As the debate over the future and purpose of Australia’s superannuation system continues to heat up, the federal government has signalled its intention to explore changes to the program.
The Superannuation Guarantee, introduced in 1992 by the Keating Labor Government, made it mandatory for employers to contribute a set percentage of their employees’ salary to a superannuation fund.
The portion has since increased from three per cent to 10.5 per cent.
Originally, superannuation was viewed as a means of addressing the financial challenges presented by Australia’s ageing population and the pension system.
Today, the pool of funds has grown to $3.3 trillion, making it one of the largest in the world.
About 78 per cent of Australians have money in their superannuation account with the average balance sitting at $150,000, according to the Prime Minister.
The decision to consider changes to the system has sparked an ideological debate between the Labor Government and the opposition.
Opposition leader Peter Dutton has accused the Albanese Government of breaking an election promise and preparing to increase taxes on superannuation.
Prime Minister Anthony Albanese, on the other hand, has insisted there will be no major changes to superannuation in the May budget.
“What we’re doing is defining properly the objective of superannuation, which is something that is needed,” he said.
Why does the government want to have a ‘national conversation’ about super?
The Australian government is exploring options to reform the country’s superannuation system, including tax concessions and the introduction of a legislated objective for the scheme.
Under the current system, employees are required to pay 10.5 per cent of their income into a superannuation fund, with both mandatory and voluntary contributions being taxed at 15 per cent.
This rate is significantly lower than the personal income tax rate, meaning individuals who make extra contributions to their super not only boost their retirement savings but also reduce their personal income tax.
However, the former government’s retirement income review found some Australians had been using the system to build up multimillion-dollar super balances.
The 2020 report, which was commissioned by then-Treasurer Josh Frydenberg, claimed large balances are held in the system as a “tax minimisation strategy”.
More than 11,000 Australians now have balances in excess of $5 million, receiving annual tax concessions of about $70,000.
Treasurer Jim Chalmers has raised concerns about the current system‘s cost to the budget, stating that tax concessions currently cost the budget $52.5 billion a year and that “we’re on track to spend more on super tax concessions than the Age Pension by around 2050.”
Dr Chalmers has called for a “national conversation” on the issue, which he believes could include a reform of the tax concessions system or a $3 million cap on super balances.
The other major area the government wants to tackle is the proposal to legislate an “objective” for superannuation, which would mean that future governments would find it difficult to introduce policies that allow Australians to dip into their super earlier.
Superannuation accounts can be accessed earlier than retirement age under a number of limited circumstances, including financial hardship and compassionate grounds.
Opposition assistant treasury spokesman Stuart Robert said the Coalition supports enshrining a purpose for superannuation, but the government is attempting to limit access to people’s own money.
He has claimed: “It is quite clear the government is building a mandate to come and tax Australians more.”
The government’s proposals represent a major ideological point of difference between Labor and the Coalition, who proposed allowing Australian’s to dip into their super to buy a house in the 2022 federal election.
How much super do you need?
According to the Association of Superannuation Funds of Australia (ASFA), individuals need a minimum of $545,000 to enjoy a comfortable retirement.
Couples, on the other hand, should have a combined balance of $640,000, reflecting the shared cost of major expenses such as housing.
These figures assume retirees own their own home and account for a budget of $48,266 per year for singles and $68,014 for couples.
For a modest lifestyle, with an estimated annual budget of $40,656 for couples and $28,379 for singles, ASFA says retirees need to have a superannuation balance of just $70,000.
“The lump sums needed for a modest lifestyle are relatively low due to the fact that the base rate of the Age Pension is sufficient to meet much of the expenditure required,” the association advises.
The government’s Age Pension acts as a means-tested safety net for those that need additional income during retirement.
However the Australian Securities and Investments Commission says these figures aren’t a one-size-fits-all approach to retirement, estimating retirees need about 67 per cent of their pre-retirement income.
Experts advise Australians should start planning for their retirement as early as possible and consider voluntary contributions to their superannuation account.
A report published in December by Savvy found more than half of Australians aged 45 to 54 do not have confidence their super will be sufficient by the time they reach the age of 65.
Savvy’s money expert, Adrian Edlington, said that current super balances are representative of wider social and economic issues in the country.
“It’s clear that more needs to be done to educate adults, particularly those between the ages of 18 and 44, to grow their super so they can more comfortably set themselves up for retirement,” he said.
