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

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