Final Report: Detailed Analysis
A2. Retirement incomes
The retirement income system will face challenges as the 21st century unfolds. These include the ageing of the population, longer life expectancies and more people interacting with the system. A key finding of the Review’s strategic report on the retirement income system, released in May 2009, was that the current three-pillar retirement income system is well placed to deal with these challenges.
Many OECD countries tax retirement savings using an expenditure tax benchmark linked to personal income tax. Such a treatment is consistent with encouraging retirement saving, which is important in the context of population ageing. The Review recommends a number of tax changes to retirement saving that would combine to achieve a similar outcome as in these OECD countries.
The Review recommends that employer superannuation contributions be treated as employee income, with employees receiving a flat-rate tax offset. This would result in a more equitable distribution of tax concessions between low- and high-income earners. Access to concessions should be broadened by making voluntary contributions eligible for the offset. Retirement incomes should be improved by removing the tax on superannuation contributions currently payable by the fund, and halving the tax on superannuation fund earnings to 7.5 per cent.
These changes would address equity concerns with present arrangements, simplify the taxation of superannuation and improve retirement incomes, but they may not be sufficient to enable people to effectively manage their retirement incomes for longer as life expectancies increase. The current retirement income system does not provide the products that would allow a person to manage longevity risk. This is a structural weakness. The government should support the development of these products and better facilitate their provision by the private sector. This could be achieved through issuing long-dated bonds and removing rules that restrict the development of income stream products. The Review Panel is not convinced, however, that the purchase of such products should be made compulsory.
The government has a role in improving people’s awareness of the retirement income system. Arrangements could be improved by requiring superannuation guarantee contributions to be paid at the same time as wages, linking superannuation records and developing a single portal through which people could interact with government agencies.
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