Superannuation must be built on reality, not stereotypes

The Australian

29 August 2020

Adam Creighton – Economics Editor

The biggest policy battleground over the next year will almost certainly be superannuation.

The government is sitting on the retirement income review, a recommendation of the Productivity Commission from 2018 that is bound to raise troubling questions for the super sector.

Aware of the political risks of tinkering with super, the government instructed the panel not to make specific recommendations, but the facts alone should make it obvious what needs to be done.

The review will probably show, just as the Henry tax review did a decade ago, that lifting the superannuation guarantee to 12 per cent, as is currently legislated, will cost far more in fees and forgone tax revenue than it could ever save in age pension outlays.

Fees are about $30bn a year, concessions are about $36bn, while age pension savings are, very generously, less than $10bn a year.

Proceeding with a policy that’s a net drain on public finances, especially when budget deficits and debt have ballooned, is questionable. The review will also make it clear mandatory super contributions are paid by workers, out of their gross incomes, rather than by employers. The genius of Paul Keating’s innovation, compulsory super, is that it appears to workers as if contributions are made by their employers.

But the economic incidence is very different from the legal incidence. Employers pay workers’ income tax, on their behalf, yet few believe an increase in income tax would be borne by the boss.

From the employer’s point of view, employees’ income tax and superannuation contributions are the same. The government says what proportion of workers’ pay goes in tax, super and disposable income.

In the short term an employer might choose to absorb an increase in the compulsory savings rate, but in the long run the government cannot dictate how much a business will spend on payroll. It must by definition mean lower take-home pay for workers.

Absent these two arguments, the super industry is likely to fall back on a paternalistic one: people don’t save enough without compulsion. While savings myopia might feel right, it’s empirically wrong. People are simply not spending their accumulated savings in retirement and instead are leaving significant bequests, research shows.

To be sure, uncertainty about how long we will live naturally induces precautionary saving, although this becomes less and less a justification the older we become (and the probability of dying increases).

A major study of 10,000 age pensioners in 2017 found that at death the median pensioner still had 90 per cent of their wealth compared to the start of their retirement. “On average, age pensioners preserve financial and residential wealth and leave substantial bequests,” the authors concluded.

We are hardwired, whether for cultural or biological reasons, to protect or grow our wealth. There’s nothing wrong with that, but it does undermine the claim that people aren’t saving enough. On the contrary they might be saving too much.

Grattan Institute analysis of the Survey of Income and Housing conducted by the ABS similarly found retirees typically maintained or increased their non-housing wealth through their retirement.

“Wealth appears to have dipped only because the global ­financial crisis reduced capital ­values, rather than because retirees drew down on their savings,” says Grattan.

“The bottom third by wealth of the cohort born in 1930-34 (aged 71-75 in 2005) increased their non-housing wealth from $68,000 in 2005 to $122,000 in 2015,” the ­authors pointed out.

The government has known this tendency for some time, too. As social security minister in 2015, Scott Morrison pointed to research by his own department that showed 43 per cent of pensioners increased their asset holdings during the last five years of life, and a quarter maintained them at the same level. “Less than a third of pensioners actually saw their ­assets decrease in their last five years,” he said.

What is the point of providing concessions if the savings are not being used to fund retirement but are simply passed on? It would be better to scrap the concessions, pay a bit more in age pension, and use the difference to radically cut income tax rates for everyone.

While the Coalition government is unlikely to propose anything like that, there’s an argument for being bold. The fact around three million Australians have just accessed their superannuation is a massive chink in the armour of compulsory super.

The government could make super voluntary, in effect offering a significant pay rise to any worker who wanted it. Remember, employers don’t care whether workers’ pay is sent to a super fund or the worker’s bank account.

The savings could be used to make significant cuts to income tax, or make the age pension universal, thereby scrapping the means testing that has so twisted the incentives of the over 65s. About 80 per cent of retirees already receive the full or part age pension. A universal pension would remove the significant disincentives to work that pensioners face, dramatically simplify retirement and end the game of retirees’ engineering, quite understandably, their affairs in order to receive a part-pension.

There are powerful political reasons for being bold, too.

Labor will be hoping the government does seek to delay or stop the increase in the super guarantee. That would give the party, rendered irrelevant by the corona­virus, something to fight for, even if it were for the vested interest of the super industry rather than working people. Indeed, a senior Liberal once told me the biggest supporters of compulsory super were older, wealthy Liberal voters, who believed the poor should be forced to save for their retirement so as not to be a burden. The ­median worker, let alone the poor, can never save enough to provide the equivalent of an age pension.

Regardless, facing a hysterical campaign from Labor and the doubts among its own base, it could lose the debate.

The government needs a positive plan rather than promising to stop something from occurring. Dangling the carrot of an optional near 10 per cent pay rise for workers or promising a universal age pension would be a significant proposal with plenty of merit.

The government’s successful early access scheme, which has seen around three million people withdraw almost $40bn, has delivered a body blow to compulsory super. Now is the time to reform it.