Superannuation policy has received considerable attention over the last 15 years. A number of measures have been announced over this time to better target government concessions and to broaden the availability and participation in superannuation across the workforce. In 1983 only some 40 per cent of employees, including only 8 per cent of part time workers, were participating in superannuation. As a result of the reforms since then, superannuation has grown to cover over 92 per cent of the workforce, including around 70 per cent of part time workers. More dramatic has been the increased coverage of women. Between 1983 and 1995 this rose from below 25 per cent to around 85 per cent. Superannuation fund assets have grown over the same period from some $40b to over $180b.

Table D.1: Major superannuation policy changes


Announced Measure


1983 Application of a 15% tax (plus Medicare levy) on lump sum payments up to $50,000 (later increased and indexed) and a 30% tax on lump sum payments above that threshold paid from superannuation benefits accumulated after 1983 (previously, lump sum payments were subject to a 5% tax). Encourages drawing of superannuation benefits as annuities. Grandfathering provision results in minimal immediate impact.
1985 Agreement on inclusion of a 3% employer-funded superannuation benefit in industry awards as part of a productivity package. This was endorsed by the AIRC in 1986. Substantially extended coverage of superannuation to around 72% of the workforce by 1991.
1988 Application of a 15% tax on superannuation contributions by employers and on superannuation earnings. Part of a package which effectively brought forward tax revenue from superannuation, increasing the public finance burden on future generations.

Table D.1: Major superannuation policy changes (continued)

1991 Introduction of the Superannuation Guarantee (SG) which requires employers to make, on behalf of employees earning more than $450 per month, prescribed minimum contributions to complying superannuation funds or to otherwise pay a tax (namely the SG). Generally, the prescribed minimum contributions were set initially at 3% rising to 9% in 2002-2003. Built on the earlier productivity award and further extended the coverage of superannuation (to around 87% currently).
1994 Replacement of salary-based limits with flat dollar Reasonable Benefit Limits which limited the amount of tax concession for superannuation benefits up to $400,000 per person (where taken as a lump sum) and $800,000 (where at least half taken other than by lump sum).

From July 1994, all employer funded superannuation benefits provided pursuant to awards and the SG must be fully vested in employees and be fully preserved to age 55 or beyond (with a view to increasing the preservation age to 60 by 2025). Most other superannuation benefits attracting tax concessions to be fully preserved from 1 July 1996.

Reduced availability of concessions to income-rich thereby improving targeting. Included further incentives towards annuities.

Penalty tax on lump sum drawings above threshold does not recognise tax already paid on superannuation assets.

Improved focus of superannuation as a system for providing retirement income. Another stated aim was to improve the role of superannuation as a source of long-term funding for investment.

1995 Announcement of award (or enterprise bargaining) based minimum employee superannuation contributions to commence from 1 July 1997 at 1% of salary rising to 3% for 1999-2000 and beyond. Concurrently, the Government would phase in matching direct contributions (co-contributions) to the superannuation accounts of the employed and self employed. These co-contributions to be means tested so that persons on or above roughly twice average earnings will be excluded. Extended the superannuation reforms of the previous decade. Means-testing co-contributions reduces concessions to higher income groups which are usually well catered for in terms of superannuation benefits.

The reforms announced since 1985 would result in the majority of employees accruing superannuation benefits of at least 15 per cent of salary by 2002-03. These benefits would be made up of:

The estimated 1994-95 cost of tax concessions for superannuation is $7.3b. The announced co-contributions policy is estimated to cost some $4.5b per annum by 2001-2002.

Impact on pension dependency

Available projections suggest that the superannuation arrangements in place will generally not have a significant impact on the projected numbers of retirees claiming a pension. It will, however, substantially increase the number receiving only a part pension. In his 1993 report to the Treasurer, National Saving, FitzGerald estimated that independence from the pension requires, on average, achievement of 60 per cent income replacement through superannuation. For an individual contributing over a working life of 40 years, this suggests average contributions around 18 per cent of earnings.

The co-contributions policy announced in July 1995 effectively lifted the long term contribution target for superannuation saving to some 15 per cent of earnings. Projections released by the then Treasurer in the 1995 policy statement indicated that the new superannuation arrangements, when combined with pension entitlements, would enable an individual on 75 per cent of Adult Weekly Ordinary Time Earnings (AWOTE) with 40 years of continuous contributions to achieve a retirement income, including part pension, of more than his/her pre-retirement disposable income. In a later review, FitzGerald noted this and raised the question of whether, taking into account non-superannuation household savings trends, the superannuation arrangements were in fact overkill.

The recent reforms have been introduced at a time when most of the current workforce are intending to retire well before another 40 years employment. This considerably extends the lag before the new arrangements are seen to have any effect on pensioner numbers and expenses.

The partial impact of the superannuation arrangements was recognised at the time of the reforms announced in 1995 when it was estimated that individuals on AWOTE with 40 years continuous contributions under the compulsory arrangements would still receive around one quarter of the full pension.

Forecasts by the Retirement Income Modelling Task Force (RIM) of the Commonwealth pension outlays impact of superannuation reforms indicate a saving in Government pension outlays of around 0.35 per cent of GDP (equivalent to $1.7b in 1995-96) by the year 2035.

Figure D.1: Projections of age pension outlays Undisplayed Graphic

Source: Retirement Income Modelling Task Force.

As can be seen from figure D.1, the SG and co-contributions reforms are unlikely to make an appreciable impact on pension liabilities before 2015.

Impact on national saving

Superannuation reforms have already had a substantial impact on the size of superannuation fund assets. Assuming a constant annual CPI growth of three per cent, RIM has estimated that superannuation funds will grow from some $193b in 1994-95 to $371b in 2001-02, $1,000b in 2010-11 and $1,920b in 2019-20 (see figure D.2). This reflects a quadrupling of real assets by 2016.

Figure D.2: Superannuation fund assets by source of contributions Undisplayed Graphic

Source: Retirement Income Modelling Task Force.

However, it does not follow from the build-up in superannuation fund assets that national saving will show a commensurate increase. To the extent that the income directed to superannuation would have funded other saving, the net impact on private saving is less than the growth in superannuation assets. Further, it is also necessary to bring to account the full net cost to the Government of the reforms in terms of tax concessions, direct expenditures on superannuation incentives and realisable savings in outlays on the aged.

RIM has attempted projections of the impact on national saving of the SG and the announced co-contributions policy. In its published analysis, RIM assumes that the increase in superannuation saving is offset by a 30 per cent reduction in other forms of household saving and that the co-contributions policy was a substitute for the post-1993 One Nation tax cuts. RIM's projections indicate that the SG alone has the potential to add some 1.8 per cent of GDP to net national saving by 2027. Original estimates of the impact of the co-contribution policy indicated a further boost to national saving of 2 per cent of GDP over the same period. However, this latter estimate is based on viewing the co-contribution policy as an alternative to proceeding with the post 1993 One Nation tax cuts. It therefore credits the co-contributions policy with the net savings impact of not proceeding with those tax cuts. Analysing the co-contributions policy in isolation produces a lower, but still positive, impact on national savings from the co-contributions policy (figure D.3).

Figure D.3: Impact of co-contributions policy on national saving

Undisplayed Graphic

Source: Retirement Income Modelling Task Force.

FitzGerald argued that the national saving impact of the SG and co-contributions policy is likely to be less than that estimated by RIM on the grounds that the private long run saving offset is likely to be nearer 50 per cent than the 30 per cent assumed by RIM. Analysis of past superannuation policies suggests that the offset may be as high as 75 per cent. However, past superannuation policies have focused on encouraging voluntary saving and may not be a reliable indicator of responses to compulsory superannuation arrangements. At higher private saving offset levels it becomes less certain whether the net impact on household saving is sufficient to offset the loss to public saving from the cost of superannuation concessions.

Despite the superannuation reforms of the past decade, total household saving has continued to decline as a proportion of household disposable income. It now appears that the ratio has fallen below 2 per cent of household disposable income – a quarter of what it was a decade ago. Several explanations have been advanced for this, including the impact of extended home equity based credit facilities (to finance non-housing expenditure) and the slow growth in wages since the 1991-92 recession relative to consumption spending.

The link between superannuation policy and household saving is unclear and warrants further investigation. It is reasonable to assume that superannuation concessions rely on having a positive impact on household saving to increase self provisioning for retirement and national saving rates. Accordingly, the recent decline in household saving is cause for concern that either the superannuation reforms are failing in their main policy objectives of increasing saving for retirement as well as national saving, or that these objectives are more sensitive to other influences which the government should address.

Commonwealth of Australia