REPORT

Provisions of the Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996 - Schedule 1

REPORT

Origin of the inquiry

1. On 20 August 1996, the Government announced the removal of the means test exemption on superannuation assets and rollover funds for people aged 55 and over. In announcing this measure, the Government stated that:

2. On 31 October 1996, the Senate referred the provisions of the Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996 (Schedule 1) to the Committee for examination and report by 18 November 1996. The Committee subsequently sought two extensions of time to report on this matter, to 21 November and finally, to 26 November 1996.

3. Schedule 1 proposes from 20 September 1997 to remove, in certain circumstances, the exemption of superannuation and rollover funds from the means test for social security purposes. Those circumstances are when people are between 55 years and age pension age and have accumulated 39 weeks of income support payment since turning 55.

4. For those people affected, superannuation and rollover assets will be added to other financial assets for means test purposes. Annuities and pensions including allocated pensions will be not be affected.(2)

5. In its reasons for recommending this inquiry, the Senate Selection of Bills Committee cited the impact of the removal of the exemption on:

6. The Committee received 41 submissions (listed in Appendix A) and held a public hearing in Melbourne on 11 November 1996 (witnesses listed in Appendix B). It also received copies of a number of representations that have been made to Parliamentarians on this issue.

Background to the Schedule 1 proposals

7. Under the Social Security Act 1991, superannuation assets held by people below age pension age are currently exempt under the pension and allowance income and assets tests. However, at age pension age, amounts held are assessed under the extended deeming rules for the purposes of the income test, and are assessed as assets under the assets test.(4)

8. Prior to March 1993, compulsorily preserved superannuation assets were exempt from social security income and assets tests until age pension age. As from March 1993, all superannuation benefits held in superannuation or rollover funds have been exempted from social security tests until age pension age. "This initiative involved estimated additional outlays of $4.1m in 1992-93, increasing to $17.1m in 1995-96."(5)

9. This policy was consistent with the principle that superannuation savings should be used in retirement, and will alleviate the pressure on the age pension as the community ages. In addition, there is the compulsory nature of employer superannuation contributions, which means that employees effectively have no options about this form of saving.

10. The Government now considers that, as with other savings, a person's superannuation savings should be included with other financial assets for the purposes of assessment for income support. The second reading speech states:

11. The Committee has difficulties with the final phrase. If the provisions of Schedule 1 apply, it is not a question of choice for the people affected. They are required to access their superannuation savings if they are to maintain a similar cash income flow.

12. The date of effect of the Schedule 1 proposals is 20 September 1997 and the anticipated financial impact is:

Details of Schedule 1

13. Under the social security means test, superannuation and rollover investments now will be counted as assets and included with other assessable assets, which exclude the principal place of residence. Then, under the income test, the superannuation assets will be treated as financial investments and added to the value of other financial investments to which the extended deeming rules apply. The income so derived is then added to income from other sources to determine the person's total income.

14. Although not a specific matter for its inquiry, the Committee does have concerns about the operation of the deeming provisions. In particular, there does appear to be an undue delay in adjusting to lower interest rates. The majority members are concerned that the current operation of the deeming provisions may further disadvantage people aged 55 who will be affected by Schedule 1 of the Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996.

15. Social Security customers with small amounts of superannuation will not be affected and the current means test arrangements will continue. A single pensioner is permitted to have up to $45,000 in total financial investments including superannuation assets and still receive the maximum payment rate.(7)

16. Persons who may now be denied a social security payment by exceeding the assets limit "may requalify for payment if they decide to draw on their assets to the extent that the total value of their assets falls below the means test limit":

17. For this proposal to work in practice, those persons affected need to be able to access their superannuation savings. In this respect there is a potential conflict with the Superannuation Industry (Supervision) Regulations (SIS regulations). Before a trustee can release preserved and restricted non preserved benefits under the retirement provision, one of the following two requirements has to be satisfied:

18. The Committee notes the views of Ms Roslyn Shirlaw who stated:

She went on to say:

19. Alternatively, superannuation entitlements may be withdrawn "if the person can convince the Insurance and Superannuation Commissioner that they are suffering severe financial hardship and the rules of the fund provide for early access to entitlements in such circumstances" (12)Section 1084 of the Social Security Act 1991 provides for the Minister to allow those superannuation assets which cannot be genuinely accessed because of superannuation regulations to be exempt from the income test. However, if a person is above the assets test it would seem this exemption would not apply.

The context and recent history of superannuation

20. Australia's retirement incomes policy, although a Labor initiative, was developed with bi-partisan support and sought to address problems arising from an aging population caused by the post war "baby boom" generation moving toward age pension age over the next couple of decades. A major objective of the policy was "to ensure an adequate income for retired Australians, both now and in the future".(13)

21. The then Government considered that improving superannuation benefits for both employees and the self-employed was of major importance, and this could be achieved by:

22. Until the advent of award superannuation in the mid-1980's, Australia's retirement incomes policy was largely confined to an age pension regime and voluntary superannuation. Only a minority of workers had superannuation coverage, with most of those being highly paid white collar workers or public sector employees.

23. Between 1983 and 1986, a number of policy initiatives were introduced to address perceived problems with superannuation. They included:

24. In 1987, the Insurance and Superannuation Commission (ISC) was established to administer guidelines under which superannuation schemes were to operate in order to attract taxation concessions. These guidelines or standards were codified in the Occupational Superannuation Standards Act 1987 (OSSA) and its associated regulations.

25. In August 1991, the then Government announced its intention to introduce widespread compulsory superannuation. The Superannuation Guarantee Charge Act 1992 and the Superannuation Guarantee (Administration) Act 1992 took effect from 1 July 1992. Consequently, Australia's retirement incomes policy now had three key components which remain in position today:

26. The supervisory regime of OSSA was then seen to be ineffective because its sanctions were derived mainly from the Commonwealth's taxation head of power under the Constitution. This Committee reported that:

27. This was seen as inadequate in protecting the superannuation assets of the work force. As a result, the Superannuation Industry (Supervision) Act 1993 (SIS) and associated legislation came into force, generally for a complying fund's 1994-95 year of income.

28. It is against this background that the Committee reports on its inquiry into the provisions of Schedule 1.

Retrospectivity and confidence

29. Provisions of Schedule 1 will retrospectively impact on a number of Australians. Many individuals have made financial decisions, in good faith, that a policy would continue as articulated. As a result of Schedule 1, many Australians who have previously sacrificed income so that they could contribute to superannuation will now be required to change their financial arrangements.

30. The retrospective complaint was best expressed by Mr Noel Cook, a person of 59 years in receipt of a job search allowance and who would be affected by the proposals. Mr Cook said:

31. The retrospectivity is primarily in relation to the effect it will have on those who had made retirement decisions. The Committee especially noted the views of Ms Roslyn Shirlaw of RetireInvest Pty Ltd, who said:

32. The Committee is also concerned at the fees and charges that individuals may have to bear in order to change their financial decisions to access their superannuation. The RetireInvest Pty Ltd submission noted:

33. The Committee is concerned that a threat of damage to the confidence of the public in superannuation may occur as a result of the changes proposed by Schedule 1. There have been many changes to Australia's superannuation regime over the past decade, most of which have been related to improving the equity and efficient operation of what is a rapidly growing and successful industry.

34. There is, however, a risk in making changes for reasons not consistent with the integrity of the established superannuation system. As Mr Ross Clare, Principal Research Officer, ASFA Research Centre, Association of Superannuation Funds of Australia (ASFA), said:

35. Threats of the potential to undermine public confidence in superannuation were further highlighted in evidence given by witnesses Mr Trevor Yaxley, a 55 year old former bank employee, and Mr Noel Cook. Mr Yaxley said:

Mr Cook said:

36. Apart from the need to maintain superannuation in as stable an environment as possible, the Committee also considers it inappropriate to be requiring vulnerable people to deal with complex changes which effectively penalise them and have little to do with improving the superannuation system.

37. There is also the very real question of financial penalties attached to early withdrawal of superannuation entitlements from some superannuation policies. That is in addition to the income foregone from those superannuation savings which have been prematurely withdrawn.

38. The Department of Social Security advised the Committee that, as only 67,000 people might be affected, they "do not necessarily see that this initiative of itself is going to impact on the confidence of people".(22) The Department's view notwithstanding, the Committee considers that the provisions of Schedule 1 have already had the effect of reducing confidence in superannuation.

Creating a new category of beneficiary and superannuant

39. The Committee considers that the 67,000 people to be affected by the provisions of Schedule 1 are at the very least treated differently to all other people in regard to their superannuation, if not directly discriminated against. No other group is required by legislation to access their superannuation entitlements as a condition for the receipt of social security entitlements prior to age pension age. Furthermore, the Committee knows of no other group who would have had their planning so disturbed by changes to superannuation entitlement access requirements.

40. From the carers to the disability pensioners and the older unemployed, the Committee found a unanimity in the written submissions and telephone inquiries: that plans had been disrupted, hardship anticipated and hopes disappointed by the prospect of the Schedule 1 provisions. Another aspect, that of early compulsory retirement, is discussed below.

What about the rorting?

41. Savings from the Schedule 1 proposal are claimed to be "much greater" than the costs of the 1993 initiative which put the original exemption in place. The Government cites a significant reason for the difference:

42. The Committee notes that the only witness who agreed that there was rorting in the current system was Mr Daryl Dixon. Mr Dixon was in favour of Schedule 1 and indicated that is quite possible for millionaires and half millionaires to get social security at the moment.(24) However, the Committee also notes Mr Dixon's point:

43. The Committee noted with interest that Mr Dixon advocated a relaxation of the assets test for everyone, whether they had money inside or outside of superannuation.(26)

44. The Department of Social Security stated that only about seven per cent of the people affected by Schedule 1 have over $200,000 in superannuation.(27) The Committee is therefore unconvinced, on all the evidence presented to it, that the proposals would have as a major consequence the prevention of rorting of the social security system. Certainly the major proportion of the projected savings to the budget would not be coming from the wealthy.

45. If rorting is also alleged in relation to persons not equitably entitled to the benefits they are receiving, then the Committee finds that to be a problem for the respective qualifying tests associated with each benefit. Those people the Committee has encountered during its inquiry could fairly be classed as genuine "battlers" who are currently not part of the work force through no personal fault or discreditation, or are sick or disabled.

46. The Committee is, however, of the view that the Department should pursue those persons who could be perceived to be taking an unfair advantage of the current provisions. It therefore suggests that the Department undertake an investigation of such cases to assess the degree of rorting that is taking place, and to propose appropriate measures to overcome the practice.

Compulsory early retirement

47. Are these persons retired? The Committee considers the provisions of Schedule 1 have the effect of placing many of the affected individuals in an invidious position with regard to their position in society. On the one hand, the social security system is seen to be offering them income support in recognition of their non-working situation, whatever the cause. However, that offer is effectively (and strangely) conditional on the affected persons not having provided significantly for their own retirement.

48. The message these people are receiving is really that you are retired, the retirement decision has been taken out of your hands and your own retirement and superannuation plans are as nothing.

49. The Committee noted Mr Cushway's evidence:

50. The Committee recognises that persons whose benefits are reduced or withdrawn by Schedule 1 could requalify for income support by drawing down their superannuation assets to the limit allowed. However, the Committee sees an unfair and potentially damaging lack of logic in such a scenario. Not only are such persons regarded as effectively retired against their wishes, but are impliedly being encouraged to dissipate their retirement savings in order to become effectively "unretired".

51. While effectively treated as retired, the affected persons are not however accorded the same rights as persons who have attained age pension age. Instead, they are still assessed in respect of their eligibility for benefits such as Jobsearch and Newstart (JSA/NSA). The proposed changes particularly disadvantage JSA/NSA recipients who subjected to a considerably more stringent means test than that applied to age pension applicants. In common with other affected persons such as disability pensioners, they are required to draw upon their superannuation benefits to replace the income support payments for which they would otherwise have been eligible. Essentially, their superannuation savings are diverted towards their pre-retirement income support.

52. The Committee detects an element of danger to the integrity of the superannuation system inherent in such provisions.

53. Due to the requirement to report quickly, the Committee was not able to fully assess some of the social and moral issues which emerged from the evidence presented to it. Considerable anger and frustration has been expressed in written and oral submissions and other representations made to the Committee. The Committee is unable to regard 67,000 people affected as insignificant, nor is it able to ignore the message of uncertainty that Schedule 1 is sending to those who would plan for their retirement. Nor is the Committee able to ignore the distress that these proposals have caused to many people so long before their planned date of introduction.

54. The Committee also notes that due to both demographic changes and the increasing Superannuation Guarantee contributions, the number of people affected by this measure will rapidly increase beyond the current 67,000 persons immediately affected. The Committee notes that in 1983 less than 40 per cent of the workforce had any superannuation savings. In 1996 more than 92 per cent of the workforce have superannuation coverage.

55. In 1983, white collar and public sector employees fortunate to have superannuation savings had an average amount of $13 000 in superannuation. These benefits were predominantly accrued in defined benefit corporate funds, or public sector schemes.

56. Between 1983 and 1996, the average amount in a member's superannuation account grew at a rate of 9 per cent per annum. The 92 per cent of the work force that currently have superannuation largely as a result of award superannuation and the introduction of the Superannuation Guarantee Charge, have an average superannuation equity per member of $38 000.(29)

57. The Committee notes that should the 3 per cent employee and 3 per cent government contribution proceed, an increasing number of Australians will be affected by the provisions of Schedule 1.

58. The Committee also notes that in 1995, 805 383 Australians were aged between 55 and 60; 972 552 aged between 50 and 54 and 1 256 733 between 45 and 50.(30) The Committee also notes that people aged between 45 and 65 constitute 21 per cent of the total unemployment figure.(31)

Disability Support Pensioners

59. Of the 67 000 people whose payments will be reduced as a result of this policy change, around 48 000 will be in receipt of a Disability Support Pension (DSP).

60. It should be noted that, in addition to the Bill under consideration, the Government has also introduced into the Parliament the Social Security Legislation Amendment (Budget and Other Measures) Bill 1996. Schedule 13 of that Bill seeks to introduce revised impairment tables for use in assessment of disability support pensions.

61. When combined with the increased medical reviews to be undertaken of Disability Support Pensioners announced in the Budget, the introduction of these new tables will see some 34 000 people lose their DSP and 5 000 fewer people will qualify for the DSP in 1997-98 alone.(32)

62. Many of these people are expected to transfer to Newstart allowance. As previously noted in paragraph 51, those receiving Newstart are subject to considerably more stringent income and assets tests than those in receipt of a pension.

63. Thus, there will be a significant group of Disability Support Pensioners who, due to the introduction of the new impairment tables, will not only lose their pensions but, due to the tighter income and assets tests on the income support payment to which most will transfer, will also be forced to more rapidly erode their superannuation savings.

64. To date, the Department of Social Security has not been able to provide further details of the impact of the interaction of these two policy changes.

National savings and budgetary concerns

65. Australia's relatively low national savings have been of concern to successive governments. In the time made available for the conducting of the inquiry, the Committee has been unable to obtain any information on the longer term effect of the Schedule 1 provisions. However, the Committee finds it difficult to imagine how these proposals could possible advantage the cause of higher national savings.

66. In the time made available for the inquiry, the Committee was unable to examine any modelling of the long term impact on the budget as a result of the Schedule 1 provisions. The Committee notes its concern of the apparent lack of modelling that has been undertaken on this critical aspect, and strongly recommends that such research and analysis be undertaken.

67. The Committee notes the following dialogue between the Deputy Chairman of the Committee, Senator the Hon. Nick Sherry, and Ms Kerry Flanagan, Assistant Secretary, Retirement Programs Branch, Department of Social Security:

68. The Committee is concerned that many of those who will now be required to prematurely eat into their superannuation savings will correspondingly have a greater call in later years on the age pension than otherwise would be the case. In addition, if there is an erosion of confidence in the superannuation system, a resulting lowering in voluntary contributions would also have a negative impact on future budgets.

69. Accordingly, the Committee is not persuaded that the estimated savings to the budget as a result of these proposals are sustainable, and it may well be the longer term overall effect is a cost burden. The relationship between superannuation and the social security system is a delicate one. It may be that this Committee needs to examine that relationship in greater detail at some stage.

Conclusion

70. The Committee emphasises that superannuation is not just another form of saving and investment. It has a specific purpose - to provide for people's income in their retirement years. It is not designed to underpin income support policies legitimately designed for other reasons.

71. Australia has a world class superannuation system, with an unique mix of voluntary and compulsory contributions all underpinned by a means tested age pension.

72. It is critical that the structures and the degree of confidence in the system are maintained and enhanced. Individuals must be allowed sufficient time to watch their superannuation grow and must be able to rest assured that the whims of government or supposed budget necessity will not cause the erosion of their retirement income.

73. Superannuation ensures a level of intergenerational equity. The Committee notes with concern that the Schedule 1 provisions fail to account for intergenerational equity and therefore the Committee recommends the following:

Recommendations

The Committee recommends that the government consider the following:


[Go to Government Senators' Report]

Endnotes

  1. 1996 Budget Paper, "Recognising Older Australians", page 7.
  2. Second Reading Speech, Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996.
  3. Selection of Bills Committee Report No. 13 of 1996, Appendix 4.
  4. Social Security Legislation Amendment (Further Budget and Other Measures) Bill 1996, Explanatory Memorandum, p. 2.
  5. Second Reading Speech.
  6. Second Reading Speech.
  7. Explanatory Memorandum, p. 3.
  8. Department of Social Security Information Paper of 18 October, p. 5.
  9. SIS regulation 6.01(7).
  10. Evidence, S1.
  11. Evidence, S1.
  12. Parliamentary Research Services Bills Digest on this Bill, p. 2.
  13. Statement by the Hon Brian Howe, MP, Minister for Social Security, Better Incomes: Retirement Income Policy into the Next Century, August 1989, p2.
  14. Statement by the Hon Brian Howe, MP, Minister for Social Security, Better Incomes: Retirement Income Policy into the Next Century, August 1989, pp35-36.
  15. Super Guarantee-Its Track Record, 15th Report , Senate Select Committee on Superannuation, p.11.
  16. Evidence, S47.
  17. Evidence, S25.
  18. Submission 1, p. 3.
  19. Evidence, S10.
  20. Evidence, S32.
  21. Evidence, S44-45.
  22. Evidence (Ms Flanagan), S52.
  23. Second Reading Speech.
  24. Evidence, S27.
  25. Evidence, S28.
  26. Evidence, S29.
  27. Evidence (Ms Flanagan), S62.
  28. Evidence, S36.
  29. Information provided to the Committee by Mr Alex Dunnin, Insurance and Superannuation Commission.
  30. ABS, Demographic Statistics 3101.0, March Quarter 1996.
  31. ABS, Labour force 6203.0, September 1996, Table 24.
  32. Portfolio Budget Statements 1996-97, Social Security Portfolio, pp. 77-8, p. 81.
  33. Evidence, S59.