Essential to include ‘adequacy’ in objective for superannuation

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It is essential to include the concept of adequacy in the legislative objective for superannuation, says the SMSF Association.

A Bill to set in legislation an objective for superannuation is currently before the Parliament, the Superannuation (Objective) Bill 2016. However opinion on the objective are divided, with the superannuation industry calling for the objective to include adequacy. However some groups, including the Grattan Institute, support the currently proposed objective:

The primary objective of the superannuation system is to provide 3 income in retirement to substitute or supplement the age pension.

SMSF Association CEO Andrea Slattery said, in a submission to a Senate inquiry into the Bill, that: “Adequacy must be included in the objectives of the superannuation system so that our retirement system maintains its goal to provide people with adequate retirement savings to deliver a ‘financially secure and dignified retirement’.”

“This upholds an aspirational element to superannuation and encourages people to save during their working life to fund a self-sufficient retirement.”

Though, the Association’s submission did acknowledge that there is no currently accepted definition of ‘adequate retirement savings’. However the Association says this issue could be addressed by including adequacy in the subsidiary objectives, proposing an objective of “providing a secure and dignified retirement”.

Slattery said it is “most important” for policymakers to use the objectives of superannuation to evaluate future changes to superannuation.

“This will help deliver greater certainty for superannuation fund members and provide increased transparency on future government policy and its effect on superannuation.”

“With a retirement system that is still to mature, the importance of setting these objectives down in in law correctly is essential. This is why we are so adamant that the concept of the superannuation system aiming to deliver a ‘secure and dignified’ retirement must be included in the Government’s final objectives for superannuation.”

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  1. No, no, no, you are missing the point ….. or perhaps you aren’t and hence the absolute need to include the word ‘adequate’ in the legislative primary objective for Super.

    Under the proposed objective Super savings in retirement are to be used to ‘substitute’ being laid the Aged Pension!

    Think about it ….. AP for a couple with a house is $35,000 PLUS pensioner benefits.

    At pensionable age with NO Super savings you get for free an income from the Govt of $35,000/yr plus benefits.

    Alternatively if Super savings are to ‘substitute’ the AP then you have to save enough in Super to deny you any AP payements plus the benefits.

    So how much Super will give you the same amount as the AP income of $35,000 plus, say, $5,000 in benefits being say $40,000/yr????

    I’m guessing a deemed income rate of 5% …. so you will need to save about $800,000 to allow you to substitute the AP payments.

    So why bother saving $800,000 just to fund your very own AP payments … which you would get anyway allowing you to spend the $800,000 over your working life?

    And the sting …. what if you save more than $800,000???? Excess cash in a Super above a balance that Will allow you to substitute the AP will be subject to penalties!

    It makes you wonder why would you bother saving in Super???

    As the ‘adequate’ argument goes … it adds the aspirational element to Super and encourages people to save Super cash for their retirement. Without the ‘adequate’ rider then your Super savings will be used to substitute the AP payments and Super saving above that will further taxed!!!

    Questions: How much lump sum cash can you be paid out of the AP? Under the proposed definition how much cash will you be allowed to withdraw from your Super savings and at what rate??? Can Super savings be allowed to be inherited by others???

    Political greed is just about to make Super savings far less attractive!

    1. Yes. What I’m saying is if the bill goes through there is even less incentive to save through super, because, under its terms, fairly recent proposals may resurface such as:
      1. not being able to access super pension until age pension age (67)
      2. only being able to take super as a pension (no lump sum withdrawals allowed)
      leading to a situation where you would wonder why people would bother, and there will be more on the age pension not less.
      Also as I said there is no way of predicting whether $1.6 m is adequate; history would suggest it may not be (inflation and a few market crashes are not predictable, look at previous RBL limits), yet once you are at that limit the the means to top it up are limited.

  2. I think people contribute to be independent of the age pension, aiming to retire early (in an uncertain labour market) at above age pension level.
    There has been past talk of raising the age to access super pensions and to disallow lump sum withdrawals.
    Should these issues resurface after such a bill passes, super may wind up with no advantages as it is difficult to see why people would lock their savings up save simply to replace an age pension.
    Even the $1.6 m cap allowed in is a concern; it’s not that long ago RBLs were removed and the limits set for those look inadequate today. (Removed because of complexity now re-introduced!)
    Perhaps the day won’t be far away when workers request that contributions are not paid to a superfund, preferring to invest elsewhere (mortgage etc).

  3. Ruth, if Super savings are to be used to as a ‘substitute’ for the AP then you present an optimistic view for the future of Super!

    1. Oh Peter you are too cynical. The measures will raise billions.
      Hardly anyone will be affected.
      Well, not this year that is.
      There is, as I understand it, an unindexed cap of $1.6 m limit on the total amount you can have in super and after that (unless compulsory amounts are added by an employer) no NCCs can be made, ever again.
      As the value of defined benefit pensions decline (inflation and taxation) anyone who started with, say, the magic number of $1.6m will have an ever-decreasing balance (assuming inflation, which is a reasonable bet long-term), with no top-up opportunity (except, for now, CCs as I understand it). This looks like a sleeper to me. Unlike accumulation funds there is no opportunity draw lesser amounts to retain the balance. There is a one-off opportunity to make contributions before 30 June, but you have to wonder whether that’s a good idea.
      And as you pointed out, the Bill leaves the door open to prevent the balance of accumulation funds going to your estate as that’s not the function of super is it (defined benefits don’t anyway), but they’ll have to boil that frog slowly.
      In fact the more I look at it the more it seems that lots of frogs are being warmed and people I talk to haven’t even checked whether they are in a pot.
      I first heard of this proposed Bill on the ABC’s The Business in 2015 and have been wary ever since.
      Maybe it’s time the savers relied on the age pension and took those 1st class world cruises they’re always accused of taking.

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