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What will super look like in 40 years?

David Murray and Don Russell spoke at a leadership forum as part of the SMSF Association’s 2015 Conference on the future of Australia’s retirement income system. They included many valuable insights.


This article paraphrases presentations at the Thought Leadership Breakfast, SMSF Association (formerly SPAA) Conference, 18 February 2015 by:

• David Murray, Chairman of the Financial System Inquiry
• Don Russell, Senior Public Servant and one of the architects of compulsory superannuation.

The subject of the breakfast was: “The future of Australia’s Retirement Income System: What we want the system to look like in 40 years.”

(Presentations by Warwick McKibbin, Andrea Slattery and Sir Anthony Mason will appear in subsequent editions of Cuffelinks).

David Murray

The FSI was specifically asked to consider the financial system in the context of its users and how the system could serve the economy better. The focus was on improving resilience, mainly through strongly capitalised banks; enhancing economic growth through more innovation; building confidence and trust especially in context of financial advice and education; making the regulatory system more accountable and efficient; and extracting more value from superannuation.

It is hard to do a good job on anything unless there are clear objectives, and the FSI saw three objectives of superannuation:

  1. To provide super for those not previously in the system especially low income workers, and it’s certainly done that.
  2. To augment national savings, and it’s not clear if this has occurred because we don’t know what would have happened otherwise.
  3. To improve the government budget position by reducing reliance on the age pension, but this has not happened.

We did not want the financial system to be politicised, but if you have a mandatory system which produces inequities, then it remains politicised.

We also focussed on the costs and they appear to be very high. The compounding effect of this trashes income in retirement. The system is not benefitting from any pooling of risk as might happen with a Defined Benefit system. With better information to superannuants on what income they might earn from their superannuation savings, and some requirement to offer income products, people on average earnings could increase their income in retirement by 25% to 40%.

Australia has a dependency on the rest of the world which can work for or against us. This means Australia has to demonstrate to the world a high quality of management of our system. Australia is a prolific borrower and it is a style of borrower that wants to repay its debt. But Australia has reached the point where we don’t manage the budget responsibly, so the imperative with a downturn in the commodity cycle and slowing China is that we must have a more resilient financial system. And in superannuation, we must make the most of those savings.

How do we figure what the system will be like in 40 years’ time? Don’t try. Don Sanders, my predecessor at CBA, had been Deputy Governor at the Reserve Bank and he told me once, “Before the Campbell Inquiry, the Reserve Bank used to set the exchange rate, we could fix interest rates on deposits and lending, we had qualitative controls on lending, we could control the lot. And we couldn’t forecast anything.” Nothing has changed. What matters is that the investments made for superannuants meet their needs well and are the most productive outcomes we can achieve.

We can’t change the demographics such as the ageing of the population, and we need to make sure the objectives are achieved and we make improvements. If we do not, then we have to ask if we would have been better off without it (the current superannuation system). Would people have saved just as much anyway, invested wisely themselves? I hope we don’t get to that point. We must keep the system depoliticised and as simple as we can.

The only priority of the superannuation system should be to provide income in retirement. There are very generous tax concessions in the system and very generous voluntary contribution arrangements, and there is no cap, which drives the inequities. It’s not a sustainable system. These are matters for the Tax White Paper.

Don Russell

(Don Russell worked with Paul Keating when compulsory super was introduced in 1992).

It’s fair to say a lot of damage has been done to the superannuation industry in the last decade. There is a notion that superannuation is a tax rort for the well-off, and that the industry itself is run largely for the benefit of providers has become almost the conventional wisdom. It has got worse with the focus on budget priorities. Why has it come to this, having started with high hopes and a large amount of public support? Treasury has always disliked tax preferences in superannuation, but the notion that the tax advantages bought the compulsion has been lost. We are asking people to lock their money away, that’s why there was an incentive.

People have realised that by locking money away for 35 years, it will run the gauntlet of a minimum of five Treasurers and perhaps 10 Superannuation Ministers and all the bright ideas of hundreds of public administrators for the rest of their lives. With no particular guarantee of whether it will come back to them, people have to believe it’s a good deal for a compulsory system to operate. If they don’t, someone along the way will say, let’s just make the SG voluntary. Most people won’t save unless it’s a very good deal to lock it up for that time.

It’s what makes the Australian system so remarkable. Very few other countries have had the capacity to make people give up such a large part of their current income and get it back in many decades’ time.

Why are we in the current predicament? A major reason is the industry has been unable to speak with one voice. The industry has used the political process to try to improve particular competitive positions. This has discredited the industry and strengthened the critics who want to change super. It has enabled the Treasury in particular to hone in on those aspects which are being emphasised within the industry itself, and to remove the tax preferences. The problem for the industry is that people are not listening any more.

Participation in workforce depends on age and the ageing of the population will change the way we view things. The debate about superannuation will change as the population changes. There will be a major collision between the income needs as people age and budget outcomes, and we’re seeing it already.

Do we need to create a two-tier system? This notion of income support from the mid-60s may be replaced by support for a fixed time, perhaps private provision helps people from 60s to 80s and then the government picks up the cost after that. If we embrace superannuation filling this 20 years after people leave active employment, then we provide scope for two-tier pension. Or perhaps a lower tier from 65 to 85, and higher when superannuation has run out. We cannot cover longevity risk for most with any type of clever financial planning if people are still alive at 103.

There is scope to cover this first 20 years with significant savings to the budget. I’m sure as an industry we have focussed too much on accumulation, and we need to become active in the debate about ageing. For example, South Australia is dealing with having an older population than the rest of Australia, and is seeing an opportunity to develop a capacity to deal with this which will stand South Australia in good stead as an industry leader, as a creator of technology, where the big picture issues such as prevention and lifestyles are managed. There is a wide range of things people can do to change the costs and the dynamics of living longer.

The system was originally set up to encourage self provision of funding by the majority of people, it was not to channel more income to low income earners. You can only compel people to do things if it’s a good deal, and it does need to have tax preference to help savings. It will always benefit high income people because they are the only ones who can save.

But the debate has become, why don’t we use the tax preference to channel more income to low income earners? It is a universal system, we were trying to change the behaviour of the entire population to put aside income they probably would have consumed. The equity issue is tricky because aspects of the current arrangements are excessively generous, which go beyond what is necessary, and that’s what we should focus on.


Graham Hand attended the Conference as a guest of the SMSF Association.

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