After falling across the line at the federal election, the Government believed it had a mandate to change the superannuation rules, which it proposed in the budget and put forward to the electorate. Clearly mandates are in the eye of the beholder (or is it the eye of the government?) and can be changed on a whim – unless it is a mandate to have a plebiscite!
The scrapping of the proposed backdated $500k lifetime cap on non-concessional contributions appears sensible. The $1.6 million pension fund limit likewise seems reasonable, as does the annual non-concessional contribution limit of $100k. In aggregate, the changes appear designed to force the reasonably well off to contribute more from their after tax earnings into their superannuation fund. However, these changes will do little to address the budget problems in servicing a burgeoning public pension liability. Those that do not accumulate significant after tax earnings because of low wages will stay on the public pension.
The problem with the superannuation changes, as they affect the budget, is that they fail to consider changes to one of the holy grails of the Australian taxation system – franking. Indeed, the cost of franking credits will grow exponentially as more people retire and move to zero tax positions. Franking will eat into the budget like a cancer and ensure that our budgets are never balanced.
Consider this bizarre outcome of franking and pension funds. A happily married retired couple with a combined $3.2 million in a pension fund, could easily receive an annual $60,000 in cash-paid franking credits from consolidated revenue. Meanwhile, a relatively poor retired couple with little super will battle to receive a full combined pension entitlement of $30,000.
The superannuation changes are piecemeal and not the outcome of a considered and thorough review. The changes proposed in the federal budget in May did, however, flag the challenges that await future budgets. It is incumbent on governments to stabilize the retirement system and ensure that an appropriate social safety net exists. The superannuation system will inevitably be revisited by future Treasurers and franking rules will be changed – if only to “means test” them so that it is consistent with other entitlements applying to pension recipients.