What is the objective of superannuation?

This post is prompted by the Australian government’s discussion paper entitled “Objective of Superannuation” released yesterday. The government is raising the matters as part of a consultation process prior to introducing legislation to specify the objective of superannuation in legislation. The discussion paper uses the word “enshrine”, rather than “specify”, but that seems inappropriate.

Unfortunately, the paper fails to point out that in specifying the objective of super the government is (or should be) focused on public policy, rather than the wide range of different objectives of different individuals and firms with an interest in super. Some people use super to build wealth to pass to their children. Some people use it to save for retirement. I expect that many people don’t have a clear objective in mind, but view super as a useful savings mechanism. Employers may view super as a way of attracting staff or ensuring that valued staff are able to live comfortably after retirement. The financial institutions that provide superannuation products have different objectives again.

The question the legislation should be trying to clarify is:  What is the objective of government legislation with respect to superannuation?  If we have an answer to that question we may be in a better position to consider questions such as whether there might be a case for individuals to continue to be encouraged, nudged or even compelled (as at present) to save via superannuation .

The government proposes to legislate the objective recommended by the Financial System Inquiry:

“To provide income in retirement to substitute or supplement the Age Pension”.

In my view that is a sensible public policy objective. The government should be encouraging people to become more self-reliant rather than expecting taxpayers to support them in their old age. This is particularly important given the projected increases in the government spending on pensions in coming decades and the many other burdens being placed on taxpayers.

The subsidiary objectives raised for discussion tend to cloud the issues. For example, “facilitating consumption smoothing over the course of an individual’s life” is presumably also an objective of the age pension, unemployment benefits and other welfare payments. Some other suggested subsidiary objectives relate to prudential regulation and fiscal policy.

A potential problem I see with the proposed clarification of the objective is that pursuit of that objective in isolation could result in a less efficient tax system than we currently have. 

Even though they do not do as much as they should to substitute or supplement the aged pension, the current tax concessions for super do reduce the bias against savings and investment under the income tax system. The concessions reduce the extent that individuals who save, and re-invest income from their savings, pay a higher lifetime tax bill than people with similar earnings who choose to save less. The bias against savings and investment will be exacerbated if super tax concessions are reduced without more fundamental reforms being taken to improve incentives for savings and investment.

I was also concerned about this when writing about the potential for tax reform on this blog in April last year. Whilst suggesting that it made sense to include reductions in super tax concessions as part of a tax reform package, I hoped that the government did not forget to obtain a substantial reduction in tax on capital incomes as a quid pro quo.

It will be interesting to see whether specifying a sensible objective for superannuation policy helps to achieve a better overall tax policy outcome.