The problem with superannuation reform

Both parties took substantial superannuation reform packages to the last election. Unfortunately both packages had the same failing: they focused primarily on how to generate more revenue, not how to make superannuation work better.

Superannuation is a poor savings vehicle. At a fixed percentage of income regardless of age or wealth, it doesn’t reflect how people would choose to save. It disadvantages those with broken work patterns or variable income, who might wish to save more in some years and less in others. It forces people to save for retirement when they might be better off buying a home.

Worse still, it compels low income earners to save money they would otherwise consume, effectively forcing government to make up this lost income with billions of dollars of additional income support. A family of four with a single income earner on $75,000 has $7,125 deducted from their income in superannuation contributions but receives more than $7,500 in family tax benefits alone.

However superannuation savings are mandated by government and taxed substantially more generously than other forms of savings. This preference cannot be put down simply to the efficient taxation of savings, particularly when other forms of savings are taxed much more heavily.

Nor can it be about creating a safety net against old age poverty or alleviating retirement savings myopia: the age pension already fulfils those needs. Yet superannuation is singled out for special treatment.

The only rationale for taxpayers to incur such a substantial cost for superannuation that makes sense is if it reduces government pension expenditure. Yet superannuation will not substantially reduce the cost of the pension (2009 estimates suggest only a 6% cost reduction when the superannuation system is mature) nor will it make many more people independent of government in retirement.

Before government looks at how to take more money out of the system in revenue, or forces people to put more money in through higher compulsory contributions, it needs to look at how to make the system work better. Neither the reforms proposed by Labor or Liberal will cut the rising cost of the age pension.