Caps plan hits super savers
With a slowing economy and senate obstructing government expenditure reduction measures, Deloitte's forecast of budget deficit blowouts is no surprise. A critical detail, however, is falling superannuation tax collections, despite the recovery of asset prices and values after the global financial crisis.
This trend helps explain Treasury's hostility towards this basic retirement savings vehicle and its efforts to introduce new taxes. However, if Reserve Bank Governor Glenn Stevens is correct in predicting continuing slow growth and lower investment returns, introducing new super taxes or changing existing ones may not bring the extra revenue claimed.
Take the latest proposal to limit the total lifetime deductible contribution to super, if such a proposal is administratively feasible. This proposal ignores the millions of people who already have a large sum in super and a million others who are members of defined benefit funds. How new lifetime caps can be introduced midstream without disadvantaging young people and those with lesser amounts already in super is a major issue.
As the GFC experience painfully showed, the amount invested in super and the tax collected depends directly on the investment earnings.
The cheapest and most tax-effective way to accumulate a large amount in super is to deposit a lot of money at an early age and use the benefits of compound interest at reasonably high interest rates. At a 5 per cent real interest rate, $100,000 at age 25 will increase in value to $800,000 in today's money at age 70 without any further contributions. For older starters even earning such a high return, accumulating the same amount would require much larger contributions.
Clearly, lowering the cost to both the budget and individuals encourages contributions younger and solid investment returns. The push to lower ongoing fees and charges is helping increase investment returns. However, nothing is being done or even considered to encourage voluntary super contributions by younger Australians. Instead, the focus is on making super even less attractive to younger people by raising the preservation age above 60.
Given the challenges of home ownership and the risks of being unemployed without access to assets and with a mortgage to service, contributing to super at a young age or even in middle age is a high-risk strategy.
The longer people delay building up super assets, the more they will have to contribute at a later age and the greater the cost to the budget.
Without efforts to integrate achieving home ownership and building up retirement savings, the easiest way to fund retirement will be to own an asset-test-exempt home and get an age pension free of charge from the government.