Tuesday, April 14, 2015

Superannuation. At last, Hockey takes aim at Costello

Call it karma. It has fallen to Joe Hockey to undo two of the stupidest and potentially most expensive decisions ever made by an Australian government. They were made by the Howard government of which he was a part.

But they were driven by its treasurer Peter Costello, and by the treasury itself.

Costello announced both on budget night 2006 with something of a flourish.

They constituted "the most significant change to Australia's superannuation system in decades".

They would "sweep away the current raft of complexity faced by retirees, increase retirement incomes, give greater flexibility as to how and when superannuation can be drawn down, and improve incentives for older Australians to stay in the workforce".

About the only thing he didn't mention was their long-term cost.

His departmental secretary Ken Henry was proud. They were "as good as anything I've seen the department produce in the 20-odd years of my treasury career," he told his staff.

They showed the treasury shaping "strategic thinking, achieving results, exemplifying drive and integrity, cultivating productive working relationships and communicating with influence".

The first of those decisions made super payouts entirely tax-free for most Australians aged 60 and over. Even lump sums. Economist Saul Eslake described it as "one of the worst taxation policy decisions of the past 20 years". It was worse than it looked. Tax-free payouts are quite sensible in theory. After all, withdrawals from bank accounts are tax-free. That's because the income that goes into the account is already taxed, and the interest earned on the money in the account is already taxed. It's the same for super: tax has been paid as the money is earned and as the returns accrue, albeit at concessional rates.

But the earnings of super accounts stop being taxed when the retiree begins to take money out. Costello insisted (against the against the advice of treasury) that this provision stay, meaning that the earnings of retirees who had turned 60 weren’t taxed at all, regardless of their size. Low and middle income Australians who continued to work into their 60s continued to pay tax. But high income Australians who didn’t need to work paid nothing, if all of their income was channeled through super...

The budget papers had it costing $6.2 billion in its first three years.

But they were silent on what it would happen beyond that as more and more Australians spent their entire working lives in super and their balances swelled. Back then only 18 per cent of the population was aged 60 and over. It's now 20 per cent, on its way to 25 per cent. Costello had opened an ever-widening hole in budget revenue.

But at least it would get people off the pension, right?

It might have, were it not for the second decision.

The pension assets test was to be eased so that instead of losing $3 of fortnightly pension for each $1,000 of assets above the threshold the retiree would lose only $1.50. As before, the family home wouldn't count. It extended the part pension to a new wave of previously-excluded wealthy retirees, and with it the much-prized Seniors Health Card.

Labor's Kim Beazley and then Kevin Rudd backed the changes. Only the Greens said no. When they passed the Senate the assistant treasurer Peter Dutton declared 27 February 2007 "super day". It had ushered in the "the greatest reforms to superannuation in Australia's history". For the first time couples with a million dollars in assets (plus a family home) found themselves eligible for some of the pension and the all-important health card.

So great was the cost that the Abbott government reportedly considered axing the pension extension it in its first budget. As it prepares for its second, the Social Security minister Scott Morrison has is seriously considering a proposal from the Council of Social Service to reign it back in. He has reached out to the Greens and the independents for support. Hockey's tax discussion paper has called into question the worth of the zero tax rate on fund earnings for the over 60s saying it opens up "tax planning opportunities".

Even the Association of Superannuation Funds, as attuned as anyone to the worth of tax concessions, says they go too far for very high earners. It says a small group of 24,000 retires receives average super payouts of $216,000 per year, all tax free. Non-retirees earning a fraction of that income pay tax.  

"It is appropriate for the community to start questioning whether it should fund growing tax concessions on very high balances," it says.

The tide is turning. Hockey will start to clean up Costello mess in the May budget. He'll finish the job after a retirement incomes review later in the year.

In The Age and Sydney Morning Herald

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