17 October 2017
Judith Sloan – Contributing Economics Editor
You’ll have heard that our system of compulsory superannuation is the envy of the world. But dig a little deeper and you’ll discover that the people making this claim are the beneficiaries of the system, rather than the superannuants.
The superannuation funds, the trustees, the fund managers and the workers more generally who are employed in the industry think compulsory superannuation is the bee’s knees. But the reality is that superannuation is a dud product for pretty much every present and past superannuation member and, deep down, the government knows this.
In effect, compulsory superannuation is a tax-gathering mechanism that knocks off many people’s entitlement to the Age Pension, full or part, while forcing them to forgo valuable current consumption — think buying a house, paying school fees, taking a holiday.
It is a form of compulsory saving that is taxed on the way in, taxed while it is earning, and taxed, implicitly or explicitly, on the way out.
We should be clear on one thing: governments should use compulsion as sparingly as possible. Think compulsory vaccination, compulsory schooling, compulsory military service, compulsory helmet-wearing for cyclists. Sometimes these interventions are debatable, and rightly so.
The arguments that were used to justify the introduction of compulsory superannuation were twofold: Australia needed to raise its rate of savings, as well as overcome people’s short-sightedness in order to provide for a comfortable, dignified retirement. The alternative was to compel people to save to achieve this outcome.
The first rationale was quickly discredited and is no longer used as an economic argument. The second line of reasoning has a series of weaknesses, most of which were discussed last week by former treasurer Peter Costello.
Costello, now the chairman of the Future Fund, made the point that the system of compulsory superannuation is reaching maturity but is failing to meet its intended objectives. The present final balances of superannuants are relatively meagre, on average $148,000 for men aged 60 to 64 and $124,000 for women.
He notes that the average balance for men and women is worth “less than the value of six years of the Age Pension”. Nice, but no cigar.
Moreover, 80 per cent of those 65 or older rely on the pension, in full or in part.
And even in the context of a lift in the rate of the superannuation guarantee charge — from the existing 9.5 per cent to 12 per cent, heaven forbid — the rate of reliance on the pension doesn’t change overall, although more retirees will be on part pensions.
But here’s the real kicker. Because of the way the income and earnings tests for the pension work, there is an effective 50 per cent tax rate on higher superannuation balances after a certain point. In other words, for every extra dollar you have in your superannuation account, you lose 50c of income from the pension. This is a shocking deal.
What super amounts to is a compulsion on citizens to knock off their entitlement to the pension while having their contributions and fund earnings taxed in the meantime.
It really is highway robbery — and I haven’t even mentioned the excessive fees and charges by the funds that are part and parcel of the way the system operates.
It gets worse. For citizens whose incomes are high enough potentially for them to become self-funded retirees, this government has decided to increase their tax burden and limit concessional contributions to the point that many will simply give up the quest and shoot for the pension, at least in part. This is seriously dumb.
The package of superannuation taxation measures implemented by Revenue and Financial Services Minister Kelly O’Dwyer is so complex and counter-productive that the likely medium-term outcome is less net revenue (and I’m not even talking here about doing your political base in the eye — which is, of course, seriously stupid).
And don’t you just love this: one law insists that employers must pay 9.5 per cent of a worker’s pay into superannuation and another law insists that the worker must remove any amount above $25,000 a year if the worker’s superannuation balance is high enough.
But the government seems incapable of doing anything about this inconsistency.
Indeed, apart from raising taxes and vastly increasing the regulatory burden on superannuation, particularly self-managed superannuation schemes, O’Dwyer has been incapable of effecting any real reform of a system replete with perverse features.
For instance, her effort to achieve a better balance of trustees of superannuation funds, with one-third of directors (including the chair) being independent, has come to nothing. She has been faffing about in relation to what should happen to the default arrangements — these give an egregious leg-up to the union industry super funds. There is a long list of other required changes, including enforcement of the sole purpose test for super funds, but it remains just that — a list.
This is where the importance of Costello’s speech comes in. He is proposing that the Future Fund, or a body similar to it, be used as the destination for default funds, which are the superannuation contributions made on behalf of workers who don’t make an explicit choice.
It is estimated that upwards of 75 per cent of workers who could make a choice don’t. Note, however, that in most enterprise agreements (which cover close to 40 per cent of workers), a single superannuation scheme is generally nominated and it is the one associated with the trade union linked to the workplace. (Kelly, you must outlaw this — put it at the top of your list.)
Let’s be clear, Costello is not proposing the nationalisation of superannuation. Rather, he is saying it would make sense for the default funds to flow to a national investment body — think Canada, Singapore — where the economies of scale and scope can ensure lower fees and charges as well as a global reach of investment. One of the biggest flaws of the investment side of our system is the overweight position of local equities, particularly the big banks.
Sadly, it seems unlikely that our system of compulsory superannuation will be dismantled anytime soon, even though it cheats so many people. In all likelihood it has induced higher levels of household debt as people anticipate being able to use their final superannuation balances to pay down outstanding debts, including mortgages.
The key now is to ensure that the super charge remains where it is (at 9.5 per cent); that we have a better way of directing default funds; and that the raft of other reform measures is acted on — sooner rather than later.