The proposed superannuation changes are still dominating Parliament. This week they brought part of the legislation to the table but I understand that the parts of it that relate to the $1.6 million limit per person in pension mode, and the lifetime limit of $500,000 in non-concessional contributions are still being worked out.
The thinking in Canberra is that superannuation should be set at an amount that is considerably above the age pension cut-off point but not excessively so. You may have noticed that $1.6 million is slightly less than double the proposed asset test cut-off point of $823,000 which will come into force in January. As the pension asset test is indexed to CPI, the government believes that the $1.6 million tax free limit should also be CPI indexed. It will rise in $100,000 increments – current modelling indicates that the $1.6 million limit may rise to $1.7 million in the financial year ending June 2021.
Note that $1.6 million if invested at retirement, at an rate of earning inflation plus 3%, would pay an income equivalent to four times the single age pension for 25 years. The numbers are realistic, and in line with the government’s stated purpose to stop superannuation being used as a tool for squirrelling away large sums of money in a zero tax area for the benefit of one’s beneficiaries. For a couple aged 65, this represents an indexed income of $176,000 a year until age 90 if the fund earns 5% and inflation is 2%.
The backdating of the $500,000 non-concessional lifetime cap, which is the most controversial of the proposed measures, also makes some sense once the logic behind it is explained. The government has taken the view that wealthier superannuation contributors have already made after-tax contributions averaging $700,000 per person, which should be adequate to get them to the notional target of $1.6 million. They believe that allowing a lifetime cap of $500,000 for everybody from 1 July 2016 would give an unfair advantage to older wealthy people over the young accumulators.
The changes may not be welcome to many, but at least now you understand the logic behind them.
The big difficulty for this government, and future ones, is that Australia, like most developed nations, has serious ongoing budget problems. The Social Services budget, which has ballooned to $159 billion a year, now represents more than a third of the total Commonwealth budget of $451 billion a year. The terrifying news is that the Social Services budget is growing at 8% a year while total Commonwealth revenue is growing at less than 3% a year. Given we still borrow $1 billion every month to pay our way, more cuts to welfare are inevitable.