13 April 2016
Adequacy is key for the superannuation system
The Association of Superannuation Funds of Australia (ASFA), has released its submission to Treasury on the objective of the superannuation system.
ASFA believes that the primary purpose of the system should be defined and enshrined in legislation and proposes the following definition: “Ensure that all working Australians, save for their retirement throughout their working life to achieve an adequate level of income throughout retirement.”
“While we support the Financial System Inquiry (FSI) proposal to “provide income in retirement to substitute or supplement the Age Pension”, we believe that if narrowly interpreted, it could mean that superannuation only provides assistance up to the level of the Age Pension,” said Ms Pauline Vamos, CEO, ASFA.
“This would not be an acceptable outcome for the community and would fall well short of delivering on the social goals of the system.
“Our alternative definition proposes that the system delivers adequate retirement outcomes with commensurate economic and social well-being, free from undue hardship,” said Ms Vamos.
In considering adequacy, ASFA notes that the Organisation for Economic Co-operation and Development (OECD) nominates a replacement income rate of 65 per cent of pre-retirement income. However, while important, ASFA says that this should not be the sole measure, because the purpose of the system should not be to support that level of income replacement for very high earners. It proposes the ASFA Retirement Standard ‘comfortable’ income level as an additional appropriate goal.
“Achieving a comfortable retirement is the hope and aspiration of the bulk of Australians, and the achievement of this is fundamental to Australia’s economic and social well-being,” concluded Ms Vamos.
In addition to the primary and subsidiary objectives of the system, ASFA has also proposed policy design principles and measures of success to ensure that policy is achieving the agreed objectives.
When considered against the objective it is clear that the policy is not appropriate as it would reduce the adequacy of retirement incomes. It also runs contrary to ASFA’s policy design principle, that superannuation savings are not to fund unrelated public policy objectives. The use of savings for alternative purposes diminishes confidence in the system and disillusions members.
Contributions made early in a working life, which remain within superannuation for 40 years are important for achieving adequate retirement incomes through compound interest. For an average 25 year old who retires at age 65, contributions account for 27 per cent of the balance at retirement and investment earnings 73 per cent.
With investment earnings in retirement and applicable Age Pension the balance would last until age 95, assuming drawdown to support ASFA comfortable standard. Without investment earnings the lump sum would run out at age 80.
Removing funds from a superannuation account early in life has a significant effect on the balance at retirement because they miss out on the earnings on those funds and means many will run out of superannuation in retirement.
Such a policy would also not be in the overall financial interests of the individual, as superannuation returns an average 9.3 per cent per annum (over 30 years), whereas HELP debts increase at CPI, 3.8 per cent (over 30 years).
For further information, please contact:
Katrina Horrobin, 0451 949 300.
ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation, which aims to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice.