A key commitment of the Government is the development of a sustainable retirement income system, that is, a system that meets its objectives in a manner that the community can afford over time. The Government’s retirement income objectives were set out by the Treasurer and the then Minister for Social Security in the policy statement Savings: Choice and Incentive.
Retirement income policy objectives
The Government is committed to a retirement income policy that provides encouragement for individuals to provide a higher standard of living than would be possible from the Age Pension alone, but also ensures all Australians have security and dignity in retirement. This will be achieved by:
- encouraging people who are able to save for their retirement to do so, particularly through superannuation;
- ensuring the provision of an adequate public safety net in the form of an Age Pension for Australians who are unable to support themselves in their retirement years;
- ensuring the system is predictable, but facilitates choice and is equitable; and
- ensuring the system is fiscally sustainable and delivers an increase in national saving.
The Government believes these objectives can be met by the current three pillared retirement income system comprising:
- voluntary superannuation and other private savings;
- compulsory superannuation savings through the Superannuation Guarantee contributions; and
- a means tested Age Pension and associated social security arrangements.1
The statement also highlights that a sustainable retirement income system is needed to address the implications of the ageing population.
Implications of the ageing population
Australia, like most other economically advanced countries, is facing a steady ageing of its population … This … demographic change highlights the increasing need to develop a retirement income policy that is fiscally sustainable. It implies the need for Australians to make adequate provision for their own retirement. The primary way in which people can provide for an income in retirement is by saving through their working lives.2
The statement also indicates how the Government intends that superannuation savings be used.
The purpose of superannuation savings
The Government believes that superannuation savings should be directed to their intended purpose: namely to provide for retirement income. Towards this end, superannuation receives substantial tax concessions.3
In A more flexible and adaptable retirement income system the Government expressed this alternatively by stating that the substantial tax concessions provided to superannuation to encourage people to save for their retirement ‘assume people will draw down on their superannuation benefits later in their lives’.4 Accordingly, the Government regards the use of superannuation specifically for estate planning rather than retirement income purposes as ‘inconsistent with the purpose of providing tax concessions to superannuation’.5
The retirement income system is not designed for individuals to build up excessive wealth or manage their pre-retirement affairs in a low tax environment.
Limits imposed on the retirement income system to meet these objectives include:
- a sole purpose test, and investment and borrowing restrictions for superannuation funds;
- special duties for superannuation trustees including investment strategy covenants;
- age based deduction and reasonable benefit limits on taxation concessions; and
- a means test for the age pension.
The social security means test, comprising the income and assets tests, helps keep the age pension affordable and sustainable by requiring people with significant resources to draw on them before calling on the community for assistance through the age pension. Social security concessions are provided to income streams when ownership of the asset backing the income stream is signed away in return for a regular, dependable income based on life or life expectancy. They encourage people to maximise their income in retirement while restricting the scope for relatively wealthy people to qualify for the age pension through income minimisation or estate planning strategies.
1 Savings: Choice and Incentive, Statement by the Hon Peter Costello, MP, Treasurer and Senator the Hon Jocelyn Newman, Minister for Social Security, 13 May 1997, p. 10.
2 Savings: Choice and Incentive, p. 9.
3 Savings: Choice and Incentive, p. 17.
4 A more flexible and adaptable retirement income system, February 2004, p. 8.
5 A more flexible and adaptable retirement income system, p. 8.
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