The elephant in the room is wearing heels

Pam Roberts, IOOF Senior Technical Services Manager

The super changes announced in the 2016 Budget threw up passionate responses from politicians, particularly during the election campaign. There were vehement objections to the retrospective provisions of the $500,000 lifetime cap (what happens if I want to put an inheritance into my super?), fervent opposition to unfairness of the $1.6 million cap on pension assets (which affects less than 1 per cent of members). But no-one appears to have noticed the elephant in room. And that she is wearing heels.

Concessional contributions cap

One of the key savings measures in the Budget super changes is to reduce the annual concessional contributions cap to $25,000 pa from 1 July 2017, and removing the higher cap of $35,000 for those aged 50 or more. This particularly affects women, who characteristically have irregular employment patterns and lower super contributions while raising families, and make catch up contributions later in life when family financial responsibilities reduce. Although the changes will allow up to four years of unused cap amounts to be brought forward for those with account balances under $500,000, this will only commence on 1 July 2017, and is cold comfort for many women who will lose the higher concessional contribution rate.

Yet only a few days before Federal Budget was handed down, the Senate Economics Committee released its report “A Husband is not a Retirement Plan: Achieving Economic Security for Women in Retirement”.

Australia's retirement income system …. structurally favours higher income earners who work full-time, without breaks, for the entirety of their working life. The women (and men) who do not fit this pattern of work face a significant handicap when saving for their retirement.

The committee recommends that the Australian Government ensure that any changes to the retirement income system … should:

  • deliver a decent standard of living for both men and women in retirement;…..
  • recognise the diversity of experience and outcomes in retirement incomes for different groups in society, particularly but not restricted to women;

ASFA retirement standard

ASFA estimates that for a comfortable income in retirement a couple will need annual income of $58,922 and a single person will need $42,893 income. This equates to a super accumulation at age 65 of $640,000 for a couple or $545,000 for a single person.1

Now let us look at the real situation. The HILDA2 survey is a longitudinal survey that has been conducted each year since 2001. It surveys the same group of 9432 Australian households comprising 17,325 persons on a range of subjects covering issues such as family life, employment, health issues, household wealth and superannuation. The results for the gender gap in superannuation are damning. For those who were aged around 51 years3 in 2001, the mean super balance for women was $74,912 and for men was $154,769. For the same group in 2014, now aged around 62 years, the mean super balance has grown to $187,327 for women (2.5 times) and $284,312 for men (1.84 times). The next (younger) group, aged around 464 in 2001 and 58 in 2014 have similar results: the mean super balance for women grew from $66,701 to $149,497 (2.24 times) and for men: $120,858 to $232,804 (1.92 times).

What does this tell us?

Firstly the gender gap in superannuation at retirement between men and women is appalling. On the 2014 survey, the mean account balance for women aged around age 62 is only 66 per cent of that of males. Sadly the pre-retirement situation is worse with mean account balances for women currently aged around 51 only 52 per cent of their male counterparts.

Also both women and men are trying to improve their retirement savings by contributing more in the ‘empty nest’ years during their 50s and 60s. The trends indicate that women, in particular, are trying to improve their situation with a higher rate of increase in their account balances than men of the same age. The Government should be encouraging women to improve their superannuation outcomes when they can. Certainly not act to discourage these savings.

There is no doubt that the reasons for the gender gap in superannuation between men and women are wide and complex. Women are more likely to be paid less, have broken working patterns, and work part-time or casually. Therefore they do not have the same opportunity to accumulate adequate superannuation savings throughout their working career as men.

Further, older people generally are disadvantaged by the super system. The Super Guarantee system did not fully phase in at 9 per cent salary until 2002, by which time many employees currently in their 50s and 60s had been in the workforce for 20 or more years with little or no super. Older employees can also have greater insurance costs, which can eat away at concessional contributions being made to super. Premiums for income protection insurance in particular can be high for older workers. Even though these premiums would be fully tax-deductible outside of super and not subject to FBT if provided directly by the employer, the concessional contribution cap will still apply to super contributions used to fund these premiums in super.

Consequently the Government should not be acting in any way that will reduce the opportunity for women and men to contribute more to super when they can and improve their retirement savings. Reducing the concessional contribution cap for those over age 49 from $35,000 to $25,000 does just that.

1 ASFA Retirement Standard – Issued 2 June 2016 based on 2016 March quarter cost of living. It assumes the individual/couple owns their own home and that all capital will be used during retirement.
2 The Household, Income and Labour Dynamics in Australia (HILDA) Survey: Selected Findings from Waves 1-14. University of Melbourne. June 2016
3 HILDA survey results for the age group born between 1950 and 1953. Results are in December 2014 values.
4 HILDA survey results for the age group born between 1954 and 1957. Results are in December 2014 values.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.