Labor has the politics of superannuation badly wrong. Its core constituency would be much better off without it. So would the economy.
But Labor has long promoted super as 'gift' to ordinary workers that it compels employers to provide. Recently, however, the superannuation minister Bill Shorten acknowledged that compulsory contributions to super come from money that could otherwise be paid as normal wages.
Rather than being forced to hand the money over to fund managers to punt volatile financial markets, many employees could prefer to spend the money on their own priorities, such as raising a family, paying off a mortgage and improving their education.
Shorten is pushing ahead with Labor's decision to increase compulsory super contributions to 12 per cent of salaries. Yet Treasury modelling has shown that even the existing 9 per cent, plus the age pension, will produce an incongruous outcome in which low income earners have a higher disposable income in retirement than while working. Shorten is now fighting union resistance to trading off the increase to 12 per cent against wage rises.
If employers were allowed to convert the 9 per cent to a normal part of salaries, this would boost take home pay by $85 for those on average weekly earnings of $1333 and by around $45 for someone on the minimum wage of $589. Finding better things to do with this money than putting it into super should not be hard. Australian Prudential Regulatory Authority data show the average rate of return on super over the ten years to June 2011 was a meagre 3.8 per cent.
Governments could also find better things to do with the money they spend on superannuation tax concessions that are heavily biased towards high income earners. The research director for financial information company Rainmaker, Alex Dunnin, says about half the value of the concessions goes to the 8 per cent of superannuation members who are in a self-managed super fund (SMSF). Tax office figures show 75,000 of these funds have assets between $2 million and $10 million. Two have more than $100 million. Yet 90 per cent of SMSFs have only one or two members. Dunnin estimates the average balance in not-for-profit industry funds is $44,000.
The Henry tax report notes the cost of lifting contributions to 12 per cent will outweigh any savings on the age pension. Well before the 12 per cent rate is fully in place, official projections show the tax concessions will cost the budget over $42 billion in 2014–15.
Even after subtracting offsets, scrapping the concessions should increase revenue by well over $30 billion a year. The concessions consume vast sums that could improve productivity and wellbeing through increased outlays on education, childcare, health, transport and well designed tax cuts. Until it tackles the concessions, Labor can forget about making serious headway on a new disabilities scheme, dental care and disadvantaged schools.
A recent Productivity Commission report rejected calls to give saving for age care the same tax concessions as super. It said, 'Such subsidies perform poorly on equity grounds as they offer the greatest benefit to those with the greatest capacity to save.'
The report also highlights how compulsion produces inferior economic outcomes: 'Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings. In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home).'
Compulsory super also prevents the efficient allocation of resources by artificially boosting fees paid to fund managers and administrators by several billion a year. Not even the local car industry could dream of winning an assistance package in which governments compelled all Australians to buy its products, regardless of whether they had better things to do with their money.
The vast bulk of the money in super is used to buy and sell existing financial assets. Only a tiny proportion goes directly into creating new productive capacity. Often one super fund merely swaps the ownership of a parcel of shares with another.
Paul Keating says he changed superannuation while Treasurer from an elite system to one in which 'the bloke running behind the garbage truck could have super'. But a new elite has left the garbo in the dust. Unlike someone still working for the minimum wage, members of this elite pay no tax on retirement income from super, even if it is millions of dollars a year.
Tax-free super income is also exempt from the means test for prescription drugs. This allows rich retirees to buy drugs for $5.80 a prescription compared to $35.40 for a minimum wage earner. But Labor refuses to abolish this rort, let alone tax those over 60 at normal rates.
Given their limited resources, governments should not fund massive budget subsidies for super as well as the age pension. Once governments fund the pension as a decent safety net, they have fulfilled their basic welfare obligation to retirees. Anyone who wants to save more can do so.
Apart from being impervious to financial market gyrations, the age pension is immune to a new problem peddled by the finance industry called 'longevity risk' — that your money could run out before you die. The age pension has the great advantage that it never runs out.
Walkley award winning journalist Brian Toohey is a columnist with the Australian Financial Review.