The Federal Government’s proposed budget for 2016/17 contained a significant number of changes to be made to superannuation laws. Overall, superannuation has been made less flexible and tax incentives have been reduced. That, in conjunction with a proposed legislated ‘purpose of superannuation’ that is insipid, suggests that the Government has downgraded the importance of superannuation in retirement incomes policy in Australia.
The reduction in flexibility is casued by a tightening of the annual limits on contributions. Contributions from year to year have varying levels of disutility for a saver. When incomes struggle to meet living expenses, housing costs, education costs, savings are minimal or non-existent. When the pressure of expenses eases, people are more able to save, typically when they are aged 45 and above during their peak earning years prior to retirement. Savings are adjusted in accordance with the disutility associated with them. The new limits will inhibit savings because they fail to recognise this point.
The proposed limit to savings of $1.6m is causing a lot of anger among today’s retirees and near-retirees. At current interest rates, $1.6m will not generate a particularly lavish lifestyle. But for future retirees that have been constrained by the new lower annual caps on contributions, I suspect the $1.6m limit is beyond reach anyway.
The Government has messed around with the rules, upset a lot of people with the retrospectivity of the changes and made administration more complex. The best next step would be to admit the total failing of Government regulated savings. Abolish the compulsory Superannuation Guarantee, make all investment earnings tax free (within super), remove super contributions as a deductible expense and tax all benefits as income.