Superannuation fund members with enough cash to make extra contributions to their super accounts have just got a leg-up over those who must survive on Centrelink payments like disability support pensions, carer pensions and the Newstart allowance (the dole).
The news comes in the detail of the Turnbull government’s superannuation reform legislation, the third tranche of which was released on Monday.
The boost to cashed-up super fund members lies in the way super contributions are indexed compared to Centrelink benefits.
The new legislation indexes super excess super contributions to Average Ordinary Weekly Earnings, (AOWE) while most Centrelink benefits are indexed to the Consumer Price Index or a similar index that measures the cost of living for beneficiaries.
The issue with this is that the AWOE, a measure of how much Aussies earn through wages and salaries, usually goes up significantly faster than the CPI, as the following chart shows.
If you translate that differential into cold hard cash over 10 years, allowable super contributions would grow 24 per cent more than benefits would increase. Here’s what that looks like.
The Abbott government had planned to apply CPI indexation to the age pension but this measure was not implemented in response to loud political opposition. So the age pension remains indexed to the CPI and AWE though a complex formula.
Independent economist Saul Eslake told The New Daily that the equity issues around indexing super contributions “depend on where you sit. If the idea is to maintain purchasing power, then they should be indexed to the CPI.”
“If the argument is about setting aside a percentage of real earnings then you could use average weekly earnings.”
“One is more generous than the other because wages grow more quickly than the CPI. Given the fact than the government is still allowing fairly generous super contribution caps the indexation arrangement confers a privilege on the well off as not many people can afford $100,000 contributions,” Mr Eslake said.
The new deal
The latest tranche of the super legislation details the contentious issue of non-concessional or after-tax contributions. The original reforms announced with the May budget saw these subject to a lifetime $500,000 limit with the commencement date for counting back-dated to July 2007.
That triggered revolt in significant parts of the coalition with prominent members like Tasmanian Senator Aric Abetz and Queensland National George Christensen threatening to cross the floor if the measure wasn’t withdrawn.
The new legislation repeals that and introduces $100,000 annual non-concessional caps that can be rolled up into one-off three yearly payments of $300,000 along with a maximum concessional cap of $25,000. There is no lifetime cap but once a fund gets to a maximum of $1.6 million no more non-concessional contributions can be made.
Another hidden benefit
The legislation details how allowable non-concessional caps will taper and there is a further advantage here for wealthy fund members. Where a balance is below $1.4 million, a $300,000 payment is allowable and where the fund is below $1.5 million, a $200,000 payment is allowable.
What that means is that people with with funds sitting just below the $1.4 million or $1.5 million levels can effectively put in almost $100,000 above the $1.6 million cap.