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How super hurts the poor and middle income earners


Suited coin snatchers graphicNext 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.

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

Coin snatchers image by Shutterstock.

Topic tags: Brian Toohey, finance, economy, wealth, superannuation



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Existing comments

Brian, your summary of the nature of superannuation and its inherent inequities points to the real governing power in our nation - the un-elected Corporate Party. While it is fairly easy to point to what we might term as the undercurrent of greed dripping security that is driving this creation of rich and poor, I think it is important to look at what might be driving this much hidden selfie. We know there are tens of thousands of citizens who have have amassed millions of dollars that sit in fund pots all over the world as they ride on their $2.50 senior tickets in a carriage along side the worker and the student who pay tens times more for their weekly ticket. I know, because I have a seniors card. I also have adult children who are professionals yet cannot afford to buy their own home. (Is it any wonder that some of us are raiding our stored fat accounts to assist our kids?) It is risky, but what am I afraid of? Could it be a fear of the fountain of youth? Might my addition living longer - which is squarely based on the fear of being a corps - be causing us to lay our young into labour camps to fund what is appearing to me, as a truly indecent obsession.

Vic O'Callaghan | 27 March 2015  

I don't understand complicated finance, but I am continually perplexed at the superannuation con job that has taken over our country. Thank you for explaining what I intuitively knew!

Deborah | 27 March 2015  

Thank you Brian for such an honest appraisal of what has turned into a terrible distortion of a basically good idea...at least in part! What we should be after is taking as many people out of state pension as possible, but with two caveats:1) those who will need a state pension anyway, say the bottom 50% of earners, should not be in the compulsory system at all; and 2) the maximum tax-subsidised savings pool over a working lifetime (to say age 65) should be capped at $1million, to give an income of about $50k per year at 5% return. All, wealth needs to be taken into account in deciding who gets the state pension, including all savings and any property above say $500K`s worth. The current system is as messy and mad as so much of our national policy bsettings.

Eugene | 27 March 2015  

Why does hardly anybody comment on this? I don't feel competent to, but it seems to be very important.

Gavan | 27 March 2015  

Another piece of journalistic pollie and oldie bashing? Why must journalists dichotemise old/young , rich/poor when dealing with such important matters.?..... a footy match to make the punters emotionally involved? Better to propose adjustment of tax rates on entry to super or adjustment of caps than to imply protection and greed. For those who went without to put extra into super (only possible when the children they had raised and educated were somewhat self sufficient) it's humiliating to be portrayed as part of a government endorsed greed ploy. Many retirees were indebted to banks at 13% or more for their one house and one car ,and they didn't take children to the snow or resorts; buy them Nikes or mobiles, nor send them to schoolies , so that money could be 'supered' for post work self sufficiency. Super is taxed...at incentive rates. Do you question bankers' fees or only super fund managers'?. Medicare levy was paid during working years. Hopefully current generations will get the same exemptions on retirement. It is divisive and counter productive to represent super savings as governmental ploy assisting greed and fat cats in keeping an underclass down.

sue | 01 April 2015  

Thank you Brian, and I couldn't agree more that the unelected corporate sector has too much power. Superannuation is something I will have little benefit from. As many women in their 50's know, there was no super for a large part of my early work life. Then taking a long period of time off to have children and returning to work part time, my superannuation is so small it is irrelevant. Women are so much worse off than men. Super is a great idea, but completely unbalanced to favour the rich. Corporate greed is a dangerous thing.

Cate | 01 April 2015  

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