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Don’t raise the super guarantee rate
The Gillard government should abandon plans to increase the superannuation guarantee’s compulsory contribution rate from 9% to 12%, according to a new report from The Centre for Independent Studies.
‘There are much better policy options for improving retirement saving and reducing future demands on the federal budget from an ageing population,’ argues the report’s author, CIS Research Fellow Dr Stephen Kirchner.
Treasury projects that when the superannuation system reaches maturity in 2040, it will lead to only a small reduction in future rates of age pension eligibility.
‘Increasing the compulsory contribution rate will not address the many problems with the current system. Double-dipping – where lump-sum superannuation benefits are dissipated to maintain age pension eligibility – is just one problem that will not be addressed.’
‘Every dollar that is forced into superannuation comes at the expense of take-home pay, hours worked, or employment.’
Superannuation succeeds in raising average household saving largely by exploiting the financial constraints faced by low income workers, who are less able to substitute out of compulsory super by reducing other forms of saving.
‘Increasing the compulsory contribution rate will increase these pre-retirement financial constraints for low income households.’
Dr Kirchner recommends reforming the taxation of super to conform to international best practice, so that only superannuation benefits are taxed, not contributions or earnings.
‘This would place the taxation of super on a similar basis to the taxation of saving via housing, making it a more attractive vehicle for voluntary saving and reducing the need for compulsory contributions,’ says Dr Kirchner.
‘Superannuation benefits receiving this tax treatment should be subject to compulsory income streams rather than being taken as lump-sums to solve the double-dipping problem.’
‘Government compulsion in the accumulation stage of retirement saving should be replaced by compulsion in the decumulation stage.’
These proposed reforms would improve retirement incomes, reduce future demands on the federal budget, and make superannuation saving less vulnerable to future government tinkering with the existing taxation arrangements.
Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and a Senior Lecturer in Economics at the University of Technology Sydney Business School. He is available for comment.
The CIS Policy Monograph, Compulsory Super at 20: ‘Libertarian Paternalism’ without the Libertarianism, is available at the CIS website.
A video of the report's findings is available on YouTube.
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