16 September 2016
SUBMISSION ON FIRST TRANCHE OF SUPERANNUATION EXPOSURE DRAFTS – Terrence O’Brien, (Address and contact number supplied)
1. Inadequate time for public comment
Providing only 7 working days for public input on the first tranche of complex super measures shows contempt for public consultation.[i]
An interested citizen may wonder: what is the reason for such a rushed consultation process for the subset of new super measures that are revenue ‘give-aways’, when all the closely related Bills to raise taxes on self-funded retirees and reduce the super savings opportunities of those nearing retirement are still weeks, if not months away?
To illustrate how far Australian super lawmaking processes have degenerated to the cost of confidence in super, contrast the current exercise with the planning for and consultation around the last major change of strategic direction in Australian super law, the Costello Super Simplification exercise of 2006 and 2007.[ii] A substantial discussion paper was issued with the May 2006 Budget announcement of the measures, with an extended consultation over four months until September 2006.[iii] There was keen interest to comment: more than 1,500 written submissions and more than 3,500 phone calls from across the community. Modest revisions to the original ideas were incorporated into revised costing for the forward estimates period and incorporated into legislation introduced by end 2006, with effect from 1 July 2007.
2. Inappropriate separation of legislative packages
It is wrong to separate consultation on the Budget super measures into a first tranche of $2.8 billion in revenue give-aways over the forward estimate period and a later tranche of yet-to-be-finalised tax increases of some $6 billion. Both sets of measures are built on similar, highly contested assertions about the purpose, fairness, cost and effectiveness of super concessions. Logically, they ought be considered together, in both consultation and Parliamentary processes.
It would be economically irresponsible if the Government were to seek to legislate sequentially a first tranche of give-aways followed by a second tranche of tax increases. If, for example, some of the $2.8 billion in new concessions proved on examination to be poor quality and unlikely to meet its stated objectives, that should affect the consideration of the $6 billion in super tax increases that in part pay for the new concessions.
One possible outcome of separate tranches is that the give-aways might be passed with populist cross-bench support despite Labor’s announced rejection of most of them[iv], and the tax increases postponed or rejected, further damaging the budget. Alternatively, the tax increases could also be passed at a second stage (or further increased as Labor proposes[v]) with Labor and Green support. The only clear message to super savers from these uncertainties is that superannuation law making has become chaotic and untrustworthy.
The Government should guarantee that all the Bills implementing the Budget’s super measures will be introduced to Parliament simultaneously as a package.
Not only should the new concessions and the increased taxes be considered together, they should all be subject to public examination by Parliamentary Committee, with the Committee calling on submissions and evidence from the public. This would help overcome weaknesses in the derisively short consultation processes concluding today.
3. Damaging mis-statement of objective(s) for superannuation
The Superannuation (Objective) Bill’s proposed primary objective for Government policies toward superannuation wrongly states that super merely “substitutes or supplements the age pension”. This is as if the government stated the objective for labour market law was that paid employment should ‘substitute or supplement government income support such as the Newstart Allowance’.[vi] The Government’s intended super objective loses all sight of the fundamental economic and moral cases in an increasingly rich society for:
- reducing systemic income tax and age-pension disincentives to long-term saving;
- supporting thrift; and
- increasing self-provision for retirement.
With this maladroit statement, the Government has turned its back on insights that have been clear since at least 1942[vii], and were applied through 30 years of super reforms during the Hawke-Keating[viii] and Howard-Costello years[ix].
The Explanatory material to Superannuation (Objective) Bill 2016 and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 adds five subsidiary objectives (most rather abstract) to the primary objective in the Superannuation (Objective) Bill, with all six to be subject to unspecified, case-by-case ‘balancing’. This destroys any coherent guidance for policy, so again the message to super savers is that anything could happen to the taxation of their life savings.
The Treasurer nonetheless asserts that the primary objective has “guided the development of the Government’s reforms”.[x] But as if to prove the uselessness of the government’s proposed ‘primary plus five other’ objectives, it is striking that the two draft Bills and the two draft Regulations in the first tranche do not themselves include illustrative statements showing the compatibility of their measures with the primary objective of the legislation (or any of the other five, for that matter) as would become compulsory if the Superannuation (Objective) Bill became law. If the Government believes its stated objectives have any meaning, it should use them to provide clear and quantified illustrations of the estimated effects of its legislative proposals on self-sufficiency in retirement and numbers on the age pension.
4. A better objective
An objective that better captures the reality of superannuation’s purpose is recommended by John Roskam: “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.”[xi]
5. New tax expenditures on super
Critics of existing super concessions currently dominate public debate with false claims that the costs of present incentives are excessive, unsustainable and unfair. (Robert Carling’s paper for the Centre of Independent Studies explains why these claims are overblown, with many of the estimates “unfit for purpose”.)[xii] Against the backdrop of these criticisms, any proposals to create additional incentives costing $2.8 billion over the forward estimates must clear a high hurdle by demonstrating their cost effectiveness measured against any stated objective of government policy.
All measures in the first tranche fail that cost-effectiveness test. All seek to induce additional voluntary contributions into super by subsidy or concessions which are both complex and modest from the individual’s perspective, albeit costly to the revenue in aggregate. The broader budget package destroys confidence in super through what Scott Morrison accurately called ‘effective retrospectivity’ [xiii], making complex new incentives less credible to savers than if confidence had been maintained.[xiv]
For an example of complexity defeating any intended beneficial impact, the Low Income Superannuation Tax Offset offers a non-refundable tax offset of up to $500 to the super fund of a low income saver with adjusted taxable income less than $37,000 and who has had a concessional super contribution made on their behalf. To the practically-minded, this $1.6 billion give-away poses three questions: how much, if anything, can someone earning under $40,000 a year afford to lock away in superannuation? How many of us could say what our ‘adjusted taxable income’ was, in terms of superannuation law? And what incentive to the low paid to save from very modest income for up to 40 years before they can access it is offered by a non-refundable tax offset to their super fund of up to $500?
Another illustration in Explanatory Statement to Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 also highlights both the trust problem and the witlessness of those who write these illustrations. “Ed is aged 67 and retired in July 2017.” He has $250,000 in his superannuation fund, and after downsizing to a smaller home, has $150,000 to invest. Under one of the Government’s new give-aways costing $130 million, he is said to add the $150,000 to his super fund. (The treatments of super balances under the income and assets tests for the age pension are complex, but it may well be that the main effect of downsizing his house and adding $150,000 to Ed’s super balance would be to greatly reduce the part aged pension he may be eligible for.) After watching the super policy circus of the last 18 months in which three political parties competed to re-write the superannuation rule book to the disadvantage of self-funded retirees, why would Ed decrease investment in his principal residence and increase his exposure to super rule changes? Ed needs a good financial adviser.
Some measures seek to induce additional super contributions from those on low incomes, or into the super accounts of low income spouses.
Possible beneficiaries from these measures fall into three categories: those who will have low income over their lifetimes; those who are lower income earners in high income households; and those who are low income at the start of their careers, but who will be richer later.
The first group will mostly not accumulate sufficient super balances to lift them above the means and income test thresholds for age pension eligibility at any plausible subsidy, and they will rightly retire on the age pension. That’s what it’s for. So for them, what was the point of the Government’s measure? At best it might induce minor lifetime savings over their working life at the cost of suppressing their modest living standards while they worked. As Simon Cowan has pointed out, exacting saving from people whose greater need was to spend the money merely boosts the demand for other forms of government income support. For example, “A family of four with a single income earner on $75,000 a year pays $7,125 a year into superannuation but receives around $7,500 a year in family tax benefits alone.”[xv]
Lower income earners in high income households may indeed pocket taxpayer subsidies to achieve super splitting strategies with their partners. But they might well use those strategies anyway without subsidy. (Such strategies reduce the damage to lifetime savings from further retrospective rule changes by tomorrow’s governments to attack high super balances.) Or they may persist with family financial planning to pool their super funds in retirement. (While ‘a man is not a financial plan’, couples are emboldened in this super pooling by trust in each other, common sense, common practice and family law, which treats superannuation entitlements as joint assets in a relationship.)
It is obvious why super funds, surely one of Australia’s worst examples of crony capitalism, want to use bogus ‘feminist’ arguments to harness taxpayers’ funds multiply the number of super accounts with low balances and high fees. It is not clear why the Government should legislate to implement the social engineering implicit in such attempted equalization of spouses’ super balances.
Finally, for those who are temporarily low income at the start of their careers, there is no case for the Government trying to front-load their lifetime savings profile away from the savers’ own preferences. Better the Government facilitate those preferences by not excessively restricting higher super savings later in life through miserly restrictions on concessional and non-concessional contributions. This is another example of the interconnection between the first tranche measures and the super tax increases of the second tranche which necessitates their joint consideration.
6. A better path forward
There are much better ways than the first tranche measures to improve the lifetime welfare and savings of lower income earners, such as illustrated in papers for the CIS by Simon Cowan (cited above) and Michael Potter[xvi]. A sensible selection from and development of those ideas would improve self-sufficiency and thrift, improve superannuation outcomes, improve retirement living standards, and improve budget outcomes. The Government should go back to the drawing board on its Budget measures.
[i] The following discussion refers to the first tranche package of revenue give-aways for which Treasury originally provided exposure drafts on 7 September 2016:
- Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
- Superannuation (Objective) Bill 2016
- Explanatory material to Superannuation (Objective) Bill 2016 and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
- Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016
- Explanatory Statement to Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016
To these were added, at some time during the short consultation period, two more exposure drafts:
- Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 – Low Income Superannuation Tax Offset
- Explanatory Statement to Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 – Low Income Superannuation Tax Offset
There was no extension of the consultation period to allow for the later provision of this last pair of drafts.
[ii] Peter Costello, A Plan to Simplify and Streamline Superannuation: Detailed Outline, Canberra, May 2006
[iv] Bill Shorten, Address to the National Press Club – Canberra – Wednesday, 24 August 2016:
“In a time of budget pressures, the Government should be closing unsustainably generous high-income loopholes in superannuation; not opening new ones.
This is why Labor will oppose the Government’s plans to:
– Allow catch-up concessional superannuation contributions
– Harmonise contribution rules for those aged 65 to 74
– Allow tax deductions for personal superannuation contributions.
Despite the merit of some of those propositions, this new spending cannot be a priority, especially when it will set the Budget back $1.5 billion over the forward estimates and $14.7 billion over the next ten years.” http://www.billshorten.com.au/address_to_the_national_press_club_canberra_wednesday_24_august_2016
[v] Bill Shorten Address above, “We will not tie the $500,000 lifetime contribution cap back to 2007.
Instead, our changes will apply from Budget night.
This means Australians who have invested for their retirement in good faith based on clear rules, no matter how generous, will not be punished after the fact.
At the same time, I am proposing we lower the threshold for high-income super contributions from $250,000 to $200,000.”
[vi] I owe this analogy to John Roskam (cited below) and Rebecca Weiser and Henry Ergas, Strangling the goose with the golden egg: why we need to cut superannuation taxes on Middle Australia , September 2016, IPA Research Essay, http://ipa.org.au/publications/2545/strangling-the-goose-with-the-golden-egg .
While 80% of age-eligible people receive some age pension, and only about 20% of those of workforce age receive government income support, the analogy still holds: no one thinks a citizen should be indifferent between being unemployed and receiving welfare.
“The great vice of democracy – a vice which is exacting a bitter retribution from it at this moment – is that for a generation we have been busy getting ourselves on to the list of beneficiaries and removing ourselves from the list of contributors, as if somewhere there was somebody else’s wealth and somebody else’s effort on which we could thrive. ….
“Now, have we realised and recognised these things, or is most of our policy designed to discourage or penalise thrift, to encourage dependence on the State, to bring about a dull equality on a fantastic idea that all men are equal in mind and needs and deserts: to level down by taking the mountains out of the landscape, to weigh men according to their political organisations and power – as votes and not as human beings? …..
We have talked of income from savings as if it possessed a somewhat discreditable character. We have taxed it more and more heavily. We have spoken slightingly of the earning of interest at the very moment when we have advocated new pensions and social schemes. I have myself heard a minister of power and influence declare that no deprivation is suffered by a man if he still has the means to fill his stomach, clothe his body and keep a roof over his head. And yet the truth is, as I have endeavoured to show, that frugal people who strive for and obtain the margin above these materially necessary things are the whole foundation of a really active and developing national life.”
[ix] Peter Costello, Address to the Investment and Financial Services Association, Tuesday, 13 June 2006, http://www.petercostello.com.au/speeches/2006/2105-address-to-the-investment-and-financial-services-association-canberra
[x] Scott Morrison, Superannuation reforms: first tranche of Exposure Drafts, Media Release 7 September 2016. http://sjm.ministers.treasury.gov.au/media-release/094-2016/
[xi] John Roskam, The Turnbull Government Backs An Unprincipled Purpose Of Super, 9 September 2016, http://ipa.org.au/news/3555/the-turnbull-government-backs-an-unprincipled-purpose-of-super
[xiii] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, http://sjm.ministers.treasury.gov.au/speech/001-2016/ : “Our opponents stated policy is to tax superannuation earnings in the retirement phase. I just want to make a reference less about our opponents on this I suppose but more to highlight the Government’s own view, about our great sensitivity to changing arrangements in the retirement phase. One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.”
[xiv] On the damage to trust in super caused by ungrandfathered tax increases, see Terrence O’Brien, Grandfathering super tax increases, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp3-12. https://www.cis.org.au/commentary/policy-magazine