Capping Superannuation funding for retirement

Why is capping superannuation funding in question?

Governments around the world are facing debt concerns that threaten their ability to provide welfare, health, education and other services. In this scenario they are looking for ways to reduce their outgoings – and protect their revenue base. In Australia, one method the government is looking to implement to provide such protection is by capping superannuation funding.

This will achieve their goal in two ways: capping concessional contributions limits the amount of taxable income that can be diverted to a low-tax environment; and capping the account from which pensions are drawn, limits the amount of capital that is free from tax.

Whilst these caps meet the fiscal needs of government, what impact is there for superannuants seeking to provide for a financially independent retirement? In assessing this policy, the following questions come to mind:

How much superannuation is enough?

Is the amount of superannuation you have accumulated excessive to your retirement needs?

Does the economy suffer when ‘wants’ subsidise ‘needs’?

The Australian government commissioned a Financial System Inquiry (FSI) that delivered its final report in November 2014. The FSI panel indicated through publication of its Interim Report in July of that year, that there are a number of issues that they would ‘tease out’ in the final report.

One of the topics hidden away in the interim report has recently become a topic of discussion in the USA as well: and that is, whether the amount of funds accumulated in tax-favoured retirement savings structures (in Australia: superannuation accounts; in the USA: IRAs) be capped? …and if so, at what level?

This is a debate that will become more openly discussed as

a)      the baby boomer generation retires (and eventually parts this mortal existence);
b)      technology increases efficiency – or outright displaces labour;
c)      significant intergenerational wealth transfers retain value within tight (what some might refer to as privileged) circles; and
d)     the ratio of the working population to the retired, social security dependent population diminishes.

What are some of the arguments in support of capping superannuation funding? 

Under the current system all superannuation accumulates (and is supervised) under one set of rules applying equally to all who enter into that system: and that includes virtually anybody who is either of working age, working, or able to satisfy regulators that they are of an eligible contributor status. One law fits all for this investment structure.

It is the tax-favoured element of the description of the retirement savings (superannuation) structures that gives rise to the debate: a question arising in the media is whether contributions to a superannuation account should be treated concessionally for tax purposes when –

  1. an adequate amount has already been accumulated to fund the likely financial needs for life in retirement;
  2. amounts held in excess of ‘reasonable needs’ are taxed within the fund favourably (and therefore it is argued, depriving the government of revenue to fund some of the community’s social security needs); and
  3. those who are unable to accumulate sufficient funds for a ‘proportionately’ reasonable retirement lifestyle are in effect subsidising the excess accumulations (and earnings thereon) of those more fortunate and able to self-fund retirement?

When is enough (superannuation), enough?

This brings us back to the first of the questions posed above: ‘How much superannuation is enough?

If there was a simple answer to this question, we wouldn’t need to provide services to clients seeking to know what is in their best interest financially – and how to achieve those goals. In any event, there is a number of calculators that can be used for individuals to come up with a number as to what would be reasonable for them: for purposes of this discussion we are going to make some basic assumptions to simplify developing an understanding of the difficulties facing legislators.

If we retire at age 65, have determined that our expected lifespan is 25 years, assume that we no longer have any financial dependants; and that, having had lifestyle expenses of running our home, maintaining our health and undertaking ‘normal, family-like’ activity at an average of $80,000 p.a.1 (free of debt), would like to consider that as the ongoing benchmark, we can determine that we would need to invest near enough to $1.250 million (in a Balanced/ Moderate portfolio) earning around 7% p.a. cumulatively. (Keeping the other criteria constant, the required capital amount to start retirement can be varied proportionately to the annual living cost required, so that $120,000 p.a. needs $1.875 million; or $50,000 needs $781,250.)

Governments may eventually be forced to determine an upper limit towards which contributions can be made under tax-favoured conditions; and thereafter impose a tax to restore some ‘fairness’ to the Superannuation system. Whilst we are not advocating one way or the other, it is important that our clients (and members of superannuation funds generally) understand that the debate is going on and may well come down to some simple considerations as outlined here.

1Indexed at 3% p.a.

When it comes to retirement, what is ‘excessive’ funding?

As a second question at the opening of this post, we ask ‘Is the amount of superannuation you have accumulated excessive to your retirement needs?

The criteria set out in calculating what might be considered ‘enough’ are very simple and don’t allow for a number of contingencies:

  • deteriorating health;
  • disability;
  • unexpected financial dependency;
  • uncertain legislative environment; and
  • the list could go on.

With the best of intention (and with a whole lot of goodwill), it may be possible to determine an absolute maximum amount that could be considered adequate and fair to the whole community, to legislatively allow to accumulate in a tax-favoured, superannuation-type account. What then of the excess that could still accrue, whether by favourable market performance, better economic conditions, earlier than anticipated death etc: should that be allowed to continue to be treated in a tax beneficial way?

[Note – In Australia we are told that there are several hundred superannuation accounts where the accumulated balances exceed $5 million and are continuing to grow in their accumulation phase.]

Economics: macro and micro –

Our third question asks ‘Does the economy suffer when ‘wants’ subsidise ‘needs’?

At the micro level each of us have individual wants to provide for as comfortable a retirement lifestyle as we can; and to do so without imposition on the taxpaying public generally. At the macro level, the economy/ population as a whole needs to ensure at least the following two things:

a)      A fair and reasonable, safe lifestyle for all of its members; but
b)      A sustainable system not unduly requiring public funding.

(In the original post of this article) we anticipated that an argument would be built around the cost to the public purse of allowing favourable/ concessional treatment for contributions to (and earnings on) excessive amounts held in superannuation accounts. This has come to be, with two sets of numbers proposed around the 2016-17 Federal Budget; and subsequent to the outcome of the 2016 double-dissolution election.

Capping Superannuation funding in the future

No doubt each of our readers will have a point of view about what is appropriate in their particular circumstances. We don’t express a view as to what course this discussion should take: we certainly don’t advocate a multi-tiered superannuation system, but we will be looking out for the development of this debate – and advise clients in their best interest once the dust has settled on any consequent legislative changes.

We maintain that governments should seriously consider the personal impacts of proposed legislation before embarking on a ‘change process’: superannuation is an area of policy that should be managed strategically, with minimal tampering once a bi-laterally agreed system has been developed. Tampering leads to a loss of confidence in the system; that leads to a higher risk of loss outside the superannuation system, which in turn could lead to a greater call on the public purse to provide welfare in retirement.

Capping superannuation funding on both an annual and an absolute basis will increase the level of diligence that superannuants will need to put into retirement planning.

Feathering your own nest (protecting your nest egg)

Continuum Financial Planners Pty Ltd will always seek to extract the most from available resources to ensure the best interest of its clients is attained. If you are concerned about whether your superannuation accumulations will be adequate: or if you are concerned that the government might threaten your lifestyle in retirement by capping superannuation funding, call our office on 07-34213456 or use our website Contact Us facility to arrange a meeting with one of our experienced advisers.

‘We listen, we understand; and we have solutions’

(Originally posted in September 2014, this article is refreshed occasionally, most recently in November 2016.)