Like the United States, Australia has been confronted by a dual
crisis in its government-run old-age pension system. Benefits
payments to an aging population threatened to consume ever larger
amounts of Australia's budget according to projections in the
1980s, yet the Australian Social Security system clearly was unable
to provide an adequate income for retirees.
In
1986, in an effort to address these serious problems, a
left-of-center Labor government began to implement an innovative
retirement system based primarily on mandatory private savings in
plans called "superannuation
funds." This system, which in 1992 became known as the
Superannuation Guarantee, continued to be modified and expanded and
now features three key elements. First, workers contribute a set
percentage of their income through their employer to private
savings plans. By 2002, when the system is fully implemented, all
workers will be required to set aside 9 percent of their income in
a superannuation fund of their choice (see Appendix 1). This
mandatory savings can be augmented by tax-favored voluntary
contributions. Second, upon retirement, workers will have
accumulated a large nest egg from which to draw a secure and
comfortable annual income. Third, a safety-net program guarantees
that all retirees will receive an income that at least matches the
income they would receive under the original government-run
program.
Even
though Australia's private retirement savings plan is still very
young, it is quite popular. The benefits which have begun to
materialize herald a significant long-term improvement in the
Australian economy. For example:
-
More income for
retirees.
In the future, average-wage workers should be able to retire with
two to three times the income they would have had under the
original government-run system, depending on the level of
additional voluntary savings and the earnings performance of the
superannuation funds.
-
Increased national
savings.
The overall savings rate could climb by more than 3 percent of
gross domestic product (GDP) by 2020. Already, private savings in
superannuation funds have skyrocketed, rising from Au$40 billion
(US$28 billion) in 1985
to Au$304 billion (US$240 billion) as of June 1997.
-
Reduced pressures on the
budget.
Because eligibility for taxpayer-financed age pensions is now
means-tested, the higher incomes made
possible by privatization will lead to substantial budget savings.
Government spending on age pensions will reach only 4.72 percent of
GDP in 2050, one-third less than would have been needed had the
government chosen to provide an American-style universal Social
Security retirement benefit. (In the United States, Social Security
retirement outlays are expected to consume 5.59 percent of GDP by
2050.)
The
United States faces many of the same challenges that Australia
confronted in trying to ensure an adequate retirement income for
its aging population.
The U.S. Social Security system is expected to begin running a
deficit by 2012. As the baby-boom population approaches retirement,
policymakers grapple with a serious dilemma: How can they reform
Social Security to give American workers a comfortable and secure
retirement while addressing the system's massive long-term
deficit?
As a
model for reform, Australia's transition from a government-run
benefits program to a system based on private savings was a
resourceful answer to the challenges the Australian government
faced. Like similar privatization efforts in Chile and Great
Britain, Australia's system offers legislators in the United States
several key lessons for reforming the troubled Social Security
system.
Why Australia Had to Reform Its Pension
System
The
government-run old-age pension system in Australia was created in
1909 to help lower-income retirees. The government progressively
began relaxing means-testing and moving toward a universal age
pension after World War II. By
1983, all Australians over the age of 69 received a full age
pension regardless of income, and the rules for men 65 to 69 years
old and women from 60 to 69 years old were so lax that almost all
of them qualified for a full age pension as well.
This
Social Security system was just one part of a massive expansion of
government's role in the Australian economy between 1901 and 1983.
Among other things, policymakers tried to promote industrial
development through high tariffs and subsidies to manufacturers.
The government nationalized most energy, telecommunications, and
transportation companies. It also created a highly centralized
system of wage bargaining, known as the Award System, in which
employer organizations, labor unions, and the government jointly
established wages and working conditions across entire industries
based on concepts of "social justice" rather than on market
conditions. The economic impact of these policies, not
surprisingly, turned out to be negative. Australia's per capita GDP
went from the highest in the world in 1900 to 14th by 1980.
This
long-term decline, as well as fears of a more immediate economic
crisis, drove the newly elected Labor government in 1983 to
implement fundamental changes in Australia's economic policies.
Then-Treasurer Paul Keating best summarized the challenges facing
Australia:
We
must let Australians know truthfully, honestly, earnestly, just
what sort of international hole Australia is in.... If this
government cannot get...a sensible economic policy, then Australia
is basically done for. We will end up being just a third rate
economy.... Then you are gone. You are a banana republic.
As part of the new Labor government's comprehensive
economic reform program, the Social Security system was given a
thorough re-examination. Prime Minister Bob Hawke and Treasurer
Paul Keating found that government policy discouraged private
savings and left too many Australians dependent on Social Security
age pensions as their primary source of retirement income.
Moreover, these policies were causing adverse consequences for the
nation's economy. The dire problems confronting Australian
policymakers included the following:
-
Less than 40 percent of all workers
participated in public or private pension plans (superannuation
funds) before 1983, and coverage was limited to government
employees, financial sector workers, professionals, and senior
business executives.
-
Accumulated retirement savings
generally could not be transferred from one employer's
superannuation fund to another when an Australian changed
employment.
-
This lack of portability, along with
the preferential tax treatment of lump-sum distributions--95
percent of lump-sum distributions from superannuation funds were
tax exempt--often meant that superannuation merely provided
high-income Australians with a way to acquire virtually tax-free
income upon changing employment.
-
Dependence on Social Security age
pensions contributed to reduced national savings and depressed
economic growth. Indeed, Australia's national savings rate had
declined from an average of more than 25 percent in the early 1970s
to 16.1 percent in fiscal year 1991-1992.
-
The population was growing older. From
1994 to 2051, the number of Australians 65 or older will climb from
11.9 percent to about 23 percent of the total population.
-
The growth in the aging population also
means that dependence on Social Security age pensions would
threaten long-term fiscal stability. Age pension payments consumed
3.44 percent of GDP in FY 1982-1983 and were projected to rise
dramatically as the population aged, potentially reaching 6.8
percent of GDP by FY 2049-2050 if Australia continued on the path
to a universal age pension like the U.S. Social Security program.
The Private Savings Solution
To
address these serious problems, the Labor government decided to
restructure Australia's retirement policy. Policymakers decided
that a new system should satisfy three goals:
- Provide more retirement
income for future retirees,
- Increase national savings,
and
- Reduce long-term pressures on
the budget.
The
government concluded that the best way to achieve these goals was
to reduce the scope of government tax-and-transfer schemes and
instead promote greater individual reliance through a system of
mandatory private savings. As a result, the Labor government took
the following steps during its 13 years in power:
-
Means-testing of age
pensions.
In 1983, the Labor government reversed the trend toward a
universal old-age pension and strengthened means-testing for age
pensions. The existing income-based means test was extended to
Australians age 70 or over. A new asset-based means test also was
imposed (see Appendix 2).
-
Superannuation portability and
penalties for pre-retirement withdrawals.
To encourage Australians to preserve their superannuation savings
until retirement, two new rollover vehicles were created in
1983--approved deposit funds and deferred annuities. These vehicles
allowed Australians to keep their superannuation savings when they
changed jobs. In addition, a 30 percent tax was imposed on lump-sum
withdrawals from superannuation funds before age 55.
-
Award
Superannuation.
In 1985, the Labor government reached an agreement with
Australia's chief labor organization, the Australian Council of
Trade Unions, to seek a universal 3 percent contribution for each
employee to a superannuation fund in lieu of a general wage
increase through the Award System. In 1986, the Industrial
Relations Commission endorsed this agreement and incorporated this
employer mandate into all future labor contracts. As of July 1991,
72 percent of all employees were covered by Award
Superannuation.
-
Superannuation
Guarantee.
In 1992, the government introduced the Superannuation Guarantee
(SG) to expand Award Superannuation to cover virtually all workers.
Under SG, every
employer is required to contribute a prescribed minimum on behalf
of each employee to a superannuation fund. The required minimum
contribution was set at 3 percent of an employee's earnings in FY
1992-1993 and will rise gradually to 9 percent by 2002-2003.
Savings in
superannuation funds are fully vested and portable between
employers. Under current law, savings in superannuation funds must
be preserved until retirement after age 55.
In
March 1996, Australians elected a Liberal Party-National Party
coalition government which made further reforms in the system in
May 1997. These included:
-
Tax relief.
To promote additional non-compulsory private savings, the
tax burden was lowered on savings. During the 1998-1999 fiscal year
period, individuals will be allowed a 7.5 percent tax credit of up
to Au$225 (about US$177) and a 15 percent tax credit in 1999-2000
and beyond of up to Au$450 (US$355). These credits will apply to
savings income and/or additional voluntary contributions to
superannuation accounts.
-
Consumer choice.
Private-sector workers were given the right to choose a
fund from at least five options into which their employers would
deposit their superannuation savings. As of July 1, 1998, these
options must include (1) any relevant industry superannuation fund,
(2) any corporate superannuation fund, (3) at least one retail
superannuation fund, and (4) a new kind of superannuation fund--the
Retirement Savings Account (RSA)--provided by the bank or financial
institution receiving an employee's pay. RSAs are low risk/low
return capital guaranteed funds offered by banks, building
societies, credit unions, and life insurance companies.
-
More retirement income.
To maximize the amount of savings in each superannuation
account (and therefore the size of the annuity that could be
purchased), early hardship withdrawals are prohibited, and the
preservation age before which no withdrawals could be made will be
raised from 55 in 2015 to 60 by 2025.
-
Gender neutrality.
The government age pension program was modified to ensure
equal treatment for men and women. Currently, women may receive age
pensions at age 61 while men must wait until age 65. As of 2013,
neither sex will be able to qualify for the government safety-net
program until age 65.
Retaining the Safety Net
Although there is a strong consensus in
Australia that individuals should be responsible for saving for
their own retirement, a safety net will remain in place to ensure
that no one will be worse off under the privatized system. In
effect, every retiree is guaranteed an age pension equal to 25
percent of the average worker's wage--exactly what was available
before privatization.
Moreover, the means-testing provisions for
the government age pension are extremely generous. Even though
almost all retirees will have some income from their superannuation
savings, more than 33 percent of senior citizens in 2050 will get a
full age pension from the government.
All told, a full 75 percent of the elderly population in 2050 will
have their private savings income supplemented by full or partial
government benefit payments.
These generous payments reflect
Australia's primary goals in adopting mandatory superannuation:
boosting retirement incomes and increasing national savings.
Reducing government spending was a lower priority. And while there
will be significant long-term budget savings, they will not be
nearly as large as they could have been with a stricter
means-testing policy, a more rapid implementation of the SG savings
mandate, and elimination of the gap between the SG preservation age
and the qualification age for age pension payments.
The Results Of Successful Reform
By
every possible measure, the Australian move to privatization thus
far must be considered a success. The Labor Government had
committed itself to establishing a system that would satisfy three
major goals: providing more income for retirement, increasing
savings, and reducing long-term pressures on the budget. As the
following information illustrates, Australia is well on its way
toward achieving those goals.
More
Income for Future Retirees
Increasing the level of private savings will result in
significantly higher retirement income for Australian workers.
Predicting exactly how much higher is, of course, difficult because
retirement income under the private system will depend on the
earnings performance of the superannuation funds as well as the
level of additional voluntary contributions. Yet even pessimistic
scenarios show that privatization will boost old-age income
substantially.
The
Australian Treasury's Retirement Income Modeling Task Force, for
instance, computed that average-wage workers who made no voluntary
contributions and earned only 4 percent in real returns each year
(a modest figure, since the average over the last 10 years has been
5.5 percent) will be able to retire with nearly twice as much
income as they would have had under the old government-run system.
More realistic assumptions, such as
higher average returns and some degree of voluntary savings, have
demonstrated that privatization easily could mean more than twice
as much, and perhaps about three times as much, retirement income
for the average Australian worker. As Appendix 3 illustrates, the
benefits for different demographic examples are similarly
startling.
Increasing National Savings
The amount of funds in superannuation accounts has soared
from 17 percent of GDP in 1985 (Au$40 billion) to more than 55
percent of GDP in 1997 (Au$304 billion). By 2020, superannuation
assets are projected to reach more than 100 percent of GDP
(Au$1,525 billion, or US$1,202 billion).
Policies to boost the level of voluntary
savings also seem to be highly successful. One-third of
superannuation deposits in the most recent reporting period, for
instance, came from unforced employee contributions. All told,
superannuation is projected to increase Australia's national
savings rate by at least 3 percent of GDP.
A
Reduction in Long-Term Budget Pressures
Age pension reform and the growth of superannuation funds
will have a long-term positive impact on Australia's fiscal
position. Before reform, Australia had an almost universal age
pension. The Australian Treasury's Retirement Income Modeling Task
Force estimates that outlays for a universal age pension would have
consumed 6.76 percent of GDP in FY 2049-FY 2050. Because the Labor
government strengthened means testing for age pensions and
initiated the Superannuation Guarantee, however, age pension
outlays will be only 4.72 percent of GDP in FY 2049-FY 2050.
Potential Future Changes
Australian policymakers are largely
satisfied with the core components of their newly privatized
retirement system. Across the political spectrum, legislators
understand the flaws of the old government tax-and-transfer scheme
and recognize that private savings can provide a more comfortable
and secure retirement for the nation's senior citizens.
Nonetheless, some features of the new system continue to provoke
debate, and it is certainly possible that changes may be made in
the near future. The issues that are most likely to attract reform
are:
-
The tax treatment of
superannuation.
The coalition government announced that it will conduct a complete
review of Australia's tax code. Many lawmakers believe the tax laws
are needlessly complex and impose unnecessarily harsh penalties on
work, savings, and investment. It is therefore possible that, as
part of comprehensive reform, Australia might choose to follow the
lead of other nations with private retirement systems and abolish
taxes on superannuation contributions and annual fund earnings,
taxing withdrawals upon retirement instead. In other words, rather than impose
the 15 percent tax on workers' contributions made by employers as
well as the high income surcharge, it might make contributions to
superannuation funds tax deductible. Moreover, both the 15 percent
tax on interest and dividend income in superannuation funds and the
15 percent tax credit on withdrawals after retirement would be
repealed. These changes would accelerate the accumulation of assets
within members' superannuation funds during their working years and
reduce their dependence on the age pension after retirement. This
approach would also ensure that the Australian tax code does not
put a disproportionately heavy burden on income that is saved.
-
A mandate that superannuation
assets be used to finance retirement income.
Australians can manipulate the current system in two ways to
increase their age pension payments from the government. First, the
gap between age 55, when SG benefits can be withdrawn, and age 65
(age 61 for women), when age pension payments commence, could tempt
some Australians to use their superannuation funds to finance early
retirement and then rely on taxpayer-financed age pensions after
age 65. The coalition government previously agreed to raise the SG
preservation age from 55 in 2015 to 60 in 2025, but this leaves a
gap of five years. Pension experts advocate eliminating this gap to
prevent citizens from "double-dipping." In addition, current law
allows retirees to make large lump-sum withdrawals from their
superannuation funds. This may tempt some workers, even those who
work until age 65, to dissipate their retirement funds by
purchasing "big ticket" consumption items immediately and then
relying more heavily on taxpayer-financed age pensions. In order to
ensure that retirement savings are used for retirement income, the
government may decide to require that at least a portion of
superannuation funds be used to purchase an annuity which would
provide a minimum level of income in regular increments over
time.
Parallels to Privatized Retirement Systems
in Chile and Britain
As
various nations around the world rush to privatize their retirement
systems and secure retirement income for their senior citizens,
Americans continue to fear for the future of their Social Security
system. Reformers can learn much from studying what other countries
are doing. And though an exhaustive comparison of the systems is
beyond the scope of this paper, it is worth noting how Australia's
system compares with those of Chile and Great Britain, two other
countries whose privatization efforts have attracted considerable
attention.
Chile privatized its old-age system in the
early 1980s, replacing a tax-funded income-transfer scheme with a
system based on mandatory individual savings. The amount of savings
mandated for retirement accounts in Chile is 10 percent, which is
quite similar to Australia's 9 percent superannuation charge.
Chile's system, however, has advantages and disadvantages. On the
positive side, Chile imposes a simple and neutral tax treatment on
retirement savings. Moreover, it imposes the savings mandate
directly on the worker instead of using the employer as a
middleman. Since labor economists are virtually unanimous in
recognizing that employer-financed benefits (such as payments into
pension funds) come out of worker compensation, the Chilean
approach deserves applause for its honesty. However, Chile's
pension funds are subject to excessive regulation, a drawback which
has the effect of limiting diversity and creating higher than
necessary administrative costs as funds compete for customers on
the basis on non-performance criteria.
Britain has a two-tiered retirement
system. The first tier is an almost universal flat-rate benefit
provided by the government. The second tier depends on earnings,
and workers can choose to use the government system or select a
private pension alternative. Only 17 percent of workers have
elected to stay in the government-run program thus far, while 73
percent have decided to divert 4.6 percentage points of their
payroll tax into a private fund. Two differences between
Australia's system and Britain's are worth highlighting. First, the
system in Great Britain is best categorized as partial
privatization (though the Labor government may propose more
complete privatization sometime next year), while Australia's has
been more sweeping. However, Australia's privatized system, like
Chile's, does not compare favorably in terms of tax treatment. The
British government does not tax contributions to the accounts or
the annual earnings of the accounts. Instead, it imposes one layer
of tax at the time of withdrawal.
Lessons for American Social Security
Reformers
The United States and Australia are similar in
many respects. In Australia, 11.9 percent of the population is 65
or older, compared with 12.7 percent in the United States. Both are
high-income, developed countries with stable democratic
governments. The overall size and structure of their governments
are also similar: General government outlays in 1996 were 36.9
percent of GDP in Australia and 35.8 percent of GDP in the United
States. It is therefore reasonable to surmise that reformers in the
United States would draw lessons from the Australian experience in
reforming Social Security. Indeed, when Australia's Labor
government first embarked on this policy, it faced obstacles that
are not unlike those that exist in the U.S. It had, for
instance:
-
1.6 million retirees receiving
government age pensions, a large majority of whom were apprehensive
about any change in the existing system, and
-
A highly skeptical working-age
population of 8.4 million employees, many of whom doubted that
politicians would make changes that would enhance their
retirement.
Nevertheless, Australia overcame these
challenges through an innovative privatization program combining
mandatory contributions to private pension plans with means-testing
of Social Security age pension benefits.
Some
of the steps Australian policymakers took are applicable to the
United States as well. To reform the Social Security system
successfully, U.S. policymakers should:
-
Be honest about the
shortcomings of the current system.
The Labor government issued a series of reports, culminating in
Security in Retirement--Planning for Tomorrow Today in 1992, which
stressed that working-age Australians could not expect the federal
government to provide them with adequate retirement incomes in the
future.
-
Appeal to
self-interest.
Australian leaders Bob Hawke and Paul Keating stressed that
superannuation was the key to obtaining higher retirement incomes.
In other words, working-age Australians needed to accumulate far
greater private savings than they had in the past if they were to
be secure in their retirement years.
-
Appeal to national
interest.
The Labor government reminded Australians about their country's
low national saving rate compared to other developed countries,
informing them that age pension reform and the Superannuation
Guarantee, along with other macro-economic and micro-economic
reforms, would accelerate Australia's economic growth and create
new job opportunities.
-
Protect existing
beneficiaries.
Policymakers realized that benefit reductions for existing
retirees or those near retirement would be a major political
liability for reform. Even though benefit reductions would generate
immediate budget savings, such outlay reductions would jeopardize
the immense long-term benefits to citizens and the nation from
privatization.
-
Avoid relying on appeals that
the reform is needed to balance the government's
books.
The fiscal benefits from introduction of the Superannuation
Guarantee were presented almost as an afterthought in Australia.
Unlike in the United States, where politicians focus on the need
for individuals to sacrifice through higher payroll taxes and lower
benefits to solve the federal government's fiscal problems,
discussions in Australia stressed how comprehensive reform would
benefit individuals by accelerating economic growth now and
increasing retirement incomes later.
There are many other features of the
Australian system that offer valuable lessons to Social Security
reformers because the two countries are so similar. But it is also
worth noting the differences between the United States and
Australia. One big difference is that it is easier to change
government policy in a parliamentary system, in which one party
generally controls all the levers of power, than in a presidential
system of checks and balances. Australia has a unique mixture of
British parliamentary and American constitutional traditions, so it is not as easy for Australia
to change policies as it is for other parliamentary nations such as
Great Britain. Nonetheless, it is still easier to make policy
changes than it would be for policymakers in the United States with
its presidential system of checks and balances.
Pension reform in Australia was
facilitated as well by the Award System of highly centralized
collective bargaining. Indeed, the unions were one of the biggest
advocates of using private savings to boost retirement income.
Although this system of collective labor negotiations has been
partially deregulated since 1996, it helped the Labor government to
introduce mandatory private retirement savings to the workforce.
Needless to say, such a system does not exist in the United
States.
Finally, the U.S. and Australian
governments fund their Social Security retirement benefits through
different methods. Australia funded its old system, and pays for
the safety net portion of the new system, out of general tax
revenues. In the United States, Social Security benefits are
financed through payroll taxes. This significant difference
actually could prove to be an advantage for reformers in the United
States since policymakers could privatize the system by diverting
some or all of current payroll taxes into private accounts, rather
than by trying to impose a new savings mandate on American
workers.
CONCLUSION
Privatization has been a huge success in
Australia: Workers will be able to retire with higher incomes, the
government has significantly reduced long-term budget pressures,
and the economy will benefit by a dramatic increase in savings.
Like other nations around the world, Australia recognized in the
1980s that replacing the government's tax-and-transfer old-age
retirement scheme with a private retirement system based on
mandatory savings was a win-win proposition. Because Australia is
in many ways politically and demographically similar to the United
States, American policymakers would be well advised to learn the
lessons of Australia's successful reforms.
APPENDIX
1
How Australia's Superannuation Guarantee (SG)
Works
Annual Savings
Requirement.
Currently, 6 percent of income must be saved in a superannuation
fund. This rate will rise to 7 percent on July 1, 1998; 8 percent
on July 1, 2000; and 9 percent on July 1, 2002. The charge is
imposed on the first Au$90,360 (US$71,273) of pre-tax cash
employment compensation; it is adjusted annually to keep pace with
inflation (see Chart 6).
Collection of SG
charge.
Employers are responsible for withholding superannuation charges
and depositing them in a fund selected by the worker. The burden of
the charge clearly falls on the worker since it is part of total
employee compensation, much as the individual income tax in the
United States is a burden on workers even though it normally is
withheld and sent to the Internal Revenue Service by employers.
Types of SG funds.
According to the March 1997 Insurance and Superannuation
Commission Bulletin, there are 137,808 superannuation funds in
Australia.
-
Excluded funds. The
majority of all superannuation funds are small self-managed pension
plans, known as excluded funds, containing fewer than five members.
Taken together, excluded funds have 228,000 members and control
10.5 percent of all superannuation assets.
-
Trustee-managed funds.
In contrast, 16.1 million Australians are members of larger,
trustee-managed superannuation funds. There are four types of
trustee-managed funds: corporate, industry, public-sector, and
retail.
-
Corporate funds
typically are set up by large private-sector employers. These funds
have 1.4 million members and control 20.9 percent of all
superannuation assets. The number of corporate funds is declining
as more employers are meeting the SG mandate through retail
funds.
-
Industry funds are
sponsored jointly by multiple employers and labor unions in an
industrial sector. These funds, originally set up to receive the 3
percent Award Superannuation contributions, now have 5.7 million
members and control 6.3 percent of all superannuation assets.
-
Public-sector funds
are established for employees of federal, state, and local
government. They have 2.55 million members and control 23.2 percent
of all superannuation assets. Some public-sector funds are not
fully funded.
-
Retail funds, or
public offer funds, are provided by financial institutions such as
banks, insurers, and securities firms. Sold through intermediaries
to those eligible to contribute to superannuation funds or holding
superannuation savings for retirement, they typically are organized
as master trusts, allowing members to direct their contributions
among a number of mutual fund investment options. Currently, the
402 retail funds have more than 6.5 million members and control
24.2 percent of all superannuation assets.
Annuities.
About 15 percent of superannuation assets are held by life
insurance companies, usually on behalf of retirees.
Today, most corporate funds as well as
almost all excluded, industry, and retail funds are defined
contribution plans in which the member bears the investment risk.
Many public-sector funds remain defined benefit plans in which the
sponsoring employer is liable for pension payments to retirees
regardless of whether accumulated contributions and earnings in the
fund are sufficient to cover the pension payment liabilities. In
March 1997, only 16 percent of all member accounts were in defined
benefit funds. However, because most public-sector funds are
defined benefit plans, 52 percent of all assets held by
non-excluded funds were in defined benefit funds.
SG asset allocation and
return.
Overall, SG assets are allocated under management as shown in
Chart 7. The Insurance and Superannuation Commission (ISC) reports
that the average real rate of return for all superannuation funds
was 5.5 percent for the 10 years ending on June 30, 1996.
SG regulation.
Superannuation funds fall under the supervision of the Insurance
and Superannuation Commission to ensure that fund managers do not
engage in self-dealing or other forms of imprudent behavior. The
ISC takes a light-handed approach, relying primarily on a high
degree of disclosure of funds' policies and performance to members.
Other than a 5 percent ceiling on in-house investments, the
government imposes virtually no regulations or restrictions on the
investment decisions of superannuation funds.
SG taxation.
The tax treatment of superannuation is needlessly complex and
excessive. Employees must pay a 15 percent income tax on employer
contributions to their superannuation accounts. Workers earning
more than Au$70,000 (approximately US$55,216) must pay an
additional surcharge of up to 15 percent on employer contributions
to their superannuation accounts. Workers also must pay a 15 percent
income tax on any interest or dividend earnings in their accounts.
Withdrawals from superannuation accounts upon retirement are
subject to Australia's income tax less a 15 percent credit. This
credit is designed to partially offset the taxation imposed on both
the original contributions and fund earnings.
APPENDIX 2
Australia's Government Benefits Payments and
Means-testing Provisions
Age Pension Benefits
|
|
Maximum Biweekly
Payment
|
|
Single
|
Au$347.80 (US$274.34)
|
|
Couple (each)
|
Au$290.10 (US$228.83)
|
- Age pensioners may also receive rent or
residential care assistance, a pharmaceutical allowance, a
telephone allowance, or a remote area allowance.
Income and Assets Tests
|
Income Test
|
Full Age Pension
if biweekly income is
equal to or less than
|
No Age Pension
if biweekly income is
equal to or more than
|
|
Single
|
Au$100.00 (US$78.88)
|
Au$806.40 (US$636.09)
|
|
Couple (combined)
|
Au$176.00 (US$138.83)
|
Au$1,347.20 (US$1,062.67)
|
- The effective marginal tax rate on income over
the amount for the maximum payment is 50 percent (single) and 25
percent (each for a couple).
|
Assets Test
|
Full Age Pension if assets are equal to or
less than
|
No Age Pension if assets are equal to or
greater than
|
|
Single, homeowner
|
Au$125,750 (US$99,192)
|
Au$243,500 (US$192,073)
|
|
Single, non-homeowner
|
Au$215,750 (US$170,184)
|
Au$333,500 (US$263,065)
|
|
Couple, homeowner (combined)
|
Au$178,500 (US$140,801)
|
Au$374,000 (US$295,011)
|
|
Couple, non-homeowner
(combined)
|
Au$268,500 (US$211,793)
|
Au$464,000 (US$366,003)
|
- The effective marginal tax rate on assets over
the amounts for the maximum payment is 7.8 percent.