revenue it generates and there appears to be no inclination to increase contributions or limit fund manager fees.
Given the problems, more changes are inevitable.
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