Why is capping superannuation funding in question?
Governments around the world are facing debt concerns that threaten their ability to provide welfare, health, education and other services. In this scenario they are looking for ways to reduce their outgoings – and protect their revenue base. In Australia, one method the government is looking to implement to provide such protection is by capping superannuation funding.
This will achieve government goal in two ways:
- capping concessional contributions limits the amount of taxable income that can be diverted to a low-tax environment; and
- capping the account from which pensions are drawn limits the amount of capital that is free from tax.
What do individuals need to consider?
Caps may well meet the fiscal needs of governments, what impact is there for citizens seeking a financially independent retirement? In assessing this policy, the following questions come to mind:
- How much superannuation is enough?
- Is the amount of superannuation you have accumulated excessive to your retirement needs?
- Will the economy suffer when ‘wants’ subsidise ‘needs’?
The Australian government commissioned a Financial System Inquiry (FSI) that delivered its final report in November 2014. The FSI panel’s interim report indicated that their final report would ‘tease out’ a number of emerging issues.
One of the topics hidden away in the interim report became a topic of discussion in the USA as well. The topic tested in both jurisdictions was whether to cap the funds accumulated in tax-favoured retirement savings structures? If they are to be capped, at what level? In Australia: superannuation accounts; and in the USA: Individual’s Retirement Accounts serve similar purposes.
This is a debate that will become more openly discussed as
a) the baby boomer generation retires (and eventually parts this mortal existence);
b) technology increases efficiency – or outright displaces labour;
c) significant intergenerational wealth transfers retain value within tight (what some might refer to as privileged) circles; and
d) the ratio of the working population to the retired, social security dependent population diminishes.
What are some of the arguments in support of capping superannuation funding?
Under Australian law all superannuation accumulates under one set of rules that apply universally to all who contribute to superannuation. That can include anybody who is of working age, working, or can satisfy regulators that they are eligible to participate. One law fits all for this investment structure in Australia.
It is the tax-favoured element of the description of the retirement savings (superannuation) structures that gives rise to the debate. The media often questions whether contributions to a superannuation account warrant tax concession treatment when –
- an adequate amount has already been accumulated to fund the likely financial needs for life in retirement;
- amounts held in excess of ‘reasonable needs’ are taxed within the fund favourably. The argument here being that government is deprived of revenue to fund other community needs. – and
- there is an apparent inequity for those who are unable to accumulate sufficient funds for a ‘proportionately’ reasonable retirement lifestyle. They are, in effect, subsidising the excess accumulations (and earnings thereon) of those more fortunate and able to self-fund retirement?
When is enough (superannuation), enough?
This brings us back to the first of the questions posed above: ‘How much superannuation is enough?’
Because we are all so different, and have personal goals and objectives there is no simple answer to this question. There is a number of calculators that can be used for individuals to come up with a number as to what would be reasonable for them. Financial planners play an important role in provide services and advice as to how to achieve those goals.
Assumptions and calculations
In this ‘enough’ discussion we make some basic assumptions to help develop an understanding of the difficulties facing legislators:
- If we retire at age 65,
- have determined that our expected lifespan is 25 years, and
- assume that we no longer have any financial dependants; and that
- having had lifestyle expenses of running our home,
- maintaining our health and undertaking ‘normal, family-like’ activity at an average of $80,000 p.a.1 (free of debt),
- would like to consider that as the ongoing benchmark, we can determine that
- we would need to invest near enough to $1.250 million (in a Balanced/ Moderate portfolio) earning around 7% p.a. cumulatively.
(Keeping the other criteria constant, the required capital amount to start retirement can be calculated proportionately. It will vary with adjustment to the annual living cost required, so that $120,000 p.a. needs $1.875 million. Conversely, a living cost budget of $50,000, needs $781,250.) 1Indexed at 3% p.a.
Governments may eventually be forced to determine an upper limit towards which contributions can be made under tax-favoured conditions; and thereafter impose a tax to restore some ‘fairness’ to the Superannuation system. Whilst we are not advocating one way or the other, it is important that our clients (and members of superannuation funds generally) understand that the debate is going on and may well come down to some simple considerations as outlined here.
When it comes to retirement, what is ‘excessive’ funding?
As a second question at the opening of this post, we ask ‘Is the amount of superannuation you have accumulated excessive to your retirement needs?’
The criteria set out in calculating what might be considered ‘enough’ are very simple and don’t allow for a number of contingencies:
- deteriorating health;
- disability;
- unexpected financial dependency;
- uncertain legislative environment; and
- …the list could go on.
With the best of intention (and with a whole lot of goodwill), it may be possible to determine an absolute maximum amount that could be considered adequate and fair to the whole community, to legislatively allow to accumulate in a tax-favoured, superannuation-type account. What then of the excess that could still accrue, whether by favourable market performance, better economic conditions, earlier than anticipated death etc: should that be allowed to continue to be treated in a tax beneficial way?
[Note – In Australia we are told that there are several hundred superannuation accounts where the accumulated balances exceed $5 million and are continuing to grow in their accumulation phase.]
Economics: macro and micro –
Our third question asks ‘Does the economy suffer when ‘wants’ subsidise ‘needs’?’
At the micro level each of us have individual wants to provide for as comfortable a retirement lifestyle as we can; and to do so without imposition on the taxpaying public generally. At the macro level, the economy/ population as a whole needs to ensure at least the following two things:
a) A fair and reasonable, safe lifestyle for all of its members; but
b) A sustainable system not unduly requiring public funding.
(In the original post of this article) we anticipated that an argument would be built around the cost to the public purse of allowing favourable/ concessional treatment for contributions to (and earnings on) excessive amounts held in superannuation accounts. This has come to be, with two sets of numbers proposed around the 2016-17 Federal Budget; and subsequent to the outcome of the 2016 double-dissolution election.
Capping Superannuation funding in the future
No doubt each of our readers will have a point of view about what is appropriate in their particular circumstances. We don’t express a view as to what course this discussion should take: we certainly don’t advocate a multi-tiered superannuation system, but we will be looking out for the development of this debate – and advise clients in their best interest once the dust has settled on any consequent legislative changes.
We maintain that governments should seriously consider the personal impacts of proposed legislation before embarking on a ‘change process’: superannuation is an area of policy that should be managed strategically, with minimal tampering once a bi-laterally agreed system has been developed. Tampering leads to a loss of confidence in the system; that leads to a higher risk of loss outside the superannuation system, which in turn could lead to a greater call on the public purse to provide welfare in retirement.
Capping superannuation funding on both an annual and an absolute basis will increase the level of diligence that superannuants will need to put into retirement planning.
Feathering your own nest (protecting your nest egg)
Continuum Financial Planners Pty Ltd will always strategise extracting the most from our clients’ available resources in their best interest. If you are concerned about whether your superannuation accumulations will be adequate, call our office on 07-34213456 or use our Book A Meeting facility to arrange an appointment with one of our experienced advisers.
‘We listen, we understand; and we have solutions’
(Originally posted in September 2014, this article is refreshed occasionally, most recently in August 2024.)
