Opinion & Commentary

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Liberals Drop Ball in Super Free-For-All

Adam Creighton | Australian Financial Review | 14 November 2011

Robert Menzies created the Liberal party in 1944 to celebrate and promote “the individual, his rights, and his enterprise”. Compulsory superannuation offends each of those principles, which is why the party opposed its introduction in the early 1990s, along with very reasonable doubts about its ability to boost net aggregate or individual saving.

The government’s push to increase the superannuation guarantee from 9% to 12% by 2019 is bad economics – expensive and inefficient – but it is not surprising.

Compulsory superannuation is totemic Labor party and trade union policy, the biggest legacy of Paul Keating, who had long envisaged a 15% compulsory saving rate. The superannuation guarantee appeals naturally to a collectivist and paternalistic mindset.

That the Liberal party now appears to endorse the shift to 12%, seemingly for the sake of poll-driven expedience, is surprising and disturbing.

From a liberal perspective, compulsory saving is only excusable when it is designed to protect taxpayers from their own rational profligacy: it should be obvious that a universal old age pension like Australia’s massively discourages private saving, for instance.

You fix that problem with a meagre and restricted age pension, and much lower income taxes on ordinary workers, who are then forced to pre-fund their own pension. That is a liberal policy.

But Australia’s superannuation system is pure paternalism, not hard-nosed fiscal prudence. For a start, eligibility for the age pension in Australia is so generous that increasing compulsory superannuation contributions does little to stem pension outlays.

The Henry review clearly shows that the cost of tax concessions from increasing the superannuation guarantee vastly outweighs any fall in pension payments, even in the long-run. That logically means other welfare-sapping taxes (such as a mining tax) must rise if the budget is to balance over time.

Compulsory superannuation is predicated on pessimism: that Australians are too stupid to organise their own affairs. The clamour to lift the compulsory rate to 12% is sustained by a slew of studies parading ‘inadequate replacement rates’ – spending power in retirement as a fraction of pre-retirement income.

These cookie-cutter forecasts inevitably ignore crucial individual realities: expected inheritances, spousal assets, housing equity, and likely assistance from children, to name a few. Individuals are in the best position to judge the adequacy of their savings.

In any case, Treasury modelling shows that for people on median incomes, reliant in their retirement solely on the age pension and their compulsory superannuation accumulation, the existing system will eventually provide a satisfactory replacement rate of about 75%. The compulsory savings rate has only been 9% since 2002.

But more to the point: they ignore the care factor. Given superannuation’s paternalistic character, why should it matter if someone hasn’t saved ‘enough’ (assuming we can even know what ‘enough’ is)? That would be his or her own fault.

Indeed, the liberal philosophy is optimistic about human agency. That some people save too little or too much is natural in a society of free people. But the ability to observe the consequences of others’ mistakes limits their incidence, encourages responsibility and fosters independence and resilience – hallmarks of any robust and prosperous society.

As Robert Menzies wrote, “the best people in this community are not those who ‘leave it to the other fellow’, but those who by thrift and self-sacrifice establish homes and bring up families and add to the national pool of savings”.

A meddling state, however well-meaning, curtails the capacity of people to even be ‘the best’.

Yet for all its faults and superfluity, superannuation is popular. Indeed, it is brilliantly designed for expansion: everyone thinks everyone else is paying. Workers don’t feel any direct pain from increasing superannuation. Yet businesses will ultimately rein in the growth of workers’ take-home pay. It is like an invisible python coiled around the real economy.

Meanwhile government can bathe in the glow of mandatory ‘extra savings’, while others pay.

Moreover, superannuation has a powerful cheer squad, from trade unions to fund managers. They are motivated by the power compulsory superannuation bestows and the multi-billion dollar annual flow of fees, which are ultimately paid by ordinary workers who are often none the wiser.

As defender of the forgotten people, the Liberal party should be a bulwark against paternalistic subterfuges and corporatist rent-seeking. Far from endorsing a one third expansion of compulsory superannuation, it is incumbent on liberals to explain how it dupes workers, limits their freedom and corrodes their independence.

Adam Creighton is a Research Fellow at the Centre for Independent Studies.