The hidden poverty trap in a successful super system

By ACOSS CEO Cassandra Goldie

First published in The Australian Financial Review, Monday 3 February 2020.

Every dollar counts if you’re trying to get by on a low wage, and later in life if you retire with scant resources behind you, like the one in 10 older people who rent their homes.

We must strike the right balance between people’s needs during working life and after retirement, and better support those who struggle throughout. That’s why the retirement income review now under way is so important for people on modest incomes.

We’ve made progress. Decades of reform of retirement incomes – including a $32-a-week rise in single pensions in 2009 and the introduction of universal compulsory super – have lifted retirement living standards. For the first time, people over 64 years as a group hold more wealth on average than people considered middle-aged. Yet 12 per cent of older people relying on the age pension are still living in poverty, mostly those who rent.

This is bad enough. But the neglect of people of working age who have to rely on the Newstart allowance – including 184,000 people over 55 – has become senseless cruelty on a grand scale. Newstart is $183 a week less than the pension and 55 per cent of people relying on it live below the poverty line

Superannuation policies have also paid too little heed to the needs of people struggling on low incomes during working life. When the super guarantee was introduced in 1991, the Australian Council of Social Service (ACOSS) urged the then government to fix glaring inequities in tax breaks for super contributions. We’re still waiting.

A cleaner earning $20,000 a year receives no benefit at all from tax breaks on the $1900 her employer contributes to super each year. A fund manager on $200,000 saves 32¢ for every dollar of the $19,000 contributed by his employer, because those contributions are taxed at a flat rate of 15 per cent.

This tax bias in favour of people with high incomes (who are usually men), together with the gender pay gap of 14 per cent, helps explain why two-thirds of tax breaks for super go to men. Not only do people on higher incomes receive higher contributions, every dollar of their contributions is taxed less.

Since the Henry review recommended it a decade ago, people of goodwill across the community sector, unions and the superannuation industry have advocated replacing the existing tax breaks for super contributions with a rebate that offers the same tax saving per dollar of their income that they contribute to people at all levels of income.

Compulsory super contributions are being lifted from 9.5 per cent to 12 per cent by 2025 without fixing the unfair way that contributions are taxed. Further, it’s not clear to us that increasing the superannuation guarantee (SG) takes proper account of the financial pressures facing people on lower wages before they retire. Attention has been focused on lifting living standards after retirement.

We’re told by super funds we need to achieve a “comfortable” living standard in retirement, including an overseas holiday every few years and a restaurant meal once a week. How many people on low wages can afford these things when they’re younger?

Compulsory superannuation is forced saving. We need to make sure that whenever we ask a person to save a dollar now, it is going to be worth it for them later. If we don’t fix the tax breaks now, further increases to the SG will disproportionately benefit people on higher incomes, who will save more tax now and secure higher incomes after they retire.

For people on lower incomes, who often struggle to meet the basic needs of life now, the benefits are not so clear. For many people with modest incomes, the time of greatest financial need comes when they’re supporting young children and paying a large mortgage, when they lose their job, separate from their partner, or have to care for a family member who falls ill.

The retirement income review should use the best available data to carefully weigh up the costs and benefits of increasing compulsory savings for people with low and modest incomes.

The review is a rare opportunity for a rigorous assessment of the purpose, costs and benefits of the $25 billion in tax breaks for superannuation, which now cost as much as the age pension. This includes the flat 15 per cent tax on contributions and the complete exemption from tax of the investment income of super funds that pay pensions to members. These are costly legacies of an era before superannuation became a universal entitlement.

Universal super is one of the enduring strengths of our retirement income system, but it must work for all, not just those with high incomes. The flawed system of tax concessions for super contributions should be fixed before compulsory contributions are lifted to 12 per cent.