Increase to super contributions won't work

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The Australian Government intends to raise the compulsory superannuation contribution rate from 9% this year to 12% in 2020 as part of their measures to strengthen the age pension, announced in the 2009-10 Budget.

They believe the measures will generate an additional $10b and benefit around 8.4m employees, with a 30 year-old earning average full-time wages receiving an additional $108,000 in retirement savings.

The changes are expected to reduce future demands on the pension from an ageing population, but Stephen Kirchner from the Centre for Independent Studies said a mature compulsory superannuation system would only have a modest impact on future age pension eligibility.

“Instead of raising the compulsory contribution rate, it’s worth looking at other reforms that might better achieve the government’s objectives,” said Kirchner.

In his research report Kirchner recommends that the government could look at changing the superannuation tax arrangements.

“At the moment, superannuation is taxed at the contribution stage and the earning stage but not at the benefit stage, and this is really anomalous in terms of international practise.

“A much better way of taxing superannuation is to leave contributions and earnings exempt from tax and to tax benefits.”

He suggests coupling these tax reforms with mandatory annuitisation of retirement benefits, to reduce double dipping and future demands on the budget in a “more transparent, equitable and politically robust way than further increases in the compulsory contribution rate”.

Kirchner released his report Compulsory Super at 20: ‘Libertarian Paternalism’ without the Libertarianism in November. The first initial increase of 0.25% to the SG rate will be implemented on 1 July.

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