Now that reform to the base and rate of the Goods and Services Tax (GST) is seemingly off the table, attention has once again focused on other areas of potential tax reform. As per usual, superannuation reform is receiving its fair share of attention.
One idea that has recently received some airplay, is whether low-income earners should be able to ‘opt-out’ of the compulsory contribution regime currently in place.
The argument, put by some in relation to this idea, is essentially that low income earners will never achieve a meaningful superannuation balance, such that they will always be reliant on the old-age pension. In which case, improving their current real wage (assuming low-paid workers would actually receive the difference in the event it is not contributed to superannuation) would improve their current financial situation.
This argument short-sells the benefit that compulsion plays in the Australian superannuation system. Allowing opt-out, would also be the first step in breaking down compulsion. It also fails to recognise that there are other ways to assist low-income earners build up their superannuation balances – like providing low-income tax offsets (to reduce the 15 percent tax to nil) and flexible contribution caps (that allows workers who move in and out of the workforce to catch up with their superannuation if and when they can afford to).
Prior to the introduction of compulsory superannuation in Australia, superannuation benefits were largely the domain of the public service and white-collar workers. Under compulsory superannuation, superannuation benefits are enjoyed by the large majority of workers. Our system is still only 24 years young and yet to reach full maturity.
Compulsion is an important design feature. The original designers of our system, including the union movement, realised that without compulsion, many Australians would not save for their future retirement.
As an aside, I was in London in December 2015 representing Australia at the Global Pensions Meeting. It was interesting to hear that our system, a compulsory, portable, defined contribution system, is the envy of many other Western countries.
Compulsion has worked well for the Australian system for the last 24 years. Let’s not throw the baby out without careful consideration.