Once again, superannuation is in the news. This time the debate is about whether the employer contribution should be capped at 9.5 per cent of salary or raised progressively to 12 per cent.
To be fair, both sides are making reasonable arguments. Those in favour of raising it point to rising life expectancies and the inadequacy of many superannuation balances.
Just this week UMR Research published a report claiming that 43 per cent of Australians expect to retire with less than $200,000 in super, and just 19 per cent of us expect to be able to retire with enough superannuation to live comfortably. And, as any increases would not start for two years, and would be only 0.5 per cent per annum, they claim it's a drop in the ocean.
Those against the increase point out that in most cases the employer contribution is taken into account when wages are negotiated. In other words, an increase in employer superannuation means workers would have less money in their take-home pay after superannuation is taken into account.
They claim that a worker on $50,000 a year would get better value from $3112 (after tax) spread over their year's pay packets, than with an employer super contribution of $4000 (after entry fees and other costs), which would be inaccessible until they retired. They also point out that extra spending money stimulates the economy.
Another point is that employers' on-costs should be minimised not increased, as Australia's wage structure is increasingly uncompetitive in the global economy.
So, let's run some numbers for a worker aged 40, earning $50,000 a year, using the Super Contribution Calculator on my website, www.noelwhittaker.com.au. I will assume their superannuation balance is $75,000 now, their salary increases at 2 per cent a year, the employer contribution remains at 9.5 per cent and the fund returns 8 per cent per annum net.
In 25 years, at age 65, they should have around $900,000 in superannuation. This would all have been achieved at the present level of employer superannuation, and without any additional personal contributions. If those results were achieved, they should have a comfortable retirement, without needing welfare.
Since super became compulsory, there have been continual debates about what proportion of income needs to be invested to provide a comfortable retirement. The starting figure was 15 per cent of gross income and it's become the benchmark over time, based on the assumption that it starts when you enter the work force.
When Paul Keating introduced compulsory superannuation in 1992 he envisaged a system in which total contributions would be 15 per cent, made up of 9 per cent from the employer, 3 per cent from the government and 3 per cent from the employee. What happened? There was no compulsory contribution required from the employee, and the government not only failed to contribute their 3 per cent, but looted the employer's 9 per cent by introducing a 15 per cent entry tax on their contributions.
I am on the side of those who wish to increase the employer contribution progressively to 12 per cent. It's a small amount in the scheme of things, and is good insurance for workers now against what may well be difficult times, as most people live longer and the pressure on government budgets increases.
Unfortunately, one of the biggest challenges is people's apathy about their superannuation. This is why multiple fund balances are common, and many funds get away with excessive fees.
In a perfect world, our retirements would be funded by a combination of adequate employer contributions coupled with contributions from the employees themselves. That's the goal we should all be working towards.
Question. I am 70-year-old self-funded retiree - my wife is 52. I think I may be in a position to claim a part pension in the next financial year. Will Centrelink treat me as a single pensioner or will I be assessed as part of a couple.
Answer. You will be treated under the assets and income test for a couple, and, if you qualify, you will receive half the pension a couple would get. If you go to my website www.noelwhittaker.com.au you will find a deeming calculator and an age pension calculator which will help you do the numbers. Just keep in mind you should run the deeming numbers first, as you will need them when determining your position under the income test.
Question. Could you explain the pros and cons of withdrawing money from super then recontributing it back to super. What advantage is there in doing this?
Answer. There is a tax of 15 per cent plus Medicare levy (17 per cent) on the taxable component of a lump sum superannuation death payout if such sum is left to a non-dependent. By making a tax-free withdrawal from super, and then recontributing it as a non-concessional contribution, you increase the non-taxable component and decrease the taxable component. This means less tax to pay on death.