Super's evil empire on shaky ground

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Angry piggy bankMany companies pay good money for their executives to attend conferences where at least one speaker can usually be relied upon to say, 'Change is the one constant in the modern world'. Change is the last thing those who run Australia's superannuation industry want to embrace.

And little wonder. They inhabit a cosseted world in which the money pours in each day, thanks to a combination of government compulsion, massively costly tax concessions and the misguided backing of key Labor and union leaders. The upshot of this assistance — far greater than the car industry enjoyed — is that Australia now has the world's fourth biggest funds management industry, yet only the 12th largest economy.

But the foundations of this empire are coming under a growing attack. Most criticism focuses on how the tax concessions create an expensive form of upper class welfare, while being of little value to most other people. The harmful effect of compulsory super's artificial expansion of the finance sector is also attracting attention.

The Abbott Government shows scant concern about either aspect. Its terms of reference even stopped the Commission of Audit from including the concessions in its long list of recommended cuts to direct spending on welfare, education, science and many other areas.

However, the Commission's chair Tony Shepherd, who formerly headed the Business Council of Australia, says these concessions should be cut. So does former Coalition leader John Hewson, some business economists, financial planners and other beneficiaries of the existing system. Treasury head Martin Parkinson recently expressed concern about who gains most from the system. Parkinson, who is being forced to resign by Abbott in December, asked, 'If it's a wealth creation tool, who is ultimately benefiting from this?'

Fairfax Media gave a clear answer on 22 May when it reported a tax lawyer as saying, 'These are people with $10 million to $20 million in self-managed super. They've funded their retirement several times over. They don't need concessions.' Another adviser said, 'There are probably 30 different strategies motivated by tax minimisation rather than a desire to self-fund one's retirement.'

The Fairfax report said that almost 9200 self-managed super funds have a balance of more than $5 million, a rise of 76 per cent in the past three years. Some have over $100 million. Given that 92 per cent of SMSFs have only one or two members, many could easily have an income from super of $500,000 a year or more, from age 60 when no tax applies.

Before then, the standard tax rate on super is a flat 15 per cent. For someone on a salary and other non-super income of $250,000, for example, this compares to a marginal rate of 49 per cent following the Budget's new temporary levy. In a twist that tips the whole purpose of means testing on its head, those who pay no tax on other income below $18,200 pay the 15 per cent on their compulsory super contributions and earnings.

Wealthy beneficiaries often claim they are entitled to pay no tax because they paid some while working. But they still have a big income. Unless they pay tax on it, younger people will have to fund more of the growing cost of government services for retirees who are often better off financially. Many low and middle income employees would be better off if their compulsory contributions to super were instead paid out as higher take-home income when they are often struggling to bring up a family, pay off a mortgage, education fees and so on.

According to conservative Treasury projections, scrapping the concessions should increase revenue by over $35 billion in 2016–17, rising each year. This money could be used to improve living standards for the workforce via tax cuts and improvements to health care, education and infrastructure. Moreover, reputable studies show that the cost of the concessions outweighs the likely savings on the age pension costs.

Compulsion has another bad result. It distorts the flow of resources away from more productive uses. It encourages fund managers to trade existing financial assets rather than help mobilise capital for productive new investment to boost growth in a country with an ageing population.

To its credit, Industry Super Australia, a group of funds run jointly by union and employer representatives, identified this problem in a report, Finance and Capital Formation in Australia, which it submitted to the current Murray inquiry into the financial sector. The report shows the sector overall is now nearly three times less efficient at utilising economic inputs to facilitate capital formation than before compulsorily super began.

Likewise, a recent Reserve Bank study shows super funds made no discernable contribution to funding new investment in Australia's mining boom between 2003 and 2012.

Despite the global financial crisis, the industry super report also notes that the finance sector grew faster than any other industry in Australia over the past 20 years, to 10 per cent of gross national product. Yet research by the Bank of International Settlements concludes that economic growth can suffer after a finance sector accounts for more than 6.5 percent of GDP.

The above concerns have not stopped Labor's Shadow Treasurer Chris Bowen from promising not to change super for five years after the next election.


Brian TooheyWalkley award winning journalist Brian Toohey is a columnist with the Australian Financial Review.

Topic tags: Brian Toohey, superannuation, Tony Abbott, Budget 2014


 

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Existing comments

Brian, I think you have nailed one the major flaws of the compulsory system - that it uses existing financial instruments. Venture capital, when it is available is very expensive and controlled, not allowing entrepreneurship to flourish. In such a climate the ownership of capital is not re-distributed, protecting those that already own Capital. Apologies for the slightly Marxist analysis - I can assure you I'm not one!
Julian | 10 June 2014


One of the worst features of the coalition's budget is that seeking changes to the superannuation tax concessions was, to quote both Mr Abbot and his treasurer, "never on the table.' This demonstrates the values that motivate this conservative government. The burden of the budget strategy is thrown unevenly on the pensioner and the struggling lower middle class. This is obviously a conscious decision of a government which sees a surplus as an end in itself and to hell with anyone who falls in front of this bus whose terminus is that surplus. The only factor that might save this mob is the paucity of the opposition.
grebo | 11 June 2014


Absolutely fascinating, thank you for enlightening me on this.
Georgina | 11 June 2014


But what else would us 60yr olds talk about at dinner parties?
chris g | 11 June 2014


The super industry's biggest fear, shared with the Abbott govt, is that the coal and power utility industries asset bubble will burst on their watch.
David Arthur | 11 June 2014


chris g asks "But what else would us 60yr olds talk about at dinner parties?" At age 60, chris g and fellow diners might expect to live for another 26 years if female, and 23 years if male. A topic of conversation they might enjoy is climate projections for 2041 - 27 years from now.
David Arthur | 11 June 2014


And another thing, if, llike me, you're a superannuant who can afford to give a few thousand a year to overseas aid, you are not encouraged by the fact that you won't get anything much of it back on tax. I suppose that fits with the government's desire to have less aid money going overseas.
Gavan | 11 June 2014


The fact remains that many people would spend every single Dollar earned if needed or not needed. The current system allows for some money to be available if people reach retirement age. The idea is that in years to come, welfare payments need only to go to very few. In Switzerland retired people do not get or need any concessions. Everyone is a member of an compulsory Government run age and disability insurance scheme. The employers and the employees pay a certain percentage. In many situations people have also a work place based superannuation scheme. In most situations retired Swiss are well off, do not need tax payer support and provide active support to the economy. Any suggestions to go back to a 19th century tax payer funded charity model is just economic lunacy, rewarding the lazy at the expense of hard working people.
Beat Odermatt | 11 June 2014


My wife and I have a relatively high balance in our SMSF. However probably 70% of it came from salary/bonuses which were taxed at the top marginal rate plus from the sale of property on which capital gains were paid and contributed as a one off under the Howard Govt $1mil window. Therefore to tax our earnings now in retirement would be double taxation at a very high punitive rate. Also I am bewildered how rich people get these huge balances into super given all the controls that limit contributions. Can you explain. Thanks, Rod.
Rod O'Neill | 14 June 2014


9200 SMSFs with >$5million if in pension mode means that >$46million is being lost to Medicare as tax free pension funds pay no Medicare. The tax free pension should be limited to the income at the 30% tax rate, income above that should be taxed at the relevant tax level. The idea of drawing down a tax free pension of $250,000 is ludicrous when people on AWOTE are paying for the fat cat retires through their taxes.
David Roberts | 14 June 2014


For Army Veteran Retirees, this discussion about Super becomes a running sore. I joined the Army in 1955 and served until medically retired from war service injuries in 1972. Super was compulsorily deducted from our paybook before wages were paid. One could assume therefore this is Self-Funded Super. This has never been accepted by either major party. In 1972 Whitlam rolled profits into Consolidated revenue: fixed annual increments to the CPI: which meant a loss to each veteran or retired serviceman/woman of about $3,000/yr. Keating did the same rollover and maintained the CPI. The Gillard/Rudd government were "Looking at it?" but it remained on CPI. The Abbott government promised a change in DFRBF from CPI to MATWE (to be compliant with the Old Age Pension), for all ADF personell in the DFRBF or equivalent Super to change on 1 July 2014. I have been assured (?) that when the OAP is reduced to the CPI on 1 July 2014 that DFRBF recipients will still be increased to the new level. Many have fought for this change but my view was any change should be independent of OAP. Pensioners derive benefits through attrition. ADF through putting their lives "on the line".
Dr Karl H Cameron-Jackson | 14 June 2014


Rod, I can't explain how such huge sums got into individual super accounts, given the supposed limits. I would be very surprised if these contributions were legitimate. brian t
Brian Toohey | 14 June 2014


Part 2: Under different leaders, Labor continues to suggest one thing then does the opposite when it's with anything to do with Taxation or Super Funds. In a ‘flashback in time’ to April 2012 (Eureka, Vol 22 No 6), then superannuation minister Bill Shorten acknowledged compulsory contributions to super came from money that should otherwise be paid as normal wages. Nevertheless, Shorten pushed ahead in support of a decision to increase compulsory super contributions to 12 per cent of salaries. He did this, even though Treasury’s 2012 modelling showed low income earners would have a higher retirement disposable income than while working with the then existing 9 per cent, plus if the Old Age Pension (OAP) were retained. Shorten actually fought against union resistance to the increase to 12 per cent against wage rises. Then he supported an increase to 15%? Now, Labor's Shadow Treasurer Chris Bowen is promising "not to change super for five years after the next election." Maybe "Pigs WILL learn to fly".
Dr Karl H Cameron-Jackson | 14 June 2014


It is obscene, outrages and totally unfair that any person with balances over say 2 Million Dollars and are retired receiving the benefits of that super tax free. Why allowing balances of 5, 10 or 100 Million Dollars. It's disgraceful.
Wolfgang Bose | 14 June 2014


Couldn't agree more. Massive misutiliation of capital which is parked in passive interest bearing accounts/investments. One inprovement should be for the super funds to be allowed to invest in infrastructure
Emmanuel Conomo | 15 June 2014