Make large-scale reforms to super or leave it alone

The Treasurer’s announcement that the government remains committed to its terrible super tax changes is unwelcome news for many.

The changes, which would double the rate of tax on earnings from balances above $3 million and apply that tax to unrealised gains, have already been rejected by the crossbench. The fact that even the unreconstructed populists in the Senate don’t think the government is on the right track should have caused the Treasurer to pause and rethink.

Nothing doing apparently. When it comes to increasing taxes, the government is not for turning, no matter how unfair the changes.

Of course, supporters of the change largely ignore the inherent unfairness in this differential treatment.

Although they rarely come out and say it, their attitude seems to be that ‘rich’ superannuants have somehow gamed the system to achieve high balances and are still gaming the system to unfairly capture most of the benefit of super tax concessions.

Combine that with the progressive item of faith that taxes on the ‘rich’ should be perpetually increasing (so they ‘pay their fair share’), there will always be some support for measures like this, regardless of how unfair they are.

One immediate problem is that both those beliefs are wrong.

While the rules did once allow for the accumulation of truly large superannuation balances, that is no longer the case. The rules have been progressively tightened over the years both to limit the amount of super balances and to increase taxation on those with higher balances.

Higher earners are already paying far more tax on their earnings and on their super contributions. That those with greater contributions will secure a greater dollar amount of concessions overall and end up with higher balances in retirement is not manipulation, its mathematics.

The problem of course is far deeper than just maths. The core division actually lies at the heart of superannuation itself.

The superannuation system is trying to achieve two objectives at once. It is both a wealth creation vehicle and a scheme to offset the cost of the age pension on the federal budget. Sometimes those objectives clash, or at least require regulatory contortions because one size doesn’t fit all.

Or, if you prefer to look at it from the individual perspective, superannuation is a universal scheme with universal rules that are being applied to individuals with incredibly different circumstances and needs.

Forcing everyone to contribute a flat percentage of their income ends up creating a significant divergence in balances over time. This causes problems at both ends of the scale.

Lower income earners are being forced to contribute more of their income than they rationally would, at a relatively less concessional rate because their marginal tax rate is far lower.

But it’s not obviously better at the other end of the scale. Compulsory contributions on those with high incomes, who already have large balances, are forcing money into super that could have been used for other savings or active investments.

It is worth pointing out some of that money would end up in super even if it was voluntary, because of the absence of a tax-advantaged savings vehicle other than superannuation (except for the family home of course).

As the level of compulsory contributions goes up over time the divergences in balances, and the resulting problems, get worse not better.

The government is continuing to force more and more money into the system, hoping to brute-force better outcomes overall. The tinkering with the tax treatment, and other policy band-aids like paying super on parental leave, are creating new messes and exacerbating the problems caused by the coercion and bluntness in the system.

The government is fully aware of this problem. However the dominance of union-backed industry super —both in the market and the Labor party —makes any meaningful attempt to tackle these problems unlikely.

There are some good policy ideas mixed up in the debate. For example, a recent Grattan report highlighted a long-time policy recommendation of my colleagues at the CIS: encouraging (or compelling) retirees to convert some of their super balances to lifetime annuities.

This would at least begin to solve one of the real problems of those in retirement (asset rich, but income poor).

Rumours are also swirling that the opposition might take another look at the rate of compulsory contributions —at least by pausing the upwards trend or rejecting the seemingly inevitable push to 15% compulsory contributions. Given they lost this fight in government last time, it seems unlikely they will find greater success in opposition.

They may have more success in opening up super for other purposes, and thereby increase its utility to those who are not in or near retirement age. Allowing the use of super for housing, or as an income smoothing vehicle (for example as a supplement to unemployment benefits or parental leave payments), would likely have a greater benefit overall.

There is also a strong argument that super should simply be left alone, even if it’s not perfect, because the endless changing of the rules is unfair on people making decisions on the long timeframe super involves.

Unfortunately the government seems to have little interest in either leaving the system alone or the large scale reforms that would fix the bigger issues at the heart of the system.

Instead, as was the case with their previous proposal to end the refundability of franking credits, or their repeal of transparency requirements, the government will continue to chase additional revenue and protect union super at the expense of super consumers.

Simon Cowan is Research Director at the Centre for Independent Studies.

Photo by Polina Tankilevitch