12 October 2016
Speech - #2016014, 2016

CSRI Leadership Forum

Thank you for that kind introduction — it’s lovely to be here for the Committee for Sustainable Retirement Incomes’ Leadership Forum.

Here in this room we have thought-leaders from across industry and academia.

Each of you has a different background and different experiences on which to draw. And you all bring different ideas to the table as a result.

But what unites each of you is your understanding that it is critical to secure a sustainable retirement income system for all Australians.

Superannuation is important to improving the retirement income of Australians and is one pillar of the Australian retirement income system, together with the age pension and other voluntary savings.

The Turnbull Government is determined to deliver not only a strong and sustainable retirement income system but also a system that delivers choice, flexibility, fairness and security so that individuals can maximise their retirement income.

The challenges ahead

Let me place my remarks today in the context of the broader challenges we face — and they are not insignificant, as many of you are no doubt aware.

Over the past 40 years, Australia has enjoyed strong economic growth underpinned by a growing population and a series of major economic reforms.

This economic success has greatly enhanced our quality of life and we have seen average incomes double in real terms since 1975, and this increased wealth has been broadly shared across the community.

But as last year’s Intergenerational Report made clear, we cannot take any of this for granted.

In the next 40 years, for instance, life expectancy will further increase and the number of Australians aged 65 and older will more than double.

In other words, more Australians will be living longer and for all of us, that is a good thing.

Yet at the same time there will be fewer people of working age for every person aged 65 and above.

This represents a very significant demographic shift — one that will have implications for Australia’s tax base and the ability of future governments to deliver services – as there will be less people to fund them and more people who want to use them.

It means that we need to think beyond the election cycle and seriously consider the challenges ahead.

We must be proactive in our approach and innovative in our solutions, particularly around boosting productivity and participation.

But it also means that we need to encourage people to be self-sufficient in retirement.

Superannuation

We all know how important superannuation is. More than 80 per cent of working-age Australians have superannuation savings, and it is our second-largest savings vehicle.

In fact, it makes up around 22 per cent of all assets held by Australian households.

Along with the Age Pension and other voluntary savings, it is one of the key pillars in our retirement system — a $2 trillion system that is growing rapidly.

And as it grows in size, so does its importance. That is why the Turnbull Government is focused on a range of areas to make sure the system is well-placed to deal with these future challenges.  

As many of you are aware, and I know that you’ll be hearing from him this afternoon, the 2014 Financial System Inquiry, led by David Murray, recommended that there should be a clear objective for the superannuation system and recommended that that objective should be “to provide income in retirement to substitute or supplement the Age Pension”.

Superannuation was not designed as an estate planning or tax management vehicle.

The Government agrees with the Financial System Inquiry about the importance of enshrining a clear objective in legislation, and is currently consulting on a draft Bill and I know that many of you contributed to the consultation process.

Superannuation Reform Package 

The Government began its reforms to retirement incomes with the fairer pension reforms in the 2015–16 Budget — including rebalancing the asset test for the Age Pension to target those most in need.

Under those changes, which commence from 1 January 2017, more than 170,000 pensioners with modest assets will receive more pension — and 3.7 million pensioners will either be better off or unaffected.

The Government’s Superannuation Reform Package, first announced on Budget night this year, is designed to improve the sustainability and integrity of the system as a whole.

Under our superannuation reforms 96 per cent of individuals with superannuation will either be better off or unaffected as a result of these changes. 

To secure these benefits, we will be making some changes to make superannuation tax concessions fairer, more flexible, better targeted and more sustainable.    

We are changing contribution caps and introducing a $1.6 million cap on transfers to tax-free retirement phase accounts — a move that will affect around four per cent of superannuation members. 

The $1.6 million transfer balance cap is double the pension assets test limit and much higher than the $545,000 that the Association of Superannuation Funds of Australia suggests is necessary for a single person to achieve what they call a ‘comfortable’ lifestyle. 

We are also making targeted changes to improve the flexibility of the system to the benefit of the overwhelming majority of Australians.

The Government will allow individuals with superannuation account balances of less than $500,000 to make ‘catch-up’ superannuation contributions. 

From 1 July 2018, Australians will be able to access any unused component of their concessional contributions cap on a rolling basis for a period of five years. 

This measure demonstrates both the improved flexibility of the Government’s superannuation package as well as its targeted nature.

It is flexible in that it will make it easier for people who have interrupted work patterns or irregular income to have similar access to concessional contributions as those with more stable income. 

We know that women, on average have much lower superannuation balances than men. So this reform will benefit women who may have interrupted work patterns and taken time out of the workforce to undertake caring responsibilities as an example.

It will also provide flexibility to those later in their working life who may have more disposable income due to expenses diminishing, such as those who no longer have to deal with mortgage repayments or school fees.

The Government’s changes will help around 230,000 Australians giving them the chance to catch up on concessional contributions if they choose – and have the opportunity – to do so. 

However, it is a targeted measure, in that it is limited to people with superannuation balances of less than $500,000. 

This will ensure that favourable tax treatment for concessional contributions is steered towards those who most need to build up their superannuation balances. 

We will also be allowing people a tax deduction for personal superannuation contributions, regardless of their employment arrangements.

This has been a bug-bear for many people, for many, many years, and no Government, I think, has had the courage or ability to actually tackle this.

This particularly helps people who are self-employed or who may be employed by a small business that doesn’t offer salary sacrificing arrangements.

This makes the system fair for everyone and by improving access to concessional contributions, and these changes are expected to assist 800,000 Australians to build up their superannuation balances.

In addition, the Low Income Superannuation Tax Offset is targeted to help boost the superannuation savings of around 3.1 million low-income earners — including 1.9 million women. 

It doesn’t make sense for individuals with low incomes to pay higher tax on their super contributions than they would on their wages.

The Government has also recently announced that we will not proceed with a $500,000 lifetime cap on post-tax contributions.

Instead, we will adopt a flexible, but targeted measure, allowing individuals with total superannuation balances of up to $1.6 million to make post-tax contributions of $100,000 per year.

This is combined with the ability to bring forward three years’ worth of non-concessional contributions for those aged under 65 years. This gives Australians more flexibility to realise their aspiration to build their superannuation balance to the limit of the transfer balance cap.

New opportunities for retirement income products

Although there has been significant focus on reform to the accumulation phase of superannuation over the past two decades, the Financial System Inquiry concluded that superannuation assets were not being efficiently converted into retirement incomes. 

That is why the Government has agreed to support the development of comprehensive income products for retirement – otherwise known as CIPRs.

CIPRs will seek to increase individuals’ standard of living and choices in retirement. Managing longevity risk – a risk we actually like – is essential to drawing a higher level of income with the confidence that retirees will not outlive their savings.

To support the introduction of CIPRs, as part of the superannuation reform package, the Government is removing barriers to innovation in retirement income stream products.

The Government will extend the tax exemption on earnings to new retirement products that help retirees better manage consumption and risk in retirement.

The potential gains to retirees, the economy and taxpayers from the introduction of CIPRs and a more efficient retirement phase are significant.

For retirees, the FSI found that incomes from CIPRs could be 15 to 30 percent higher than those from the current typical strategy of drawing the minimum amount from an account-based pension. They would also provide security of income for life – often at a time people feel most vulnerable.

Notwithstanding the trade-offs involved, seldom are there public policy changes that offer such large potential increases in income.

We will facilitate superannuation trustees pre-selecting these products for members to help guide members at retirement.

However, people will not be forced to have these products – they will simply have a broader range of choices in how they want to support themselves in their retirement.  After all, it is their retirement and it is their money.

Of course, the Government will have more to say on this in coming months when we release a discussion paper on the implementation of CIPRs, and I welcome further engagement with the Committee for Sustainable Retirement Incomes on these measures.

Update on reforms

So our task now is to deliver this comprehensive reform package.

The Government has been working closely with a wide range of stakeholders to do that.

In the last month, the Government released two tranches of draft legislation, and the level of engagement has been high. 

Very shortly, as in very, very shortly, we will be releasing our third tranche of draft legislation, which I expect will be before the end of the week. 

We have received more than 60 submissions on each tranche so far, and are working closely with stakeholders to ensure the legislation gives effect to our reforms — with the least cost and with no unintended consequences.

The Government is intending to bring these tranches of legislation together, separate to the objective of superannuation, which will sit as a separate bill, as a combined reform package that will be introduced into the House before the end of the year. And the Government remains on track to deliver this.

Concluding remarks

So let me finish by again thanking you for welcoming me here today.

As I said at the beginning, the Turnbull Government shares your passion for securing a more sustainable retirement income system.

We know that there are challenges before us — both in our immediate view and on the horizon — and that is why we are making these comprehensive changes now.

Australians are hard workers. They work hard to secure a high standard of living in their retirement.

They should have confidence that the system works for them – that it is flexible and supports a sustainable retirement income system.

I am confident that the reforms we are embarking upon delivers on those aims. 

Thank you, I look forward to working closely with you.