The current superannuation system is excessively inefficient, unfair and complex. It involves hugely generous subsidies to many wealthy people but little, if any, net assistance for many lower-income people. It also unduly reduces governments’ capacity to strengthen national development, especially through investment in long-term infrastructure. The system is targeted excessively towards older people at the expense of younger people and towards needs in old age at the expense of those arising earlier in life. In these and other respects, the scheme does not adequately promote efficiency or inter-generational equity.
The superannuation system would be substantially improved by taxing all superannuation contributions at the beneficiaries’ marginal income tax rates but then reducing their tax liability by a proportion of the contributions up to a modest level. This approach would create a much simpler, fairer and more efficient system, especially if complemented by removing the age pension means test. Some early withdrawals could then be allowed from superannuation accounts in order to meet mid-life needs, preferably without limiting the purposes for the withdrawals.
A medium-term goal could be to establish a system of subsidised Lifelong Savings Accounts (LiSAs) which includes government contributions at birth, compulsory superannuation contributions in the workforce years and also voluntary contributions from the beneficiaries or other sources. Tax exemptions or concessions could apply to phased withdrawals from the accounts up to fixed limits. A significant proportion of moneys held in superannuation accounts or LiSAs should be made available for national infrastructure investment which may not maximise direct profit to individual members but improves the economic and social strength of the community as a whole. This could be achieved by vesting some contributions in a government fund with a guaranteed rate of return and/or vigorously encouraging national infrastructure investment by private funds.
The failings of the current superannuation system can readily be obscured by vested interests. Reform should be a very high priority for people who are concerned about social justice and alleviating hardship, as well as for those who are concerned about efficient and sustainable economic development.
Banking and Finance | Law and Economics
Date of this Version
Julian Disney, "Superannuation and Lifelong Saving" (May 2007). University of New South Wales Faculty of Law Research Series. Working Paper 28.