|
CHAPTER 2
The broad principle underlying preservation rules is that
benefits which have received concessional taxation treatment should be
preserved. However, there is wide recognition that this principle is not
fully reflected in current preservation rules.1
2.1 Superannuation benefits are generally required to be "preserved"
in the superannuation system until retirement age which is on or after
age 55. However, early release is possible under certain circumstances.
2.2 Subject to the governing rules of the individual superannuation funds,
early release of preserved benefits has previously been permitted under
superannuation law in the following circumstances:
- permanent incapacity;
- where the balance is less than $500 and the individual has ceased
employment with all depositors;
- permanent departure from Australia;
- severe financial hardship; and
- any other condition of release which the Insurance and Superannuation
Commissioner approves to provide benefits for an ancillary purpose (most
commonly compassionate grounds).
2.3 The Government changes, under examination by the Committee, affect
the last four of the above circumstances for early release of preserved
benefits.
2.4 In the 1997-98 Budget the Treasurer and the Minister for Social Security
issued a joint statement on savings and retirement incomes policy, Savings:
Choice and Incentive. Included in that statement were measures to
streamline and tighten arrangements for the early release of superannuation
savings. To come into effect from 1 July 1997, the new measures aimed
to ensure that superannuation is better directed towards the provision
of retirement income.
2.5 These new measures were:
- removal of the "permanent departure from Australia" condition
of release;
- removal of the $500 preservation threshold;
- replacement of the current discretionary system for release on 'severe
financial hardship' grounds (administered by the Insurance and Superannuation
Commission), with an objective test to be administered by fund trustees
and Retirement Savings Account providers; and
- reform the 'compassionate grounds' condition of release.[2]
2.6 The last of these measures, compassionate grounds, has been dealt
with by replacing the broad discretion of the Insurance and Superannuation
Commissioner with defined criteria that must be satisfied for early release.
This matter is dealt with in Chapter 4 alongside consideration of the
new hardship provisions.
2.7 As mentioned in paragraph 1.9, the Statutory Rules to amend the relevant
regulations to give effect to these changes were gazetted on 26 June 1997.
The relevant Superannuation Industry (Supervision) Regulations and Retirement
Savings Accounts Regulations were thereby amended and the changes took
effect at law.
2.8 The Government decided, through the Small Superannuation Accounts
Amendment Bill 1997, to extend the reforms to the Superannuation Holding
Accounts Reserve (SHAR) 'to ensure complete coverage of all superannuation
savings arrangements'.[3] This application
of the changes to SHAR was the subject of the initial reference of these
reforms to the Committee for inquiry and report.
2.9 Under superannuation law, preservation generally means that members
of a superannuation fund cannot access the money in their superannuation
account until retirement. This is consistent with the very notion of superannuation
as the provision of retirement incomes.
2.10 The SHAR currently only permits contributions to be accessed by
an individual for whose benefit they are held, where that individual:
- has a balance less than $500 and the person has ceased to be employed
by all depositors;
- is in severe financial hardship;
- has retired because of permanent disability;
- has turned 65; or
- is not an Australian resident and not employed in Australia.[4]
2.11 This Committee has taken a consistent view that leakage of superannuation
monies should be minimised. In its Fourth Report, Super - Fiscal and
Social Links tabled in December 1992, the Committee said:
Ideally, all net accumulation of funds, whether from contributions
or fund earnings, should be retained until needed to produce retirement
income and not dissipated on changing jobs or becoming unemployed as
frequently occurs.[5]
2.12 In that report, the Committee talked about the 'optimum operating
conditions' for achieving the government's objectives of 'increasing the
incomes of retirees and reducing the burden of aged care on the national
budget'. The Committee added:
The final link in the chain is closed when the benefits are taken
in the form of, or are used to, generate retirement income. The use
of benefits for any other purpose, however necessary or worthy, detracts
from the central purpose of superannuation, that is, the provision of
retirement income.[6]
2.13 Apart from the changes that are the subject of this report, the
Government made two other major announcements in the 1997-98 Budget in
relation to access to superannuation, They were:
- that, from 1 July 1999, all future contributions (including member
contributions) and earnings are to be preserved; and
- to increase the preservation age from 55 to 60 by 2025 (as announced
by the previous Government), to be phased in from 2020.
2.14 The Government's 1997 Budget Statement, Savings: choice and incentive
states:
This Government is committed to a retirement income policy that
provides encouragement for individuals to achieve a higher standard
of living in retirement than would be possible from the Age Pension
alone, but also ensures that all Australians have security and dignity
in retirement.[7]
2.15 In addition, the Government has stated on numerous occasions that
it believes superannuation monies should be used to provide a better standard
of living for people in retirement. That is a laudable sentiment and one
which the Australian Labor Party strongly endorses. Tightening the early
release provisions is one way of ensuring a better retirement income than
would have been expected if people access their superannuation funds before
they are ready to retire.
2.16 However, Labor and Democrat Senators consider that the Senate Select
Committee's inquiry into the early release of superannuation has clearly
highlighted the Government's inconsistent approach to superannuation and
retirement incomes policy. The Government is, on the one hand, legislating
to tighten the early release of superannuation and, on the other hand,
it is asking people who are over age 55 but below retirement age and in
receipt of an income support payment to draw down on their superannuation
savings before they are ready to retire. This is completely contrary to
the Government's claim that the changes to preservation and new tightening
of early release measures will
... increase national saving through greater accumulation of
superannuation savings, leading to reduced pension outlays as individuals
achieve higher levels of income in retirement.[8]
2.17 People aged over 55 but below Age Pension age who are affected by
the Government's inconsistent measures and have to draw down on their
superannuation before retiring, will clearly not contribute to national
savings, will potentially increase pension outlays once they have exhausted
their modest retirement nest egg and will not achieve a higher level of
income in retirement.
2.18 Labor and Democrat Senators urge the Government to rethink its superannuation
and retirement income objectives and policies which display a distinct
lack of consistency.
2.19 Coalition Senators note that the measures introduced by the Howard
Government concerning people who are over age 55, referred to by Labor
Senators in paragraphs 2.16 and 2.17, are only returning to the situation
that existed under the previous Government until March 1993. Prior to
that date, only compulsorily preserved superannuation assets were exempt
from social security income and assets tests until age pension age.
2.20 The Retirement Income Modelling Task Force (RIM) undertook some
detailed modelling on, inter alia, the change in national savings as a
result of the new preservation policy announced in the Budget. Increases
in national savings as a result of the package of new preservation measures
are calculated to be $493 million or 0.08 per cent of GDP in 1999-00,
rising to $12 383 million or 0.87 per cent of GDP in 2019-20.[9]
2.21 The new restriction on early access to superannuation will have
an immediate positive impact on national savings. RIM estimates the effect
of these changes in 1997-98 will be an increase of $115 million in national
savings in 1997-98.[10]
2.22 Labor Senators do not concur with the Committee's claim, based
on figures produced by the RIM Taskforce, that the tightening of early
release provisions will 'have an immediate and positive impact on national
savings.' Labor Senators point out that there are inconsistencies between
the assumptions made by the RIM taskforce to produce the figures on the
increase in national savings and the ISC and DSS evidence. If the RIM
assumptions are incorrect, the opposite effect to that intended could
occur and national savings may decrease.
2.23 The RIM taskforce modelling states that
The essential input to the analysis is the extent of the reduced
outflow from superannuation fund assets resulting from the policy ...
In the analysis presented ... the assumed reduction in total outflow
is initially around $120m pa compared with current total hardship flows
of $180m and uncertain amounts for persons going overseas on a permanent
basis.[11]
2.24 However, the evidence given to the Committee by the ISC and DSS
apparently contradicts the assumption that the Government's policies on
tightening the release of superannuation on severe financial hardship
grounds will result in a reduction in leakage from the system,
at least in terms of the number of applications for early release under
severe financial hardship provisions.
2.25 In response to Committee questioning about what influenced the decision
to set the objective test limits at 52 and 39 weeks, the ISC replied
One factor which informed the policy formulation of these measures
was the statistic that approximately 65 per cent of current applicants
[for severe financial hardship] are on DSS benefits and if you take
that figure alone you have to conclude that this will result in some
tightening of their own tests ... Our expectation is that these new
rules will result in a greater tightening than would otherwise have
been the case if the discretionary system remained.[12]
2.26 The ISC had earlier stated that the number of applications for early
release of superannuation on severe financial hardship grounds was 78,648
in 1996-97.[13]
2.27 However, the ISC did not 'have a clear indication' of the number
of people who would be eligible for the early release of superannuation
under the new objective test, assuming they had a superannuation account,
stating simply that 'The number of people ... is very large'.[14]
2.28 Evidence given by the DSS in response to Committee questioning on
how many people would qualify was more definitive.
2.29 With one million people automatically qualifying for access to their
superannuation under the Government's new objective test for financial
difficulty, the potential exists for many more than the 78,648 applications
which accrued in 1996-97.
2.30 While not all of the approximately one million people who are automatically
eligible for the early release of up to $15,000 of superannuation under
the new objective test would have superannuation assets, Labor Senators
believe that the new measures could increase superannuation leakages from
the system.
2.31 In addition, Labor Senators consider that the RIM taskforce figures
do not seem to have accounted for the certain increase in pension outlays
as a result of the above mentioned measures to include superannuation
assets in the Social Security means test for over 55s.
2.32 The Government's measures to tighten early release of superannuation
will have a medium term fiscal cost.
2.33 This is because the taxation on early release is payable at the
rate of 20 per cent. Under the new preservation rules, the money will
stay in Australia until individual expatriates are at least age 55 and
retired. In those circumstances, the first $90 474 (as at 1 July 1997)
will be received tax free.
2.34 The Government has estimated the cost to revenue as follows:
These measures will have a medium term fiscal cost, due to reduced
tax receipts from lower withdrawals from superannuation. The cost of
the changes is estimated to be $9.6 million in 1997-98, $10.2 million
in 1998-99, $45.8 million in 1999-2000, and $116.4 million in 2000-2001.[16]
2.35 The Committee regards the principles of preservation as very important.
However, the Committee recognises that some provision for early access
to superannuation is a recognised feature of the established superannuation
framework in this country.
2.36 Australia has in place a sophisticated privately-funded universal
superannuation system which in many respects is unique in the world. Part
of the development of that regime has been providing for the early access
to preserved benefits under certain circumstances. The Committee believes
the continuation of some restricted and disciplined means of early access
is itself a principle which is needed as a pressure valve, and to promote
belief and confidence in the system.
2.37 During the course of its inquiry, the Committee came to believe
that there may be a basic lack of understanding by the bureaucracy of
the differences between Australia's superannuation system and overseas
retirement incomes schemes. 1 Retirement Income Modelling Task Force,
Aggregate Analyses of Policies for Accessing Superannuation Accumulations,
June 1997, p. 4.
[2] Insurance and Superannuation
Commission, Policy Legislation Update, No. 5/97.
[3] Small Superannuation Accounts
Amendment Bill 1997, Second Reading Speech.
[4] ibid
[5] Super - Fiscal and Social
Links, p. 12.
[6] ibid
[7] Savings: choice and incentive,
Joint Statement by the Treasurer and the Minister for Social Security,
13 May 1997, p. 2.
[8] ibid, p. 18.
[9] June 1997 RIM paper, Aggregate
Analyses of Policies for Accessing Superannuation Accumulations, p.
7.
[10] June 1997 RIM paper, p. 8.
[11] ibid
[12] Evidence, pp. 179-180.
[13] Evidence, p. 176.
[14] Evidence, p. 178.
[15] Evidence, p. 178.
[16] Savings: choice and incentive,
Joint Statement by the Treasurer and the Minister for Social Security,
13 May 1997, p. 19.
Top
|