Wednesday, April 03, 2013

Super. It gives the most to those who need it the least

Wednesday column

Superannuation is designed backwards. It gives the biggest subsidies to those who need them the least. For Australians on truly enormous incomes they are obscene.

The notion that the super-rich wouldn’t save for their old age left alone is laughable. The idea that without government support they would fall back on the pension and be a “drain on the public purse” is not only wrong but, in the context of what’s handed to them, almost sick.

Think about an executive on $1 million per year (not quite one of Joel Fitzgibbon’s ‘battlers’ but someone several rungs above).

The firm pays a legislated minimum of $16,470 per year into a super fund of his or her choice, perhaps a self-managed one. Instead of being taxed at his or her marginal rate (45 per cent plus the 1.5 per cent Medicare levy) the payment has until now been taxed at just 15 per cent. So instead of paying $7658 the executive pays just $2470. The gift from the tax system is $5188.

In the last budget the government promised to boost the tax rate for very high earners to 30 per cent, cutting the size of the gift to a still substantial $2718. That it took Labor so long to at least recognise the need to more properly tax millionaires is an outrage. That didn’t go further is a disgrace.

Here's a tip, from someone who can only begin to imagine the spending and saving habits of millionaires: They don't need incentive payments in order to save, they'll do it anyway.

But if you're harbouring doubts, remember that millionaires are compelled to save. As for all of us, super contributions are compulsory. The government is handing millionaires a gift of $2718 a year in return for something they'll do anyway.

A middle earner on the average male wage gets $1293. Low earners get nothing, even after the new Low Income Super Contribution that the Coalition has implausibly threatened to revoke re-imposing a tax penalty for low-income contributions.

Imagine the outcry if instead of tax dollars the government was openly paying cash into the accounts of high earners (to help them with their savings). Imagine if the government suggested paying more into the accounts of high earners than low earners.

As it happens we don’t need to imagine the outcry...

Wayne Swan actually came up with such an idea shortly before becoming Treasurer. Perhaps in thrall to to the giants of the union movement - to Kelty, Crean and Ferguson, the greats who helped design Australia’s superannuation system - he developed a scheme that would tax first home savings accounts the same way. Savers would be taxed at “15 per cent on the first $5000 of income they deposit in their account each year rather than the ordinary tax rate they would pay”.

On taking office Treasury told him it would be easier to simply put cash into each savings account. If he wanted to mimic super he could put the most into the accounts of the Australians on the highest tax rates.

Incredibly Swan and housing minister Tanya Plibersek put the idea out for public discussion. The public response - still on the Treasury’s homesaver website - is humiliating.

Leah Fawcett wrote: “To whom it may concern. I would like to know why an income earner of $180,000+ will receive most contribution from the government while a low to middle income earner receives the least.”

David Ng was “shocked and utterly disillusioned to find the government contribution is twice as much for those paying the highest rate of income tax (i.e. with the most income) as for those with the lowest”.

Swan backed down, clued up about the wanton unfairness at the heart of the super system promoted by a generation of Labor elders.

Knowing that this budget will be his last, Swan will attempt to fix Labor’s greatest creation next month. If he doesn’t, it might collapse under its own weight. The cost of the concessions is set to climb 9 per cent next year, then 14 per cent, then 13 per cent. It’s why the Coalition will back him (at least to the extent of not removing the measures he puts in place). No government can afford such a massive and growing leakage of funds to Australia’s highest earners.

The Henry Tax Review wanted Swan to limit the tax gift to super contributions of $25,000. High earners would pay full tax on the rest. Swan might move closer to that by taxing at 30 per cent the contributions of all Australians on the top marginal rate. The rate cuts in at $180,000.

And he’ll need to attack the the flat 15 per cent tax on super fund earnings. So generous is it to high earners that they make extra contributions right up to the concessional maximum and then beyond to get it.

The funds say they can’t easily charge one rate of tax on the earnings of millionaires and another on the earnings of others. But already they manage to charge one rate on the earnings of retirees (zero) and another on the earnings of everyone else. They could probably find a way.

In today's Sydney Morning Herald and Age

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