Australia raises the bar on superannuation policy

Australia raises the bar on superannuation policy and boosts retirement savings, opportunities for reform in New Zealand

The changes to Australia’s superannuation system announced in the Australian Government’s response to the Henry Tax Review highlights the opportunities for reforming New Zealand’s retirement savings rates, according to Mercer.

Yesterday’s announcement that compulsory superannuation contributions in Australia will be increased to 12% of salary by 2019 will mean that, by the time the changes come into effect Australians will be putting five times the amount of money into retirement savings than working New Zealanders.

Martin Lewington, head of Mercer in New Zealand said the boost given to superannuation in Australia highlights the opportunities for reforming the retirement savings system in New Zealand and draws attention to differences between the Australian superannuation system and our KiwiSaver. “The changes announced in Australia yesterday will mean that New Zealand has further work to do to catch up to the savings machine of other peer economies,” Mr Lewington said.

“By 2019 the net employer contribution hitting every Australia superannuation member’s account will be 10.2% of an employee’s salary (based on Ordinary Time Earnings). In New Zealand employers pay the first 2% of salaries, but no contribution tax is applied. On this basis, Australian employers will be putting in five times the amount after tax to an employees’ superannuation savings compared to their New Zealand counterparts.”

“While we do need to bear in mind that Australia has had a head start – their superannuation system is more established, than our own KiwiSaver system which is just a few years old – the fact remains that New Zealand’s population is ageing just as quickly as Australia’s. The ageing population may be an even greater cost burden per capita in New Zealand because our “age pension”, NZ Super, is more generous than the Australian equivalent. It’s available to all Kiwis regardless of income or savings. In Australia it is only payable to those who meet certain income and assets tests.”

Other changes announced by the Australian Government yesterday also do more to accommodate older workers and those on low incomes. This presents opportunities for reform of New Zealand’s system:

Workers aged up to 75 years of age in Australia must have employer contributions of 12% paid into their superannuation, ensuring they are remunerated on an equal footing with their younger co-workers. By contrast in New Zealand, employers can only pay into KiwiSaver until either age 65 (but may contribute up until five years after joining if over age 65).

Contributions tax on superannuation contributions was left unchanged. Australians already enjoy a far lower rate of tax on employer contributions compared with New Zealand. In Australia, for example, employer contributions and any contributions made via salary sacrifice are taxed at 15% whereas in New Zealand any employer contributions above 2% or salary sacrifice member contributions are taxed at 33% generally (although employers may use a progressive scale).

From 1 July 2012, the Australian Government will pay an allowance of up to $500 for workers with incomes up to $37,000. This will provide a real reward for saving to many low income workers. Effectively those on lower incomes will pay no super contributions tax in Australia, whereas in New Zealand this only applies to an employer’s first 2% of contributions (and higher income earners also benefit from this in New Zealand).

As Mercer has pointed out in its Securing Retirement Incomes report, more can be done to improve the adequacy of New Zealand’s retirement savings system, in particular to make retirement savings more attractive to low and middle income earners.

Mr Lewington said that the incentives to join KiwiSaver, namely the matched contribution of up to $1040 per year from the Government and employer contributions of 2% is a positive step, but doesn’t go as far as Australia’s system.

“Australia has lifted the bar when it comes to encouraging low and middle income earners to save for retirement. Australian employers and the Government are chipping in more to help those on or below the average wage save for retirement.”

Mr Lewington also noted that Australia’s co-contribution regime whereby the Australian Government matches employee contributions at A$1.50 per A$1.00 contribution, up to a maximum of A$1,500, for those earning up to A$62,000 was more generous than sweeteners provided to middle income earners in New Zealand.

“Australia’s co-contribution system provides more for low and middle income earners, but it also means that those on higher incomes do not receive a Government paid boost, while in New Zealand the Government subsidy is available to all.”

Retirement income is a major policy issue. Mercer believes a secure retirement income system will require a multi-layered solution involving the Government, workplace and individuals. Australia’s system does not necessarily provide all the answers, but does present some ideas that are worthy of consideration.

ENDS

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