Unsettling prospect for super
Whichever party wins this year's election, one thing's already certain: there will be major changes to superannuation, including future taxation arrangements. Even more unsettling is the prospect of further changes in future years.
Worst affected by this prospect are younger and middle-aged taxpayers forced to put money into super by compulsory employer contribution arrangements. This large part of their remuneration is tied up, untouchable until the age of 60 or an even later retirement, and subject to a taxation regime that will almost certainly be different from that prevailing today.
Recent Rice Warner research concluded that low-income young taxpayers would be better off at 65 by receiving compulsory super than having additional money to pay off a house mortgage.
This conclusion is unlikely to align with the actual outcome for many reasons, including that unlike the benefits of paying off a house mortgage quickly, the future investment returns of super funds are highly uncertain.
Most importantly, the harder compulsory super contributions make saving a deposit and avoiding paying costly mortgage guarantee insurance, the more difficult it will be for younger Australians to achieve home ownership.
The research calculations are artificial because, while the assumed earnings of super funds include realised and unrealised gains, no similar credit is given for the tax-free capital gain of home ownership. Especially now that the assets test from January 1, 2017, will reduce age pension entitlement by 7.8 per cent annually of assessed assets, achieving and retaining home ownership will be an even more important goal than it currently is.
In the future, the first call on retirement super will be to pay off mortgages and/or to acquire a home exempt from the asset test to qualify for the pension. Changing superannuation tax arrangements by increasing contribution tax rates only complicates the situation for non-home owners or those with large mortgages.
Without substantial tax advantages to compensate for money untouchable until at least the age of 60, the attractions of achieving home ownership as quickly as possible will be even greater.
If, as the super industry is aggressively arguing, all wage earners continue to be forced to make compulsory super contributions, the biggest losers will be non-home owners and those with large mortgages unable to achieve home ownership before retirement.
Allowing all Australians to access part of their super, for example, via a mortgage offset account, would be one way to neutralise this adverse effect, while still retaining compulsory super contributions for all.