Super is a national disaster and coalition is to blame

The Australian

7 May 2019

Judith Sloan – Contributing Economics Editor

When it comes to monumental policy failings of the Coalition’s period in government, a standout is superannuation.

The changes that were made to the regulation and taxation of superannuation, as well as the ones the Coalition failed to make, in aggregate deserve an F — a big, fat failure.

The Coalition has come close to destroying self-managed super­annuation while giving an epic leg-up to union-sponsored industry super funds. It has paved the way for these funds to dictate the types of companies that will be allowed to operate in this country and how they will operate. Low-income workers continue to be ripped off while genuine superannuation savers have been speared in the eye.

Superannuation now exists primarily for the benefit of the industry rather than the members. It’s been a debacle.

Notwithstanding the clear pledges made in 2015 by Scott Morrison as treasurer that a ­Coalition government would not make changes that would hurt members, the measures contained in the 2016 budget were a repudiation of this.

Without any grandfathering, a cap was set for tax-free super­annuation balances; lower limits were put in place for both concessional and non-concessional contributions; the contributions’ tax was lifted for some members; and other complex restrictions were put in place.

They were essentially the wishlist of the industry super funds. These funds had the ear of influential bureaucrats able to persuade the ill-informed, gullible Coalition economic ministers of these changes.

It has made superannuation a much less attractive retirement ­income option for medium to high-income earners as well as hitting retired superannuants. (Low-income earners will always rely on the age pension and were not ­affected by these budget changes.)

It was hardly surprising that there was such a severe reaction from the Coalition’s base, including some Liberal members. It was a blatant broken promise, yet this didn’t prevent the minister principally responsible for the changes, Kelly O’Dwyer, insisting she was proud of them.

Then again, she had described superannuation tax concessions as gifts from the government, not unlike Bill Shorten’s description of cash refunds for franking credits.

Having made these ill-considered changes — and note that the surge of revenue from superannuation taxes has not been forthcoming in part because they are so dependent on the state of the share market — there were needed reforms to protect low-income workers, particularly those with multiple accounts.

The government faffed around for the next three years, putting forward bills and then withdrawing bills. The key issues were the consolidation of multiple accounts, the enablement of single default accounts, limits on fees, making insurance opt-in for low-balance accounts, the governance of super funds to include independent trustees, and defining superannuation’s purpose.

The end result of this unedifying process was legislating the role of the Australian Taxation Office to merge inactive accounts, a useful if modest outcome. But the great bulk of the Coalition’s super reform agenda was not completed.

Superannuation is a particularly dud product for low-income earners with a number of jobs within a short period of time. They typically end up with multiple accounts and are charged fees and unwanted insurance by each. At 30 they find their overall super­annuation balances trivial.

The obvious answer is to insist that workers are enrolled in a single fund that follows them through their working life unless they choose to change. This was a recommendation of the final report of the banking royal commission. But no progress was made on this.

The final issue on which the Coalition failed was in relation to the legislated increases in the super contribution charge, increases simply impossible to justify. The present rate is 9.5 per cent, but according to the legislated schedule, this rate will increase to 10 per cent on July 1, 2021. The rate will ratchet up over the subsequent years to 12 per cent in 2025.

This is bad news for low-­income earners, particularly with low wages growth.

The Grattan Institute estimates that the increase will strip $20 billion from wages. For a 1 per cent boost in retirement incomes, workers will lose 2.5 per cent of their wages. Moreover, every half a percentage point increase in the super guarantee charge costs the federal budget about $2bn a year.

Unsurprisingly, the father of compulsory superannuation, Paul Keating, has taken exception to the Grattan Institute’s suggestion that the SGC should be frozen at 9.5 per cent. Having previously conceded that the SGC reflects itself in the form of lower wage rises, he thinks the world has changed so that employers will bear the burden of any increase.

Demonstrating that perhaps Keating’s understanding of economics always was shallow, he quotes misleading figures about wage and productivity growth (using arbitrary starting points and failing to understand the distinction between consumer and producer wages) to suggest that employers can absorb an increase in the SGC without having an impact on wages.

But just think this through: if employers are able to restrict productivity gains from flowing through to wages, how can it be the case that employers will voluntarily absorb the impost of a higher SGC? What Keating is saying is ­illogical.

The Coalition has made a complete hash of superannuation policy to the point that the system is a discredited policy when it comes to providing retirement incomes and lowering the dependence on the age pension. It is very bad for low-income earners and it is also very bad for many middle-income earners. For the very wealthy, it is irrelevant.

Things will be worse under Labor given its complete capture by the industry funds. The SGC increases will proceed, there will be more taxation on members, the elimination of cash refunds for franking credits will devastate self-managed superannuation and there will be no progress on the ­establishment of single default funds because the industry super funds don’t want it.

The industry super funds will become more dominant and influential, including by forcing companies to take into account non-commercial considerations under the heading environment, social and governance.

Just don’t forget, it was the ­Coalition started this ball rolling.