RDP 9511: Superannuation and Saving 2. Trends in Superannuation Saving

Prior to the 1980s, Australia relied largely on a flat-rate age pension to provide retirement benefits. Superannuation was voluntary and covered only a small proportion of wage and salary earners.^[2] Despite generous tax concessions for voluntary superannuation and a number of attempts to promote an employment-related retirement income scheme,^[3] aged pensions remained the primary vehicle for the provision of retirement benefits.^[4] At the same time, a large part of household saving was allocated to housing which, partly because of its favourable tax treatment, was the main form in which households accumulated wealth for retirement. Superannuation provided only a small part of retirement incomes.

Net contributions to life insurance and superannuation averaged about one per cent of GDP in the 1960s and 1970s. Fund earnings (mainly interest and dividends) added a further one to one and a half per cent. Capital gains (which are not included in the national accounts measure of saving) had only a small effect over the period (Table 1).

In the second half of the 1970s and in the 1980s, a number of initiatives were introduced, expanding the coverage of superannuation and increasing its role in the provision of retirement incomes. Access to government pensions was restricted in 1976 with the introduction of an income test and further restricted with the extension of the income test in 1983 and the introduction of an assets test in 1985.

Superannuation arrangements were changed to encourage increased coverage and the retention of funds in the system. Approved Deposit Funds (ADFs) were introduced in 1983, allowing eligible termination payments to be rolled over while maintaining the favourable tax treatment available to superannuation funds. This had the effect of keeping funds in the system that would have otherwise flowed into alternative forms of saving. Net contributions to these funds averaged about one per cent of GDP over the second half of the 1980s and they were responsible for a significant part of the rise in total net contributions over the late 1980s.^[5]

Coverage was further broadened through the introduction of productivity award superannuation. Under the 1985 Accord agreement, unions accepted a 3 per cent employer superannuation contribution, to be paid into an industry fund, as part of a broader wages agreement. As a result, superannuation coverage increased sharply, particularly in the private sector where coverage had been low.

On the other hand, several changes were made to taxation arrangements for superannuation funds which reduced the attractiveness of superannuation saving relative to other types of saving. Prior to 1983, employer contributions were fully tax deductible and fund earnings were not taxed. Only 5 per cent of lump sum payments were included in recipients' taxable income. In 1983 a tax rate of 30 per cent was introduced on lump sum payments.^[6] In 1988, a 15 per cent tax on earnings and a 15 per cent capital gains tax were also introduced as well as a contribution tax of 15 per cent on employer contributions.^[7] There were however, offsetting reductions to the tax on final benefits.

As a result of the changes in superannuation legislation, particularly the introduction of ADFs, net contributions to insurance and superannuation funds increased to about 1.5 per cent of GDP by the end of the 1980s and fund earnings, buoyed by strong economic growth and high nominal interest rates, increased total saving through superannuation to over five per cent of GDP. Improved provision for preservation and portability also appears to have been important (Stemp 1991).

Only a small part of the rise in net contributions in the second half of the 1980s was sourced from new employer contributions. Despite the move to award-based superannuation in the mid 1980s and expanded superannuation coverage, employer contributions did not increase substantially (Table 2). One reason for this is that many of the schemes were defined benefit schemes where employees are entitled to a predetermined payout on retirement. Strong fund earnings caused by rising asset prices and higher interest rates resulted in some schemes being over-funded, allowing some employers to reduce or suspend contributions and in some cases to withdraw surplus funds. Strong earnings and higher employee contributions provided the bulk of the increase in superannuation saving.

The strong growth in superannuation saving started to slow towards the end of the decade as the recession ushered in a period of labour market adjustment. Net contributions fell sharply and with slower growth and lower nominal interest rates, funds' earnings also fell.

A major change to superannuation arrangements occurred in 1992 with the introduction of the Superannuation Guarantee Charge (SGC). The SGC was a major innovation, changing the emphasis from largely voluntary and contractual contributions that characterised earlier schemes to a system based on a core of compulsory employer (and to a lesser extent, employee) contributions, supplemented by voluntary contributions.^[8] The SGC scheme encourages employers to contribute a minimum proportion of employees earnings to superannuation funds. Employers who do not comply are subject to a charge which is redistributed to uncovered employees in the form of contributions to a superannuation fund. The charge, which also includes an interest component and administrative expenses, is not tax deductible for employers, and as a result, is more expensive than the originally prescribed contributions.

Existing employer contributions and voluntary employee contributions remain an important part of the overall superannuation policy, but the SGC extends the coverage of the scheme and puts a floor under the level of employer contributions.

The initial minimum level of employer contributions under the SGC was set at 4 per cent of earnings, increasing to 9 per cent of earnings by 2002/03. A compulsory 3 per cent employee co-contribution was also foreshadowed. Where the existing level of contributions is equal to, or above, the mandated level, no additional contributions are required.

At the same time as the new contribution rates were introduced the regulatory framework governing superannuation arrangements was also tightened.^[9] Under the new legislation, contributions must be made into complying funds which must satisfy prudential and reporting standards.^[10] Other requirements relating to vesting, portability and preservation were also tightened. Under the SGC arrangements, superannuation must be fully vested so that an employee retains full title to their own contributions, employer contributions and accrued interest, even if they leave employment or change jobs prior to retirement. Benefits must be fully portable so that an employee is able to move benefits from one fund to another.^[11] Benefits must also be fully preserved until the preservation age, which is legislated to rise from 55 to 60 over the next 20 years.

Under the new arrangements, concessional tax rates on superannuation benefits only apply if benefits fall within the reasonable benefits limit (RBL) (set in July 1995 at $418,000 for lump-sum, and $836,000 if at least half the benefit is taken as a pension). RBLs for pensions are more generous than for lump-sums, as part of government policy to encourage retirees to finance retirement via an income stream rather than a cash payment.

Despite the SGC initiatives, there was initially no pickup in contributions. The initial settings were only marginally above award superannuation rates and, for some employers, the legislated rates were below the rates already being contributed. Net contributions were close to zero in 1992/93 and 1993/94, although there is some doubt about the accuracy of the data. Fund assets continued to grow, however, as a result of strong net earnings growth which more than offset lower net contributions.

Further changes to superannuation arrangements were made in the 1995/96 Budget. As foreshadowed in earlier statements, employee co-contributions to superannuation of 3 per cent of earnings were introduced, with the contributions to be phased in over a three-year period from 1997/98. The government also announced that it would provide superannuation contributions to the accounts of employees and the self employed. The government's contribution will be capped at 3 per cent of earnings and, under a means test, will reduce to zero at taxable incomes of twice average weekly ordinary-time earnings. The government contributions will lag employee contributions by one year.

The initiatives, assuming they are fully implemented mean that by 2002/03, superannuation contributions will rise to a minimum of 15 per cent of earnings for most employees: 9 per cent employer contributions, 3 per cent employee contributions and 3 per cent government contributions. On the Budget's estimates, the superannuation arrangements would eventually raise national saving by about 4 per cent of GDP.

Leaving aside the cyclical behaviour of contributions and earnings, the broad pattern of superannuation saving over the 1980s was marked by significantly increased coverage, higher average contribution rates and a shift in the allocation of saving towards superannuation.

The extent to which increased superannuation saving added to aggregate saving, however, is unclear. Aggregate household saving fell over this period, but this decline is equally consistent with superannuation saving adding, or not adding, to total saving. It is possible, for example, that aggregate saving may have declined even more sharply than it did if not for the increase in superannuation saving over the period. We need to look more closely at the determinants of saving and the linkages between different types of saving before we can identify what the likely effects have been.

Footnotes

For some employees, for example in the public sector, participation in a superannuation scheme was generally required as a condition of employment. [2]

See the Hancock Report (1976). [3]

See Stemp (1991), Bateman et al. (1991) and Saving for our Future (1995) for background information on earlier superannuation and retirement income policies. [4]

See Edey, Foster and Macfarlane (1992). [5]

Lump sum benefits accruing after 1 July 1983 were taxed at the lower of 30 per cent or the recipient's marginal tax rate. [6]

The introduction of dividend imputation around this time partly offset the effect of the new taxes. [7]

Award superannuation, introduced in 1985, was an earlier move towards compulsion. [8]

An expanded regulatory framework, the Superannuation Industry Supervision (SIS) Act, was introduced in 1994. [9]

Concessional tax treatment is not available to funds which do not satisfy these requirements. [10]

The vesting and portability arrangements apply to SGC contributions but not necessarily to non-SGC superannuation. [11]