July 23 2016
Terry McCrann Business Columnist Melbourne
Superannuation is now the fundamental defining issue of Scott Morrison’s treasurership. Either he fixes the mess he unveiled on budget night or he announces his total unfitness to be treasurer.
Indeed, his failure to demonstrate even the slightest understanding of how and why he got it wrong — far less, any comprehension of the more substantive and more complex policy issues involved — suggests an incapacity to do the job.
Very simply but very significantly, what is proposed is just very bad policy. It was always going to be the outcome of a process corrupted from gestation, as it aimed solely at generating revenue and devil take any consideration of good policy.
There is not the slightest indication of any substantive analysis of the impact of the proposed changes on the superannuation system in the long term; far less its integration with the old age pension and retirement incomes and social welfare costs overall.
That’s one side of the failure; that it could prove one the great fiscal “own goals” of recent memory, if it ends up encouraging — or more simply, just forcing — more people to move out of self-funded retirement on to a full or part pension, plus all the other taxpayer-funded benefits that would then accrue.
The entire, the only purpose of the superannuation tax concessions is to encourage people to preferably fully but at least partially self-fund their retirement.
It is “penny wise and, very, pound-foolish”, if you initiate price signals that persuade people to take the, even reduced, concessions upfront and then end up still on the taxpayer teat in their, truly and most likely long-extended, “golden years”.
Even if that’s not bad enough — the utter failure to integrate the super changes intelligently with overall retirement incomes reform — what made it worse, was the incomprehension of the negative intersection with other investment dynamics.
Again, quite simply, you cannot go down this single-issue path, which Morrison has blundered on to, without at least considering the consequential impacts with negative gearing, capital gains tax and both the tax and social welfare exemptions of the family home.
To put it in simple terms which the Treasurer could hopefully understand: if you make superannuation less attractive as an investment, savings will move from it to other still tax-advantaged alternatives like investment and owner-occupied properties.
Further, at the risk of this getting a little too complicated for the Treasurer (and, it seems, Treasury) to understand, you will even encourage funds inside super to move in that (and other) directions to minimise the payment of the extra super tax you expected to reap.
To take the most obvious example: someone in retirement with a super balance of more than the proposed $1.6 million tax-free cap would split their assets, so that all the taxable-income-generating assets were in the $1.6m pot and all those generating no taxable income or indeed tax credits would be in the taxable pot.
This is what happens when you have one focus: raise revenue — an objective demonstrated most graphically by how exactly we ended up with the three major changes.
I am informed that initially only the two caps were proposed — the $1.6m tax-free retirement pot and the $500,000 for lifetime after-tax contributions.
But that just wasn’t going to raise enough revenue. Indeed, it would have been almost revenue neutral when you accounted the offsetting cost of the new concessions.
So Treasury was sent back to the drawing board to come up with a big hit that would give the package at least the appearance of contributing to so-called “budget repair”.
It came back with the reduction in the cap for concessional contributions to $25,000 and reducing the income point to $250,000 at which the contributions tax goes up from 15 per cent to 30 per cent. These will raise $2.45 billion over three years and so, hey presto, the whole package became revenue positive.
But talk about selling a cohesive retirement incomes policy for a mess of fiscal potage. Add up all the measures and they are projected to raise the grand total of $3.4bn net over the four years. As a consequence the four-year aggregated budget deficit will be $84bn instead of $87.5bn. We’ve been saved from fiscal Armageddon.
In fact, the real deficit as opposed to the Treasury and Treasurer projected deficit over the four years will be at least $120bn and the real net tax outcome of the changes will almost certainly be less than projected as investor behaviour changes and tax savings are targeted inside and outside super elsewhere.
In sum, these changes will really contribute four-fifths of five-eighths of very little to “budget repair”. A treasurer who cannot understand these simple realities should not be sitting in that office. That’s before even getting to the, ahem, more “challenging” issues.
Start with the need to model lifetime employment patterns — on a realistic 21st century basis when people are supposedly going to have eight to 10 jobs in very different industries and probably in very different geographic locations. Then factor in likely investment returns and increasingly complex risks. What are thus the likely retirement super balances?
Arguably, it will be impossible to build sufficient balances from concessional contributions, especially when Canberra takes 15 per cent going in; unless you specifically allow much greater contributions when people are in their 50s and (hopefully) finally earning serious money.
Arguably you should have a much higher ceiling on the after-tax contributions because in the world of tomorrow there will be far fewer people earning salaries and certainly not regularly for lifetimes. Or, more sensibly, have only one combined ceiling for all contributions — say, for purposes of illustration, $3m. You can get there either pre-tax or after-tax — your choice, or what’s available for or you.
In short, start from the position of what we want super to achieve, and then ground the tax concessions in the real world of both future employment and investment returns.