Wednesday, September 15, 2010

Wednesday column: The great superannuation swindle

Did Labor do things badly? You bet. Among all the hasty, ill-considered fait accomplis foisted on the public without a pretense of examining evidence is one that was actually arrived at in the face of evidence.

The decision to lift compulsory super contributions from 9 to 12 per cent of salary was announced suddenly on May 2 without a shred of public consultation. No white paper, no green paper, no summit, nothing other than the Henry Tax Review released with the decision stating clearly that it in its view the proposal could cause harm.

In fact its worse than that. Doing as the government proposes would not only further disadvantage low income earners (the Review points out that "employees bear the cost of these contributions through lower wage growth") it also would damage the fabric of Henry's recommendations.

The recommendations hang together.

Ken Henry can't speak for himself. But he did look on with apparent approval at a session of a conference he chaired in Canberra yesterday as economics professor Ross Garnaut said it a pity the report had been treated as a series of discrete recommendations.

"The different parts are interrelated," he said. "You could make big mistakes picking some bits and not others."

One of the unifying principles is that income should be taxed as income in the hands of the person who receives it... That is why fringe benefits would be taxed as income in the hands of the people who receive them - not in the absurdly complicated and expensive way we do at present where employers have to pay a separate tax applying a special formula. Workers for charities would also be taxed on what they received, rather than having much of their income hidden in untaxed fringe benefits as at present.

And superannuation contributions would be taxed as income in the hands of the employees who receive them. Simple? Simple. Needless separate tax arrangements would be abolished and the people who got the benefit would pay the tax.

Except that there would be a flat-rate tax offset meaning that lower income earners would get the biggest proportional benefit instead instead of the lowest as is the case at the moment.

Inside each fund, superannuation earnings would be taxed at an extraordinarily low rate of 7.5 per cent, building up retirement savings more quickly than is the case at present.

How quickly? The review believes that a worker on an average wage who had contributed the presently-required 9 per cent throughout his or her working life would retire on an income providing 76 per cent of the buying power enjoyed while working.

Anyone who thinks that's low should think about expenses while working. It costs serious money to raise children, pay a mortgage on a big enough house, commute to work, get dressed in a sharp suit and grab lunch at an inner-city sandwich shop. Freed from these expenses retirees don't need as much as workers need, something the superannuation lobby itself acknowledges.

But it wants the 9 per cent compulsory contribution lifted, and it won't take no for an answer - especially not from Labor.

Labor's first superannuation minister Nick Sherry saw through the industry's spin and was dispatched. His successor Chris Bowen announced on taking the job he wanted to push compulsory contributions to 12 and then 15 per cent. He didn't seem concerned about an interim Henry report in May last year laying waste to the idea. He continued to push. After all Paul Keating had a vision of 15 per cent, trade unions run funds. Bowen's replacement as super minister sworn in yesterday is Bill Shorten, a former director of an industry super fund.

Here's what Henry found 16 months ago.

Back then it found that a worker on an average income making use of a lifetime's compulsory 9 per cent super and a part pension would get 63 per cent of retirement income. A subsequent increase in the pension pushed the figure to 71 per cent. Henry's recommendations would push it to 76 per cent.

If a worker considers that not enough, Henry makes the point it is "open to any individual to save more". If a worker can't afford to save more, Henry takes the argument to its logical conclusion.

An increase in compulsory saving," his report says, would "reduce an employee's pre-retirement income". Low to middle income earners would proportionately lose the most.

Henry found that requiring poor people to put away more of their income while they were working would impoverish them further while working.

If this comes as news to you its because Labor never discussed the recommendation in public. It pretended it hadn't happened.

The government that spoke of "Operation Sunlight" and evidence-based policy was determined sunlight never get to the evidence Henry uncovered.

It'll get there now with all of Henry's recommendations up for review at a summit, as they always should have been. The super legislation hasn't yet been introduced. There's now a chance it won't be.

Published in today's SMH and Age

See Henry Review, The Retirement Income System: Report on Strategic Issues

See Henry Review, Final Report Part 2, Chapter A2

Related Posts

. The stairway to super

. While repudiating Rudd, here's an idea for Gillard -- keep super at 9%

. Talk about less-than-honest rent-seeking


Evie said...

I agree Peter. Workers need the money in their pay packet to cover the costs of living. And I reckon the cost of getting to work by public transport should be a tax deduction.

I am about to re-enter the workforce after nearly a year of unemployment. If I had not saved so hard for years to get ahead on my mortgage I would have lost my house months ago. I have had to redraw money from my mortgage to survive. I believe secure housing is the foundation of a comfortable retirement and it seems ridiculous to me that I could have lost my home with a small mortgage of $50,000 while having three times that amount locked up in super.

Anonymous said...

Evie, in some cases you can actually release some of your Super for this purpose if your bank has given you a 'notice of foreclosure' Savings do need to be locked away, but a wealth fund managed by the govt is a much better option than upping the compulsory contribution rate, a cost (essentially a tax) borne by the employer.

derrida derider said...

"Savings do need to be locked away" - anonymous
Why? Why should we assume that policymakers in Canberra and assorted super fund managers know what's the best pattern of consumption for an individual over their lifetime?

As I've repeatedly said on this blog and others, the arguments for compulsory superannuation rest on a series of economic fallacies. This is a policy that has already reduced Australians' wellbeing. Further, because a higher contribution rate mean you are doing even more interference with people's lifetime consumption patterns, the loss in wellbeing rises disproprtionately with an increase in the rate.

I've spent literally decades arguing this with people in Treasury. I finally win the argument (let me take just a tiny smidgin of credit for the Henry recommendations)- and some idiot of a minister, who would not normally be game to swerve from Treasury advice, promptly chooses that moment to listen to the most venal and well-funded lobby in Australia.

Peter Martin said...

"some idiot of a minister, who would not normally be game to swerve from Treasury advice, promptly chooses that moment to listen to the most venal and well-funded lobby in Australia"


But so sad.

Rob Bray said...


I think the question of the required contribution rate to superannuation is a bit more open than you suggest.

It is all very good to talk about a replacement rate of 71 per cent, we have to remember that this is not the replacement rate generated by superannuation, but rather the total replacement rate from superannuation and a generous proportion of the aged pension.

If you look at chart A2-4 of volume one of part 2 of the final report it is very clear that around half of this money is coming from the age pension not from superannuation. Furthermore while the figures relate to the pre pension increase calculations the earlier May 2009 Henry report on strategic issues in the retirement income system, shows (Table 4.1) that a person on AWOTE would in addition to their superannuation be receiving 88.8 per cent of the total value of the Age Pension. (Indeed the same table also shows that a person who has earned 2.5 times AWOTE will, despite getting a superannuation income of around $45,000 per year (chart 4.2), also get 55.2 per cent of the maximum rate of the pension.

These results reflect the nature of the original superannuation guarantee – it was not designed to fund the cost of providing an income for those in retirement, but rather to provide an income supplement to the Age Pension.

If there is to be a debate perhaps it might be worthwhile considering whether this rationale – while a sales point for the original introduction of the SG – still makes sense. Will future generations continue to be happy to fund an age pension/superannuation system that will see retired persons continuing to receive generous pension payments which complement levels of private income where the working age population, on income of the same level, are having to pay tax, in part to fund these pensions? Of course, if the answer is no, and the pension income testing arrangements are changed in the future, then the replacement rates look quite pathetic.

A second issue that should be taken into account when throwing around these replacement rates is that they are based on real consumption, and do not take account of changing living standards. While, as you argue, the cost of living may not be as high in retirement as it is while working, at the same time most of the aged do expect to be able to maintain a standard of living relative to the community as a whole, and not simply relative to the community living standard at the point at which they retired. (To put this another way, a retired person today generally expects to be able to have broadband internet and airbags and ABS in their car, even if these were not around when they retired.) If you take this into account then, for example, a 73.4 per cent replacement rate effectively falls to a 60.9 per cent replacement rate. (See table F.2 in the May 2009 report.)

As I said in the beginning these issues, to my mind, make the question of appropriate level of the SG a bit more contentious than you suggest, and make the SG outcomes for retirement income much more uncertain – and dependent upon the future willingness of taxpayers to underpin them.

Peter Martin said...

Hi Rob, These are truly excellent points. Maybe the pension system will change. It certainly has been changing, although in the opposite direction under our last two governments.

Personally I would be loathe to take away money from someone when they really need it because access to the pension might/will one day be further restricted (although I can see that it would make sense to do it well ahead of time).

As an aside, at my Canberra church (and yes, I know Canberra superannuants are very atypical) retirees tell me: "I need to spend more. It's a hard adjustment for at this time of life."

I reckon a system that squeezed people at the peak of their needs to give them more than they needed in retirement would be warped. I fear the super industry would like to foist one on us.

Kindest regards,


Rob Bray said...

Thanks Peter,

Where I would argue with you is on whether or not the system does "give them more than they need in retirement". My concern is that the apparent income from the SG is underpinned by the pension and future generations may not see it as appropriate to keep funding this, notwithstanding the directions of government policies.

While you are "loathe to take away money from someone when they really need it", my view is that this is applicable to future generations as well as the current, and I am loathe to see a system where future taxpayers are having to pay tax to fund pensions for people who have higher incomes than they do.


PS while I am sure DD will argue that future generations will be richer and hence can afford to pay more tax (since he usually does) this line of argument is the same as saying that all the SG does is take a little bit off the current rate of increase in real earnings - ie the productivity trade off.

Peter Martin said...

Rob, One difference is that the income available to future generations will be dramatically higher (up 80% by the middle of the century) whereas the wage increases available to be sequestered between 2013 and 2019 for a higher super guarantee will be small.

Rob Bray said...


The first part of your argument here seems to suggest that by the middle of the century people will be able to (and perhaps should) pay a much higher average tax rate than they do today.

The second is about the pace of the increase, rather than the increase itself. (Also it could be suggested that the actual time frame to consider the impact of it as a share of increasing living standards is from 2002 to 2019. That is from the time the 9% was introduced. This puts it at 3% over 17 years of productivity gains.)

Rob (I will hold my peace now)

Peter Martin said...

Re the first: That is what I am suggesting.

Re the second: Of course you are right, but it still will be felt as a steep increase because there will be a step up in the sequestering of wage increases rather than a gradual climb over all those years.

Don't hold your peace for too long.

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