Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
Address to Self-Managed Super Fund Professional
Association of Australia
Convention Exhibition Centre, Melbourne
Thursday, 18 February 2010
Good morning and thank you for the invitation to speak to you today.
This is an important time in the evolution of our superannuation system.
With the Henry Review having been handed to Government and the Cooper Review's work well advanced, there is a renewed focus in this country on superannuation and the adequacy of our national savings.
I know Jeremy has just given you an update on the progress of the Super System Review so I don't propose to go into that in any detail.
Today I want to talk to you about how these reviews - together with recent data, such as from the Intergenerational Report - fit into the Government's overall consideration of the future of superannuation and the role this plays in national savings.
This is no small question. We are talking about more than one trillion dollars of national savings in superannuation, forecast to grow to four trillion within 20 years.
So the model we set up arising out of these reviews will have consequences for the retirement incomes of all Australians, for the budget bottom line and for the broader prosperity of our nation for decades to come.
The national savings debate
When I was doing my Economics degree almost 20 years ago, debates about our national savings rate dominated economic discourse in this country. The debates centred not so much around whether we needed to raise our national savings rate, but rather about the best way to do so.
Over the past 20 years, there has been less of a focus on the national savings rate. Perhaps this is because the superannuation system set up 20 years ago has been seen to be dealing with national savings.
Additionally, the commodity boom fuelled an era of budget surpluses, making the Government a net contributor to national savings.
But, of course, as big and significant a reform as compulsory superannuation was, there is still much to do.
The recent Intergenerational Report underlines the need to increase national savings.
The number of Australians over 65 is projected to grow from 3 million currently to 8.1 million by 2050. This is a 170 per cent increase. Meanwhile, the number of Australians aged 15 to 64 will increase by only 44 per cent - from 15 million to 21.6 million.
In other words, over the next 40 years, the ratio of working age Australians to those over 65 will decrease from 5-to-1 to just 2.7-to-1.
So, while the proportion of working Australians to support an increasing number of older Australians will decrease, the ageing population will increase demand for government services and push up health costs.
Australia's ability to deal with these challenges depends in part on action we take today to lift national savings.
Superannuation has - and will increasingly - play a crucial role in keeping our aged pension payments affordable and sustainable.
The age pension will inevitably continue to supplement retirement incomes in the future. But a far lower proportion of retired Australians will be full pensioners and a higher proportion will be part pensioners.
Superannuation's contribution to national savings
Superannuation has - and will continue to be - a very important part of private saving. Both Treasury and the Reserve Bank have concluded that Australia's superannuation arrangements have added to household saving, thereby reducing our reliance on foreign funds.
Overall, Australia's savings rate is respectable by international standards, being around the OECD average and slightly above the average of the G7 economies.
But the fact is that Australia's pattern of investment, savings and consumption means that we have consistently run a significant current account deficit, even over the past 10 years, when our terms of trade have reached record levels and the commodity boom has driven export performance which is the envy of the world.
There were two important factors as to why this imbalance didn't cause major difficulties for Australia during the global financial crisis.
Firstly, our superannuation system helped very significantly in the recapitalisation of our companies.
In the 2008-09 Australian financial year, at a time when liquidity was being rapidly withdrawn from markets around the world, Australian-listed companies managed to raise $88 billion in equity. To put this in context, a greater proportion of the total value of listed companies was raised in Australia than in any other major economy.
Investor support, including from Australian institutional investors, helped to restore the capital base of companies that, together, employ over 1.6 million Australians.
Secondly, the Government's decision to guarantee wholesale borrowings by our banks enabled capital inflows to continue during the GFC, avoiding a credit crisis the likes of which we have never seen before.
And so, the need to promote national savings has returned, rightly, to be a more a matter of national focus.
Since the 1990s, any discussion about national savings has understandably focussed on superannuation.
One in every four dollars of household net wealth is now held in superannuation.
And, of course, if it wasn't for superannuation, retirement incomes would be less comfortable than they are for many Australians. As our population ages, that becomes even more important.
Over the past 10 years, more than $345 billion has been paid out in lump sum and pension benefits to super fund members. And very few of those people would have been contributing to their super throughout their careers, unlike more recent entrants to the workforce, whose superannuation will accumulate and grow over the course of their working lives.
Barely 20 years ago, only 46% of full-time workers and 7% of part-time workers had any superannuation arrangements. But, throughout the past decade, 96% of full-time workers - and at least three-quarters of part-time workers - have been making regular contributions to their superannuation funds.
This has seen the pool of funds created by superannuation grow exponentially.
The end of bipartisan support for superannuation
Compulsory superannuation was, of course, a proud Labor initiative.
And, while we have disagreed over the last 10 years with the former government about the best ways to promote super, at least a bipartisan consensus was reached that national savings through super is a good thing.
Lately, however, this bipartisanship has been thrown into question.
In his book, Battlelines, Tony Abbott questions the value of the Government encouraging Australians to save through their superannuation. It's just too expensive, he argues.
"At some point, saving money by keeping people off the pension while forgoing revenue to encourage them to make alternative provision becomes counter-productive."
He goes on:
"It could be simpler and fairer for the revenue provided in superannuation concessions to be provided as a pension instead."
To argue that we should abolish superannuation tax concessions and use the money to pay for the abolition of the pension means test strikes me as a spectacularly short-sighted approach.
It would mitigate against the preparation for an ageing population and, dare I say, it would be Tony Abbott's great big new tax on the savings of Australians.
In contrast, let me restate our position clearly and unambiguously: the Government believes that superannuation is a vital mechanism for national savings.
Getting rid of tax concessions to pay for an abolition of the means tests on the age pension would be a very retrograde step. We rule it out. Mr Abbott should as well.
The benefits of superannuation
In light of Mr Abbott's claims, I feel the need to reiterate the benefits super has had to this nation.
Firstly, it has meant - and will increasingly mean - better retirement incomes and living standards for older Australians.
A report by NATSEM released in November found that compulsory superannuation was the key contributor to better retirement incomes. The report noted that 2.3 million Australians - or more than three-quarters of people over 65 - currently receive the age pension. If retirement incomes are to reach more comfortable levels and the burden is to be reduced on Australian taxpayers, the superannuation guarantee will play a central role, it found.
Secondly, the growth of superannuation has meant the development in this country of a significant and sophisticated wealth management industry.
The skills that have been built up in managing this massive pool of funds in Australia have been a vital factor in the development of our wealth management industry. The broader finance and insurance sector is now the largest contributor to the Australian economy, contributing 10.8 per cent of GDP and employing 400,000 people.
These skills we've built up over the last 20 years managing each other's money have meant that we are now well-qualified to manage money from elsewhere, standing us in good stead to position ourselves as a global financial services centre.
Our funds management industry has experience across liquid asset classes, such as equities and fixed interest, as well as illiquid assets, such as infrastructure and property.
Without superannuation, this simply would not have been possible.
Thirdly, as I mentioned earlier, superannuation has provided a massive pool of funds, on which Australian companies could call for much-needed capital in the midst of the global financial crisis.
Making superannuation go further
But it is not enough to just support super. Instead, conscious of the demographic challenges that lie ahead, we must strengthen it.
There are several ways to potentially strengthen superannuation.
One is to drive efficiencies, to reduce administrative costs and thus increase returns. A small reduction in costs now can have a very significant effect on retirements incomes in the future. This, of course, is the focus of the Cooper Review.
Another is to examine the effectiveness and equity of the taxation treatment of superannuation. This also has the potential to improve retirement incomes.
And, of course, thirdly, is the Superannuation Guarantee. I've said before that any proper discussion of adequacy needs to include consideration of the rate of SG.
It would be imprudent to focus on one of these three areas alone - they must be considered in conjunction with each other.
Twenty years ago, everyone was concerned about how we, as a nation, were going to increase our national savings.
Since then, the advent of compulsory superannuation has meant we are all, collectively, saving more. The resultant national pool of wealth - which is available for investment in Australian companies, property and infrastructure - has been a crucial source of funds for our economy.
During this current period of debate about the future of superannuation and the design of our tax system, many people express a view about the best way to promote savings.
Some may argue for the removal of incentives for Australians to save through superannuation. For our part, though, super will remain the key savings vehicle into the future.
I appreciate the role SPAA has played in this discuss so far and look forward to your ongoing engagement.