Tag: save our super

The Australian

12 September 2016

Henry Ergas

There is a fundamental defect in the government’s superannuation proposals that has been entirely overlooked. Instead of growing in line with average earnings, the $1.6 million “transfer balance” cap, which limits the amount that can be held in the withdrawal phase, is only indexed to consumer prices.

As real wages rise over time, the cap will therefore fall relative to earnings, reducing the system’s allowed replacement rate (that is, the ratio of pre-retirement to post-retirement income) and steadily increasing the effective tax rate on privately funded retirement incomes.

To make matters worse, the age pension is, and will no doubt remain, indexed much more generously, rising in line with the higher of consumer prices or nominal wages. As a result, the government’s proposals ensure that the capped replacement rate under superannuation will fall not only in absolute terms, but also compared to the age pension.

The proposal would, in other words, punish increasingly severely those people who save for themselves relative to those whose retirement is paid for by taxpayers. And the effect is far from trivial, since compounding means even small differences in growth rates soon translate into large differences in outcomes.

Assume, for example, that initially, the $1.6m is sufficient to buy an annuity one and a half times greater than the pension, and that real wages and consumer prices each increase by 2 per cent a year. Within 10 years, the maximum annuity that can be purchased will have fallen to just a quarter more than the age pension, while in 20 years, it will barely equal the pension.

At that point, anyone relying on the withdrawal account will, despite saving for decades, be no better off than a person who did not save at all.

And adding insult to injury, it is of course those self-funded retirees who, during their working life, will have paid the taxes that finance the age pension others are enjoying.

Instead of frankly acknowledging those effects, the government’s claim is that the initial $1.6m is generous, implying that its progressive erosion as a share of typical middle income earnings is of no consequence. To make that claim, its unpublished briefing to backbenchers assumes a return on investment in retirement of 5.5 per cent and compares the resulting income stream to the age pension.

That comparison is nonsensical. The age pension is effectively an annuity that rises in value as the economy expands and incomes grow. While there is some political risk associated with that annuity, experience suggests it is slight, making it close to a sure thing, both in absolute and compared to the uncertainties that plague the superannuation regime.

As a result, the proper comparison is between the value of the age pension and the income stream a superannuant would secure investing the $1.6m in assets whose yield is also a sure thing, i.e. government bonds, net of the fees incurred in purchasing and periodically renewing that portfolio. With the commonwealth bond rate reaching a record low of 1.82 per cent in August, the resulting relativity would look far less favourable to self-funded retirees than the government claims. And of course, as the difference in indexation arrangements played itself out, the relativity would deteriorate further.

In short, it may be that the greatest effects of the proposed changes would initially be on a small number of wealthy retirees, as the government argues.

What is certain, however, is that the indexation arrangements will soon spread the damage to an ever greater swath of middle Australia, in the process redistributing income from those who save to those who don’t.

Unfortunately, the redistribution does not end there. As part of its package, the government intends to recycle a large share of the revenue it collects into subsidising the superannuation accounts of people on low incomes.

However, using the superannuation system, with its high transactions costs, to boost low incomes makes no sense: a carefully targeted increase in the pension some years down the road (when the accounts that would have received the subsidies would have matured) can achieve the same outcome at far lower expense to taxpayers.

But one person’s excess costs are always another person’s windfall income: with that other person being, in this case, the industry super funds, who will largely garner the fees taxpayers subsidise.

Moreover, the recipients of the transfers will also be grateful, although they are likely to thank Labor, which initially put the payments in place, rather than the Coalition, for the largesse. Little wonder then that the government’s proposals are endorsed in whole or in part by its bitterest opponents.

The pity is that instead of using what little political capital it has to address our superannuation system’s myriad weaknesses, the government is squandering it on changes that undermine the system’s ability to serve what ought to be its purpose — facilitating the transfer of income from working life to retirement.

Bringing that missed opportunity into sharp perspective is the great merit of Rebecca Weisser’s paper on superannuation reform released today by the Institute of Public Affairs. As the paper emphasises, these are not solely economic issues: they go to whether we want a society that rewards self-reliance or that punishes it.

So far, for all its statements about the taxed and the taxed not, the government shows no sign of understanding what is at stake.

“Stuff your pension!”, Phillip Larkin famously wanted to shout in his poem Toad.

But despite belittling the aspirations for financial security in old age that he saw as profoundly middle class, even Larkin recognised “that’s the stuff dreams are made on”.

As those dreams take another battering, an efficient and equitable retirement income system seems more distant than ever.

The Australian

12 September 2016

Sarah Martin Political Reporter Canberra @msmarto

Both major parties are condemning middle-income Australians to a dependency on the Aged Pension by targeting superannuation for budget repair, a report from the Institute of Public Affairs says.

As the government prepares to tweak its election commitment to rein in superannuation concessions , the free-market think tank says the government’s “desperation” for new revenue sources, as outlined in its $6 billion superannuation tax package, will undermine future retirement incomes.

The release of the report comes as Scott Morrison seeks to reach a consensus with Coalition backbenchers on the shape of the government’s super reforms, with MPs arguing for the Treasurer to lift the cap on non-concessional contributions from the proposed $500,000 to $1 million.

Mr Morrison has faced a barrage of criticism from backbench MPs about the reform package, including from former prime minister Tony Abbott, who argued that the “deeply unpopular” changes were an attack on aspirational voters and the Liberal Party base.

Institute director of policy Simon Breheny said instead of targeting retirement income to fund spending commitments, the government should cut superannuation taxes of middle Australians to encourage savings.

Mr Breheny said middle income earners could expect to have a retirement income equal to 58 per cent of their pre-retirement earnings, compared with nearly 90 per cent for low-income earners .

“The poor have the pension, the rich have alternative investments and the middle class will miss out again. The objective of the superannuation system should be for people to maintain their living standards in retirement, not imply that they should be grateful to be tied to the Age Pension,” Mr Breheny said.

The paper, written by Rebecca Weisser and Henry Ergas, recommends abolishing taxes on contributions and earnings to give incentive for retirement savings.

It also proposes taxing end benefits in retirement at an individual’s marginal income tax rate, prioritising the reduction of fees and charges and making it easier for people to access private, defined benefit pensions.

“Unfortunately, proposed changes to superannuation from both the government and the opposition worsen, rather than fix the system’s myriad weaknesses,” the report says. “Superannuation reforms should be judged by the effect that they have on helping each individual to accumulate sufficient funds to maintain their living standards in retirement.”

The report also concludes that the government’s proposal to introduce a cap on non-concessional contributions and lower the concessional contribution cap will “make a bad situation worse” .

“What is clear is that governments should not tax retirement savings at rates that make it difficult or impossible for savers to secure reasonable living standards in retirement based on the living standards they achieved during their working life. Nor should government taxes on retirement savings distort consumption decisions , undermining the quality of life in old age and reducing overall economic efficiency.”

The government has released draft legislation for the first tranche of the super package, which excludes the most controversial elements of the proposed changes.

A draft bill for the remaining measures, including a $1.6m cap on tax-free pension accounts and a $25,000 annual limit on pre-tax contributions is expected to be released next month once a compromise position is agreed to by the Coalition partyroom and backbench economics committee.

Herald Sun

9 September 2016

Anthony Keane

POLITICIANS are being urged to cut back some of their own superannuation tax breaks before hitting the retirement savings of millions of ordinary Australians.

As MPs argue about restricting how much money people can put into super, a new analysis by financial strategists Marinis Financial Group estimates that more than $1.5 billion a year could be saved if they remove an ”obscene” tax break for retired politicians and other public servants.

Hundreds of thousands of public servants with defined benefit superannuation schemes, which were closed to new members by the mid-2000s, were granted a 10 per cent tax offset on their retirement pension income a decade ago even though members paid no tax on their super contributions or fund earnings during their working years.

“They’re among the most generous schemes in Australia, and probably the world, and they don’t need an extra free kick,” Marinis Financial Group managing director Theo Marinis said.

“The pensions they are getting have never, ever been taxed, anywhere, but politicians want to start clobbering people who have been taxed the whole way.”

Defined benefit pensions typically pay a percentage of a person’s previous salary for the rest of their life, unlike most Australians’ super which is a finite amount that drops as it gets spent in retirement.

“Politicians and public servants in untaxed schemes receiving defined benefit pensions cannot double dip. They automatically receive their pension each fortnight, usually automatically indexed to CPI, with no exposure to market volatility,” said Mr Marinis, a former Treasury official.

Australia’s Future Fund, now worth $123 billion, was created to pay public servant superannuation pensions, but some say it is not large enough to cover the huge future cost.

Finance commentator Robert Gottliebsen has been campaigning against defined benefit scheme “rorts” and last week renewed his call for a parliamentary inquiry.

“The cost of those defined benefit pensions is rising by $6 billion a year and there is a $400bn to $600bn shortfall. That increase in costs is conveniently buried and not included in budget figures but it’s a real cost,” he said.

Public sector superannuation specialist Laurie Ebert said some senior public servants were “avoiding tax from beginning to end” and said the system should be changed.

“I doubt that it would happen,” he said. “They’re not going to give it up easily.”

Mr Marinis said politicians made little mention of these schemes “because it affects them”.

He said the tax concessions could be stopped by a simple change to the Tax Act. “You are not supposed to give tax concessions to somebody who hasn’t already paid tax on their super.

The Australian

9 September 2016

Rachel Baxendale

Tony Abbott says the government needs to be “very careful about changing the rules once the game has started”, as internal consultation continues over the Coalition’s proposed changes to superannuation tax concessions.

The former prime minister’s comments came as Finance Minister Mathias Cormann declined to speculate on how long it may take to legislate the reforms, indicating the consultation process may drag on.

Speaking to 2GB’s Alan Jones, Mr Abbott reiterated his concerns about a proposal to cap non-concessional (post-tax) contributions at $500,000.

“This is one of the issues that Coalition MPs have been discussing, it’s one of the matters that the government is considering in the post-election period,” Mr Abbott said.

“My own view, as you know, is that superannuation is not the government’s money, it’s our money, it’s your money, it’s money that we’ve saved up over time.

“In many cases it’s money that we have invested, it’s not concessional money, it’s after tax money that people have put in and governments should be very careful about changing the rules once the game has started.

Mr Abbott acknowledged the difficult fiscal position the government must confront, and said it was important to ensure superannuation was a “retirement savings vehicle rather than a wealth management vehicle”.

“But still we have to be careful about the changes that we make and there are lots of members of parliament right now who are saying on behalf of their constituents, let’s think carefully about these things, particularly this issue of the $500,000 cap on non-concessional contributions,” Mr Abbott said.

Amid speculation a revised package of superannuation measures could be presented to the Coalition party room when parliament resumes next week, Senator Cormann indicated the timeline was likely to be more drawn out.

“I obviously don’t talk and discuss what is discussed in the party room, but our reform to superannuation tax concessions is a very substantial reform package, it’s designed to make the system fairer, more sustainable and fit for purpose,” he told Sky News.

“Most of these changes actually don’t come into effect until 1 July 2017, so we’ve got time to go through a proper process.

“We said before the election that there would be consultation after the election.

That consultation has been taking place, and obviously when the Treasurer and the Minister for Financial Services and Revenue is ready to take this to the next step, they will do so.

Asked whether that meant the next step could be some weeks off, Senator Cormann declined to speculate on timing.

“We’re going through a proper and orderly process and when they’re ready to press the button on the next stage, I’m sure that they will do so,” he said.

Institute of Public Affairs

Economics & Deregulation | John Roskam
Australian Financial Review 9th September, 2016

On Wednesday the Turnbull government released draft legislation to bring some of its superannuation promises into law. These changes are not the whole policy – we are told that some of the most contentious parts will be legislated in the future. But in many ways this legislation is even more significant than the policy of how superannuation should be taxed. Because for the first time the draft legislation enshrines the purpose – the principles – of our compulsory superannuation system into law.

When the government used the May budget to shred its promise not to increase taxes on superannuation, it did not consult the public on its proposal. At least they’re having a consultation this time. But the consultation will go for nine days. That’s correct. The public get nine days from when the draft legislation was unveiled (7 September) to the date consultations close (16 September) to make submissions on the future of an industry with more than $2 trillion in assets.

Meanwhile, the government estimates it will get $100 million this year from new taxes from overseas backpackers working in Australia. The consultation period was a month, and reportedly resulted in 1000 public submissions. But the consultation on the objective of superannuation goes for nine days. A sceptical observer might conclude that perhaps ministers have already made up their mind.

Over the last month the Treasurer has travelled the country assuring the public that the Coalition’s plans to retrospectively apply a $500,000 cap on post-tax contributions and limit the amount that can be held in accounts in the pension phase will only affect one per cent of superannuants. The problem with this analysis is that even if the one per cent figure is true (accurate figures for superannuation are notoriously inaccurate), the number only applies to people who are immediately affected by the change.

The figure takes no account of people potentially affected into the future. Further, the implication of the Treasurer’s claim is that if only one per cent of superannuants are affected by arbitrary and retrospective changes to superannuation, then there’s nothing to worry about. He is coming perilously close to claiming the rule of law shouldn’t apply to rich people.

‘Primary objective’

The thing that the government will spend nine days consulting the public on is the idea that the “primary objective” of superannuation should be put into law. According to the Coalition the primary objective of the superannuation system should be “to provide income in retirement to substitute or supplement the age pension.”

The problem with this as the objective of the superannuation is that it puts superannuation and the age pension the wrong way around.

The focus on any retirement income policy should be on strengthening self-funded superannuation, and the age pension should only act as add-on or top-up. The government should aim to have as few people rely on the welfare of the age pension.

Expressing the objective of superannuation in the way the government proposes is to put tax and financial consideration at the centre of superannuation policy. Instead, the starting point for any consideration of superannuation should be the inherent dignity of individuals taking personal responsibility for the care of themselves in retirement.

Saying that the main objective of superannuation is merely to save taxpayers the cost of the pension, is like saying people should be encouraged to get a job so the government doesn’t have to incur the expense of paying the Newstart Allowance. Work is important in and of itself. The self-respect of a retirement that doesn’t rely on support from someone else is no less important.

An objective for superannuation that was centred on dignity and choice in retirement could be expressed in the following way.

“The objective of the superannuation system is to ensure that as many Australians as possible take personal responsibility to save for their own retirement. The age pension provides a safety net for those who are unable to provide for themselves in retirement.”

Their policy on superannuation is not the only thing Turnbull and Morrison have got wrong.

They’re also wrong on the principles of superannuation. Getting a principle wrong is much more serious than mucking up a policy. Policies can be fixed and reversed. Principles are more difficult to correct.

In a “tetchy” private meeting with a group of Liberal and ­Nationals MPs in Parliament House on Thursday, Mr Abbott confronted Mr Morrison and Minister for Revenue Kelly O’Dwyer about their proposed $6 billion super package. He ­argued the government was wrong to offer super concessions to low-income earners.

He also argued for the government to abandon its proposed cap on post-tax contributions.

As Mr Morrison and Malcolm Turnbull seek to reach a consensus with backbench MPs on the contentious election policy, The Weekend Australian can also ­reveal that doubling the lifetime cap on non-concessional contributions to $1m would hit the budget bottom line by $750m.

MPs at the meeting said they were “aghast” that Mr Abbott had proposed hitting low-income earners — particularly working mothers — to benefit the wealthy, whom the former leader accused Mr Morrison and Ms O’Dwyer of abandoning.

“He went in there looking for a fight; he wasn’t interested in ­information, he wasn’t interested in listening to his colleagues, he wanted to have a fight,” said one MP present at the meeting.

Mr Abbott is understood to have argued that the Coalition should represent lower taxes and smaller government, prompting a retort from Mr Morrison about policies Mr Abbott had put in place while leader that had ­increased taxes. Amid a series of tense exchanges with the man he believed betrayed him in last year’s leadership spill, Mr Abbott said the super changes ­announced in Mr Morrison’s first budget in May “sent the wrong message about aspiration” and he argued that there should be no cap on after-tax contributions.

When he was prime minister, Mr Abbott ruled out changing superannuation, ­saying it was not a “piggy bank” to be raided.

The Weekend Australian ­understands Mr Morrison told Thursday’s meeting that the ­Coalition needed to focus on its key narrative — the moral ­responsibility it had for budget repair — and pointed to legislation being pursued by the government that cut taxes and spending.

“Scott was very firm, but it was clear from Tony’s demeanour that he had not got out of bed on the right side that morning,” one MP said. Another said: “Tony ­arrived to the meeting cranky, and I think people were a bit shocked that he went for Scott so obviously. It was personal.”

Increasing the lifetime cap on non-concessional contributions to $750,000 is understood to cost the budget $250m. Removing the retrospective elements but keeping the $500,000 cap would cost $540m. Raising the cap to $1m would cost $750m, but the Treasurer did not present costings for abandoning the non-concessional cap, as advocated by Mr Abbott.

Sources at the meeting say Ms O’Dwyer took aim at Mr Abbott for suggesting the Liberal Party should only look after a narrow base of wealthy constituents, suggesting he had forgotten about the “Howard battlers” and reminded him that the Liberal Party was “not just the party of the privileged”.

On the Low Income Superannuation Tax Offset, which benefits those earning less than $37,000, Mr Abbott is understood to have criticised Mr Morrison for wanting to restore the measure that he had scrapped in 2014 when the mining tax was repealed.

“Tony argued that we had suffered political pain for getting rid of it and we won’t get any credit for putting it back,” a source said.

Another said Mr Abbott “was basically arguing that the lowest paid should subsidise the wealthy”.

One female regional Liberal MP who was at the meeting of about 10 MPs, was one said to be “shocked” at his proposal to scrap the policy. Sources said she pushed back against Mr Abbott, saying the policy benefited women and part-time workers, and the government would suffer enormous political damage if it cut the $1.6bn policy to help wealthy superannuants.

It is understood Mr Morrison and Ms O’Dwyer were supported by Fisher MP Andrew Wallace and North Sydney MP Trent Zimmerman in arguing for the offset to remain in place.

The meeting also canvassed lifting the non-concessional cap to $1m. Sources at the meeting said this received a “sympathetic” hearing from Mr Morrison and Ms O’Dwyer. Mr Zimmerman, and conservative MPs George Christensen and Tony Pasin, also argued in favour of lifting the cap.

A spokesman for Mr Morrison said: “The Treasurer and Minister for Revenue and Financial Services have been consulting with colleagues on the government’s superannuation measures and welcome the continued positive discussions that have been taking place.”

Mr Abbott did not comment.

Herald Sun

31 August 2016

Terry McCrann

THE treasurer’s absolutely bull-headed refusal to reconsider his superannuation tax changes — other than in the very narrow context of a negotiating tactic with his own backbench — is a very, very, bad sign of the quality of policy more broadly we can expect from this Turnbull-Morrison government.

It should have been clear from budget night — indeed it should have been clear well before budget night, inside treasury and Scott Morrison’s office, if not his head — that the proposals added up to very bad policy and had to be changed, comprehensively and cohesively.

No, not changed because of the squeals of pain and outrage from high-income earners or those who had built up large multi-million dollar super balances, but changed for two very important functional reasons.

The first and most important was not to end up throwing the ‘baby’ out with the ‘bathwater;’ that for the sake of saving a few billion dollars upfront, you ended up compromising the entire purpose of the superannuation system and the tax concessions.

To remind the treasurer: this is, simply, to get as many people entirely or partially off the old age pension in future years, in future decades.

It would not simply be pointless but an utter disgrace, to have multi-billion dollar tax concessions each year, while also mandating the injection of over $20 billion a year into the pockets of fund managers and investment advisers, if all you ended up with was retirees being able to binge their super before spending the rest of their lives on the taxpayer pension.

The second reason why the budget proposals were bad policy is that they were proposed in a vacuum.

The government wants to put relatively low limits on how much people can put into super; while also increasing the taxation of the money that ends up in there anyway.

At the same it is leaving in place the low-tax regimes that apply to super’s two biggest competitors — negatively-geared investment, not just property but also into shares; and the capital gains tax-free family home.

As sure as night follows day, as sure as reality ultimately wins out over wished-for fantasy, people will in future double-down on negative-gearing — including inside their super funds — and also ‘invest’ more in their family home and stay in that home longer. It was almost as if Morrison brought down a budget deliberately designed to pour money into the pockets of property speculators and real estate agents — while imposing higher tax burdens and bigger budget deficits on the backs of his children and grandchildren, whose eyes he wants to be able to keep looking into.
Prime Minister Malcolm Turnbull and Treasurer Scott Morrison. Picture: AAP

As I noted on budget night — in accepting the inevitability of getting some wind-back of Peter Costello’s boomtime generosity — the government had set the two key limits too low. That was so, especially in the context of the ‘new normal’ of very low interest rates.

At a 3 per cent earning rate, the $1.6 million maximum tax-free super pension balance would generate only $48,000 a year as against between $22,700 (single) and $34,200 (couple) from the taxpayer pension.

Yes, the $1.6 million is per person, but Labor’s similar proposal would allow annual super pension income up to $75,000 to be tax-free. That’s more realistic, more reasonable.

The government should either adopt that approach or lift its tax-free ceiling to $2.5 million, which at a 3 per cent earning rate would be the equivalent.

Far more importantly, how does anyone in future even get to the $1.6 million in the context of the absolute limits to contributions that Morrison wants to impose: the $25,000 a year pre-tax ($21,250 actually into the fund) and the $500,000 lifetime maximum after-tax?

HOW can you on the one hand say that $1.6 million is an appropriate maximum sum to fund a lifetime in retirement, but accompany it with rigid contribution limits that make it impossible to actually get to that figure?

To say nothing of the good public policy objective of allowing — if not exactly encouraging — people in their early 60s to sell their family home and put, say, $1 million into super as a one-off?

It’s been nearly two months since the election. A competent treasurer, with an objective of merging good policy with effective politics, would have spent the time reworking the entirety of his super package, so that he would really have been able to confront first his backbench and then the parliament with well thought through basic good policy.

Instead Morrison has done the exact opposite: stuck his head in the sand and approached the issue as someone negotiating a deal where you want to give away as little as possible. This goes to the broader issue of leadership at the top — that of Morrison and the prime minister.

Exactly seven weeks ago, two weeks after the election, I suggested that everyone take a very deep breath and step back.

There was no need to rush to try to implement policy, whether election promise or left hanging from the budget. That in the coming weeks of the winter hiatus, this was the time for the PM to allow policy to be reconsidered, refined, and ideally made best ‘fit for purpose.’

What Morrison’s approach to the super mess demonstrates is that the first two months of the new term has been a complete waste of time.

That has been depressingly reinforced by Turnbull’s supposed 25-point action plan. Most of the proposals have more whiskers on them than a grizzly. They include such profoundly important measures as ‘registration of deaths abroad.’

We knew before the election that we had a dud — a political and policy dud — as PM. Since the election, the treasurer has made it his singular duty to convince us it’s a two-fer.

It’s going to be a very long and dispiriting three years. If we get that far.