Fact check: Was superannuation designed to get people off the pension?

Updated

It has been more than 20 years since Australians were first made to put money aside for superannuation, and the Turnbull Government is now talking about possible changes, but how well does it know the current system?

The Government recently promised to "enshrine the objective of the superannuation system in legislation".

It was responding to the Financial System Inquiry that recommended that the Government set "clearly articulated objectives" with "broad community support".

The claim: Assistant Treasurer Kelly O'Dwyer says that Australia's superannuation system "was set up to be an alternative to the aged pension so that people didn't have to rely upon the aged pension or even the part pension".

Assistant Treasurer Kelly O'Dwyer says that Australia's superannuation system "was set up to be an alternative to the aged pension so that people didn't have to rely upon the aged pension or even the part pension". The verdict: Key figures in the introduction of compulsory super in Australia say it was introduced for a number of reasons, including a desire to relieve pressure on the social security system as the population ages. But the governments of the day did not sell the policy as a way to get people off the pension and instead said that most people would still get at least a part pension. Ms O'Dwyer is ill-informed.

On ABC's Insiders on 25 October 2015, Assistant Treasurer Kelly O'Dwyer suggested that the "whole objective behind the superannuation system" is for people to be able to live on their superannuation savings without recourse to the age pension.

Ms O'Dwyer said: "When it was set up all those years ago in 1993, it was set up to be an alternative to the age pension so that people didn't have to rely upon the aged pension or even the part pension."

Is she correct? ABC Fact Check takes a closer look.

When did the super system start?

In her October interview, Ms O'Dwyer referred to the super system being set up in 1993.

She subsequently told Fact Check that this is a reference to the passage of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The SIS Act was passed to improve the regulation of super funds, giving effect to an announcement made on October 21, 1992.

Ms O'Dwyer appears to have simply got super's start date wrong: universal compulsory super as we know it today was announced in the Hawke Government's final budget in August 1991 and brought into law during Paul Keating's government in 1992.

From 1 July 1992, the government imposed a levy on employers (the Superannuation Guarantee Levy/Charge or SGC) who did not contribute the required amount to an employee's super fund.

Beyond Ms O'Dwyer's minor error, sources consulted by Fact Check suggest that the "superannuation system" did not begin with the SGC in 1992, but instead had its genesis in the mid 1980s.

It is therefore necessary to go back to the 1980s to get a sense of the objectives behind the super system.

How did super come about?

When Bob Hawke's government came to power in 1983, up to half of employees, mostly professional workers, had some form of super.

But super was fragmented and inflexible: many funds were tied to particular employers and required years of service with the one company before any benefit was available.

The basics Superannuation is a way to save for retirement at concessional tax rates.

Employers have to pay 9.5 per cent of an employee's salary into super.

Pre-tax contributions (up to certain limits) are taxed at 15%.

Generally, people can access super at 60 (if retired) or 65 (if not retired).

Full or part age pension is offered to those who meet asset and income tests.

80 per cent of older Australians receive a full or part age pension.

The proportion of Australians eligible for some level of pension is unlikely to reduce over next 40 years

Australia's economy was also very different in the 1980s, with relatively high inflation (around 11 per cent a year in 1983), stricter labour market regulation and higher levels of union membership.

The Conciliation and Arbitration Commission decided whether workers paid under awards could get pay increases.

In 1986, the Commission ruled on a wage claim by the unions, awarding an increase of 3 per cent of ordinary earnings to be paid into super accounts.

According to a 1989 Hawke government policy document, by June 1989 around 65 per cent of employees were covered by an award that required the employer pay 3 per cent of wages into super.

In 1991, the renamed Industrial Relations Commission rejected a further union claim for a lift in employer super from 3 to 6 per cent.

It was after this rejection that the Hawke and subsequently Keating governments decided to legislate for the 3 per cent and additional increases, to be paid to almost all workers, not just those on awards.

Super under Hawke

Finding a clear "objective" for the super system is not a straightforward task, given that the policy developed over time and was influenced by many people.

Multiple aims were cited at different times, including:

extending superannuation beyond professional workers;

providing portability of superannuation between jobs;

meeting union pay demands without raising inflation;

boosting the viability of industry super funds;

satisfying future lifestyle demands of baby boomers; and

securing the social security system for those truly in need.

The big players were Paul Keating (Mr Hawke's treasurer and subsequently prime minister), Bill Kelty (then the ACTU secretary), Brian Howe (Mr Hawke's minister for social security) and John Dawkins (Mr Keating's treasurer).

Fact Check has attempted to determine what the actual policymakers intended.

As well as speaking with some of the stakeholders, Fact Check has looked back at materials published at the time and subsequent commentary and memoirs.

In the late 1980s, superannuation was sold as a supplement to the aged pension.

In 1989, the prime minister Mr Hawke said: "The pension will always be there for those who need it, but it will be supplemented by a range of superannuation options."

In that year, Hawke government minister Brian Howe announced what he called "the first comprehensive national policy on retirement income", which included initiatives on both superannuation and social security payments such as the age pension.

The policy talked of the ageing of the population and asserted that retirement expectations of the baby boomers could not be met by the age pension alone.

Instead, workers could "look forward to a better standard of living in retirement by supplementing the pension from their own savings".

Mr Howe tells Fact Check that "the age pension system is primarily designed as social security, whereas compulsory superannuation is about encouraging savings over and above the pension system".

"It was never imagined that one would replace the other," he says.

Superannuation guarantee

Sorry, this video has expired Video: Paul Keating speaks to the AGSM on superannuation (ABC News)

Mr Keating resigned as treasurer in June 1991 and then in July gave an attention-grabbing speech on superannuation.

His proposal was for a retirement income scheme for all "based on the aged pension and... augmented by a privately funded and employment related national superannuation scheme fuelled by a fully mature level of contributions"

"Such a scheme would maintain the age and service pensions as the foundation of equity and adequacy in retirement income arrangements, but be complemented by the income of private superannuation with the dual systems integrated through to tax and social security systems," Mr Keating said.

Mr Keating proposed compulsory superannuation payments, phasing up to 12 per cent of income over a decade.

The superannuation guarantee charge was announced in the Hawke government's 1991-92 Budget, handed down in August 1991 by treasurer John Kerin.

"Superannuation is the cornerstone of encouraging greater self-provision", Mr Kerin said at the time.

"That will help improve retirement living standards and will reduce the budgetary cost of the pension system as the population ages into the next century."

At the release of an information paper a few months later, Mr Kerin said that "[t]he age pension will, of course, remain to provide retirement income security for those who have not had the opportunity to save during their working lives".

Super under Keating

Mr Keating became prime minister in December 1991 and the following year his government negotiated the passage of the superannuation legislation through the Senate.

Mr Keating's social security minister Neal Blewett noted in his published diary that around this time Mr Keating viewed "workers' superannuation very much as a top-up to the aged pension and not as a substitute for it" but had to be reminded that "our objective in widening superannuation cover is to moderate pressures on the budget from age pensions as the population ages".

Today, Mr Keating tells Fact Check that "the system was never set up to replace the pension".

"The system was built for the vast majority of people needing to rely on the age pension – with superannuation savings augmenting the pension. With the proposed pension withdrawal rates this would mean that most people would have a greater retirement income but in the context of a part pension," Mr Keating says.

Ms O'Dwyer has referred Fact Check to a 1992 statement made by Mr Keating's treasurer John Dawkins that "compulsory superannuation would raise retirement living standards and reduce pressure on the age pension".

But this does not tell the full story.

In June 1992 Mr Dawkins released a detailed 'security in retirement' policy, including the following statement:

"The Government sees the age pension not just as a security net for future retirees but as the keystone of its superannuation policies. It expects that most future retirees will continue to be eligible for the age pension (for example through a part pension) which, with self-provided and tax assisted superannuation, will allow a higher retirement income than is now generally available."

The government said that, over time, the SGC would be a more affordable option than making the pension more generous: in the policy statement, a projection was made into 2025 indicating that the cost of increasing the rate of the full single age pension would end up being three times the cost of the superannuation tax concessions in place due to the SGC.

In an accompanying press release, Mr Dawkins predicted that "in the future, most retired persons will have an increased retirement income from compulsory saving and a part age pension".

When he introduced the legislation into the House of Representatives in April 1992, he said: "The increased self-provision for retirement will permit a higher standard of living in retirement than if we continued to rely on the age pension alone."

"It would also enable future governments to improve the retirement conditions for those Australians unable to fund their own retirement adequately," he said.

Today, Mr Dawkins tells Fact Check that he had to sell the SGC policy to the public and "constructed the pitch around three pillars — compulsory contribution, the age pension and private contributions".

"We knew that it would take about 40 years for the scheme to mature and the rate of contribution would have to increase to around 12 per cent for super to provide a decent retirement income," he said.

"So...the age pension pillar was likely to be an important element for a long time."

Mr Dawkins says that "as balances grew through time and as a result of higher contributions theoretically a super recipient could be independent of the pension but in 1993 that was a very long way off".

Senate committee on super

A Senate Select Committee on Superannuation scrutinised the legislation.

Former Labor senator Nick Sherry, the chairman of the committee, tells Fact Check:

"Compulsory super was established so that the 70 per cent of the workforce without much super could add to their retirement income. The fact that the means test of the age pension does gradually reduce the age pension payment to generally higher income earners and those with substantial assets was useful but incidental and was not the reason for the introduction of compulsory super."

Former Liberal senator Richard Alston, then the opposition spokesman for superannuation and deputy chairman of the committee, recalls differently: "The reality was that the vast majority of the current voters were going to get a mix of both [super and the pension] ... but my recollection is that the underlying policy objective was to reduce welfare dependence."

The committee report by Coalition senators, the minority on the committee, said: "Two major arguments constantly advanced by the government to justify a compulsory system are the need to boost national savings and the need to curb the rising cost of age pensions."

The minority report was sceptical about both of these.

Noting that the Industrial Relations Commission had recently rejected the ACTU's application for an increase in award superannuation from 3 per cent to 6 per cent, it said the only explanation for the government's haste to begin the compulsory system in July 1992 was "its anxiety to have its accord deal with the ACTU in place well before the next election".

The minority report quoted evidence from Eva Cox from the Women's Economic Think Tank that "this is a deal between the government and the ACTU about something which has got very little to do with retirement income and much more to do with the politics of the union movement and the government".

There was no suggestion in that report, or the majority report by Labor senators, that the government's rationale was to create an alternative to the age pension so that people didn't have to rely on even the part pension.

The verdict

The current superannuation system was developed from 1986 onwards, with universal compulsory superannuation coming into force in 1992 (not 1993).

It was introduced for a number of reasons, including a desire to relieve pressure on the social security system as the population ages.

But the governments of the day did not sell the policy as a way to get people off the pension and instead said that most people would still get at least a part pension.

Ms O'Dwyer's statement is ill-informed.

Sources

Topics: superannuation, social-policy, government-and-politics, welfare, tax, liberals, australia

First posted