Next time you hear financial industry executives demand that governments mustn't change superannuation because the sector badly needs 'certainty', take your cue from the former head of the Commonwealth Bank David Murray.
When asked on the ABC's 7.30 early in March about business complaints about political instability, Murray said business executives 'are rewarded very handsomely for managing uncertainty – that's their job'.
It's little wonder that the finance sector wants no changes to super. Thanks to compulsory contributions, the funds management industry enjoys an ever-increasing flood of money into its coffers.
Despite the way the existing system hurts low and middle income earners, damages economic efficiency, wrecks the budget and makes it harder for interest rate cuts to reduce unemployment, both sides of politics surrendered to the sector's demands before the 2013 election. Labor promised no major changes for five years and the Coalition for four years.
Treasury's conservative calculations show the tax concessions on super will cost the budget over $40 billion in 2017-18. According to the Henry tax review, any savings on the growing cost of the age pension from super will not be enough to offset the cost of the concessions. Given that the average household savings ratio was higher before compulsory contributions began, super may do nothing increase the number of people whose savings are too high to pass the age pension's mean tests. But this has not stopped the Abbott government claiming the cost of the age pension is unsustainable without mentioning the added burden of the super tax concessions.
Although the age pension will cost about $49 billion in 2017-18, it is means tested. In contrast, the super concessions are heavily biased in favour of high income earners. Those on the top marginal tax rate of 47 per cent pay the same 15 per cent tax as very low income earners on contributions that employers make on their behalf. This even applies to part time workers who otherwise pay no tax below $18,200. At the other end of the scale, retirees can have an income of well over $1 million a year from super and pay no tax. They don't even have to pay the Medicare Levy.
Compulsory contributions also hurt low and middle income earners by stopping them allocating this money in ways they consider to best meet their needs while working, such as helping bring up a family, paying off a mortgage and so on. The impact on take home pay is not trivial.
Part time workers on $16,000 a year would be over $30 a week better off if employers paid their compulsory contributions as normal take home pay after-tax, instead of into super. Doing the same for those on the minimum wage of just over 33,300 a year would lift their disposable income by about $52 a week. Someone on $70,000 would be about $85 a week better off.
Another damaging side effect of compulsion is often overlooked. By locking away billions of dollars until retirement, compulsory contributions undermine the Reserve Bank's interest rate cuts intended to boost economic growth by boosting demand. Super has pulled in the opposite direction by reducing take home pay, and spending power, as compulsory contributions have risen from 3 per cent of salaries to 9.5 per cent – and are due to rise to 12 per cent.
The prospect that compulsory contributions may (markets permitting) give low-income earners a slightly higher standard of living in retirement does not mean they will necessarily be better off over the course of their life. The reason is that any gain in their old age has to be paid for by a lower standard of living while working than would otherwise be the case. Given the choice, many could prefer to utilise the money at a younger age when other needs may be far more pressing. If they preferred to save the money in the absence of compulsion, nothing would stop them.
Contrary the much vaunted reforms of the 1980s, compulsion artificially expands the size the finance sector by diverting resources away from more efficient uses. Due to its compulsory access to Australians' incomes, the fund management industry is now the world's four biggest when the Australian economy is only the twelfth biggest. This amounts to an old fashioned form of industry protection that the reform process was supposed to sweep away.
Other industries can only dream about being so lucky as to have governments compel customers to hand over well over $100 billion in contributions at present. This currently guarantees the fund managers, and their affiliates, fee income of around $20 billion a year, which is growing all the time. That's probably at least $10 billion more than they would receive without compulsion and all the concessions.
Unsurprisingly, the cosseted finance sector wants 'certainty' that nothing will to stop this bonanza getting ever bigger. But that's no reason for political parties to keep such a harmful public policy in place.
Walkley award winning journalist Brian Toohey is a columnist with the Australian Financial Review.
Coin snatchers image by Shutterstock.