Andrew Southcott (Boothby, Liberal Party) Share this | Link to this | Hansard source

I would like to speak about the superannuation co-contribution scheme. Last December, an article in the Wall Street Journal marvelled at Australia’s Macquarie Bank owning and operating toll roads in Chicago, San Diego and Virginia, parking lots in New York City and airports in Brussels and Copenhagen. The Wall Street Journal article made the connection between this surprising development and Australia’s large superannuation funds. It said:

Australia, once a marginal player beyond its own borders, is emerging as a major financial centre.

It went on to say:

… the pool of assets under management in Australia is among the largest in the world …

The authors of that article, Patrick Barta and Mary Kissel, attributed this pool of funds to the introduction of the nine per cent superannuation guarantee in 1992—a Labor initiative that is worth acknowledging as one that led to this development. Without doubt, Australia’s retirement income policy, with its three pillars—that is, the compulsory nine per cent superannuation guarantee, an income tested age pension and additional private savings—is regarded around the world as a good model. Debates in the US Congress look approvingly at our superannuation system. However, there are a number of challenges and a number of areas in which we will need to do more in the future.

The first is the adequacy of retirement incomes. In a submission to the Senate Select Committee on Superannuation in 2002, the Australian Bankers Association put down for the first time how much would need to be set aside to have a retirement income of 75 to 80 per cent of pre-retirement income. They said it would require contributions of 12 per cent of income over 40 years, 14 per cent over 35 years or 17 per cent over 30 years—that is, in addition to the nine per cent superannuation guarantee, three per cent extra income over 40 years, five per cent extra over 35 years or eight per cent extra over 30 years. This highlights the importance of additional employer or employee contributions on top of the nine per cent superannuation guarantee to provide adequate retirement incomes. It is worth noting that currently the average contribution is 11 per cent of income, and lower for people on lower incomes.

The second issue we face is the pressure on future budgets from the ageing of our population. In the 2002 Intergenerational report it was estimated that by 2042 the Commonwealth government budget would be paying an additional 1.66 per cent of GDP on age and service pensions. This contrasts favourably with the OECD average of just over three per cent and countries such as New Zealand and Canada, where the rise will be much closer to six per cent of GDP. In 2005 the Productivity Commission released a report entitled Economic implications of an ageing Australia. Its conclusions were similar to those of the Intergenerational report. The Productivity Commission anticipated that spending on age and service pensions would increase from 2.9 per cent of GDP in 2003-04 to 4.6 per cent of GDP in 2044-45, or an increase of about 1.7 per cent.

The third challenge we face is the importance of having a high national savings rate. In his keynote address to the Australian Business Economists Forecasting Conference on 13 December 2005 entitled ‘Perspectives on Australia’s current account deficit’, David Gruen, from the Department of the Treasury, pointed out that Australia’s current account deficit has averaged 4½ per cent of GDP over the 20 years from 1985 to 2005, with a steadily rising net liability as a proportion of GDP over that period. To stabilise our foreign liability as a proportion of GDP, it is going to require increased national savings, or decreased national investment, and a sustained trade surplus of half a per cent to three-quarters of a per cent of GDP. I am indebted to Mr Gruen for providing those figures. National saving is currently at about 20 per cent of GDP and is underpinned by a decade of federal budget surpluses. Compare this with the United States, where national saving is only 14 per cent of GDP—and they have a budget deficit of three per cent of GDP.

In contrast with the strong performance of government saving, household saving has been negative in every quarter since September 2002. In considering what proportion of future budget surpluses should go into the Future Fund or towards income tax cuts or additional government spending, we need to consider the impact of any decision on national savings, and greater incentives for superannuation can help to increase overall national saving.

Ellis Connolly and Marion Kohler, in a research discussion paper for the Reserve Bank of Australia, concluded that compulsory superannuation has led to an increase in household savings. They concluded that for every dollar in superannuation contributions 38c was offset by a fall in private savings but 62c was additional savings. They suggested that compulsory super has increased household savings and therefore national savings by up to two per cent. Before this research, the thinking had been that any increase in super would be offset by a fall in private savings. Last year, in the 2005 budget, there were two important changes for superannuation: the extension of the co-contributions scheme and the abolition of the superannuation surcharge. Together, these measures added around $2 billion of government money to superannuation.

The Treasury’s retirement and income modelling unit estimates that abolishing the surcharge will increase the average proportion of income saved for this group from 11 per cent to 12 per cent. In this group, which has higher incomes, most of the increased super is offset by a fall in private saving, with the main difference being that super contributions are preserved over time. But, as the co-contributions scheme is targeted at those in low- to middle-incomes, who have low saving rates, this measure is expected to lead to additional private saving. In a paper entitled, Incentives to save more in superannuation, Cliff Bingham and George Rothman of the Retirement and Income Modelling Unit estimated that an additional private saving of $250 million may flow from this source. Further, their estimate is that the two budget decisions from 2005 should add an extra $3½ billion to superannuation on top of an existing base of $40 billion a year in super contributions.

The Howard government and Treasurer Peter Costello have an outstanding record in the area of superannuation. There is already very generous concessional tax treatment of super. However, in considering these issues—the adequacy of retirement incomes, the future pressures on the Commonwealth budget and the imperative of having a high rate of national savings—I believe we should do more in the future. The Minister for Finance and Administration, Senator Nick Minchin, has floated the idea of abolishing the 15 per cent superannuation contributions tax. That is one option. A cheaper alternative may be to encourage additional voluntary superannuation co-contributions. One way to do this is through an extension of the co-contributions scheme. The co-contributions scheme was first introduced from 1 July 2003, with a maximum co-contribution amount of $1,000 for incomes up to $28,000 and a phase-out at $40,000. In the 2004-05 budget, the higher income threshold was extended to $58,000.

The issue we face is that we need to create a culture of additional contributions over the nine per cent superannuation guarantee. Options include increasing the lower income threshold for the maximum co-contribution, increasing the maximum co-contribution, or a lower phase-out. I would say that the maximum 150 per cent replacement rate is already enough. So any greater co-contribution should be from a greater personal contribution.

I have two suggestions. The first suggestion is that we look at increasing the income threshold for the maximum co-contribution from $28,000 to $40,000. In their budget submission this year, ASFA wrote that they believe this would involve a $700 million cost to the budget. Secondly, I suggest that we look at increasing the maximum amount which can be eligible for receiving a co-contribution. Where $1,000 is the current maximum voluntary contribution, I suggest that we increase this amount over time to $1,500 and then $2,000. These two measures together will help improve the adequacy of retirement incomes, reduce pressure on future budgets and help increase national savings.