Don’t tell anyone, but for a brief moment this week we managed to have a debate about superannuation policy.
If you’re like me, you don’t have much super. After freelancing on low wages for most of my life, my super balance is about $11,000. If I am lucky enough to live until retirement — a fuzzy boundary for the working writer — I will, on current projections, have to rely on the age pension.
That’s assuming Australia still has one in 30 years. Our aging population means that by the middle of the century, working-aged Australians will constitute a far smaller proportion of the population than they do now.
Because superannuation touches so many people, including wealthy and powerful people, super policy is always a hot political issue. The current debate about super sees the Coalition pledging to abandon super contribution tax breaks for low income earners, while Labor gears up for some "structural savings" with mooted plans to raise tax rates on high income earners. The differences in superannuation policy are shaping as a key difference between the two major parties in the run up to September’s election.
In budgetary terms, super is expensive. The various tax breaks and concessions associated with the compulsory savings scheme cost the federal budget an estimated $32 billion this year, and are rising rapidly. We are approaching a time when the government will spend more on tax breaks for super than it spends on the age pension.
The Hawke-Keating government set up superannuation in the mid-1980s, originally as part of a bargain with the union movement regarding wage rises (the so-called "Accord"). Beginning at 3 per cent, compulsory super gradually rose to 9 per cent by the early 1990s, and the current government plans to raise it to 12 per cent by the end of this decade.
The aim was to get Australians to save more for their retirements. To do this, the government created a system in which workers’ pay was garnished and sequestered in a fund they couldn’t access until they retired. The massive new pool of money the policy created was then gifted to the finance industry, which charged workers a handy fee for the privilege of managing their money.
Despite the rocket science of modern investment theory, returns have been modest. After fees and inflation, super returns have averaged around 4 per cent over the past three decades. But over significant periods, returns have been lower than that. After the carnage on world markets in 2007 and 2008, it took almost five years for most super funds to return to their pre-GFC peak.
This report by ABC economics correspondent Stephen Long quotes figures from industry researcher SuperRatings, which put average retail super fund returns at only 3.7 per cent in the decade between March 2000 and February 2010. Cash in the bank would have done better. (Returns in recent years have been better; SuperRatings says typical returns over the past decade to December 2012 has been 6.4 per cent). The risks of financial market implosion have led some, such as Long and heterodox economist Bill Mitchell, to argue that super is a waste of money.
Judged against its goal of increasing national savings, superannuation has been a qualified success. Australia’s domestic savings are quite high compared to similar industrialised nations with deregulated banking systems like the US, UK and New Zealand.
According to respected Treasury economist David Gruen, "the compulsory system appears to have made a significant contribution to national saving — estimated currently at about 1.5 per cent of GDP, and rising to close to 3 per cent over the next few decades."
Unfortunately, the benefits of superannuation come with negative trade-offs. I’ll mention three.
Firstly, the massive fees that accrue to super fund managers, particularly retail super fund managers. Because these fees are collected before returns are paid, they act like a private rent on retirement savings — a rent paid by workers to banks and big financial institutions. It’s hard to see how these fees are justified, when in many cases savers could do better with risk-free portfolios of sovereign bonds, or even cold hard cash in the bank.
Secondly, because successive governments have decided to make super a tax effective way of saving, there are some very large costs built into Australia’s federal budget associated with super tax concessions. These tax breaks accrue disproportionately to the better off. The tax treatment of super makes it particularly unequal.
It works like this. High income earners with big superannuation balances get taxed on their super contributions at the same rate — 15 per cent — as middle- and low income earners. At the extreme end of the scale, a multi-millionaire with a huge self-managed super fund is paying a tax on that super at a far lower rate than the marginal tax rates he or she pays on ordinary earnings. So super acts like a kind of tax haven, enabling wealthy wage earners to park significant parts of their income in a special low tax vehicle. A wage earner on the top personal income tax rate enjoys a tax break of 30 points (15 per cent compared to 45 per cent).
In contrast, before recent changes introduced by Labor, a low income earner paid the same 15 per cent on their super contributions as they paid in normal income tax. They received no tax break. This was why Wayne Swan moved to give low income earners a special tax break on their super in last year’s budget, reducing their super tax rate to zero. Interestingly, this is the very break that the Coalition apparently plans to remove should it win office.
Thirdly, super has a gender problem. This is because women still earn lower wages than men in many industries, and often spend many years out of the workforce raising children. As a result, their super contributions are lower. Super balances across the country are higher on average for men — noticeably higher. According to the Australian Bureau of Statistics, in June 2010, the mean aggregate balance (pdf) of personal super was $71,645 for men and $40,475 for women. There is no policy proposal currently on the table to address this imbalance.
The current proposals mooted by the major parties will tinker with super around the edges, much as successive governments have continuously tweaked the super rules since its inception. Labor is mainly looking for savings — big savings — that it can plough into its so-far unfunded disability and schools reforms. In contrast, the Coalition will seek to entrench the inequality in the current system, probably by accusing Labor of class warfare.
In doing so, it will almost certainly have the bulk of the business media on its side. After all, who has the big balances? It’s amazing how people who should know better, like economics commentator Alan Kohler, can suddenly take up the class war cudgels when their own healthy super balances look like attracting an extra tax.
Kohler has one thing right, though: the superannuation industry is extraordinarily powerful, and will likely campaign strongly against any changes. "If they thought the mining companies’ campaign against the original RSPT was a big deal, wait ’til they see what the superannuation industry will hit them with if they propose an increase in super taxes," he wrote yesterday, and its hard to disagree. An insightful recent report from The Australia Institute ranks super as one of the four most influential industries (pdf) in the country, and the scale of the tax concessions super enjoys testifies to that.
But financial planners and the super industry may also be underestimating the determination of this Labor government to find the money it needs to fund its election promises. If Labor can’t find structural savings to fund Gonski and the NDIS, it will have precious little to campaign on come September.