No avoiding the longevity Budget challenge
One thing seems certain about the Treasurer, Joe Hockey’s first Federal Budget. It will be tight.
Those expecting tax concessions or other acts of Government largesse will be disappointed. There may even be anger in instances where the Government closes off loopholes to claw back revenue.
It is in these circumstances that the Budget is highly unlikely to deliver things such as tax deductibility around the obtaining of financial advice, higher concessional superannuation contribution caps or even more amenable tax structures capable of encouraging the use of annuities-type products.
No, Treasurer Hockey’s 2014 Budget focus will be on repairing the Budget bottom line.
However, just because Budget stringency precludes delivering on things such as higher concessional contribution caps and reviewing the tax arrangements around annuities and other income stream-type products in 2014, it does not mean that Treasurer Hockey should not seek to address these issues in subsequent Budgets.
Indeed it is to be hoped that the Government takes the opportunity to look beyond superannuation settings to a much larger and more challenging problem which will impact the Federal Budget for many years to come unless it is appropriately and holistically addressed – sustainable post-retirement incomes.
While Australia’s current superannuation regime was originally devised as a means of reducing wages pressures, it was equally intended to reduce pressure on the nation’s social welfare budget, particularly the Age Pension.
Sadly, the latter of these two objectives has not been achieved, primarily because Governments of both stripes have allowed short-term political objectives to get in the way.
A range of factors has served to undermine the ability of the current superannuation regime to address the nation’s longevity issues: the virtual freezing of the superannuation guarantee at 9 per cent, the dismissal of some of the key findings of consecutive Treasury Intergenerational Reports, and a reluctance to pursue genuine root and branch change to the tax regime.
As part of its Budget formulation process the Government has received numerous submissions from industry bodies, but an important common theme has emerged from the financial services industry – the need for reform around post-retirement product such as annuities.
The Association of Superannuation Funds of Australia’s (ASFA’s) submission encapsulated much of this sentiment when it pointed out “current laws do not allow a seamless transition into income streams at the time of retirement”.
It noted that the Government had signaled it intended to review regulatory and other arrangements relating to retirement income streams and claimed such a review should not delay the review of the tax treatment of deferred lifetime annuities, which are taxed punitively when compared to other income stream products.
“It is ASFA’s view that providing these products with the same concessional tax treatment that applies to investment earnings on superannuation assets supporting retirement income streams would encourage the take-up of such products.
This is an important step towards ensuring Australia’s retirees are guarded against the financial consequences of longevity. Removing such impediments would also encourage product innovation.”
As the Treasurer contemplates the recommendations contained in the pre-Budget submissions, he might also reflect that Australia’s longevity challenge is not going away and that a holistic approach involving both policy and tax changes needs to be devised.
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