Brian Toohey is not afraid to put forward seemingly batty ideas. A few years ago he suggested that Australia should abolish corporate income tax. Corporations would save the cost of compliance, legions of accountants might starve (or find real work to do) but companies would operate more efficiently, have more funds to invest or to disperse to shareholders as profits. International companies would flock to our shores and even the tax man would be happy because the increased economic activity would generate more income tax and other revenues.
That suggestion always had zero chance of being adopted, but wasn’t an altogether silly idea.
Ditto now for compulsory superannuation.
IT IS now clear that the union movement made a bad mistake when it backed the introduction of the compulsory superannuation scheme devised by Labor’s Paul Keating, urged on by the ACTU secretary at the time, Bill Kelty. To this day, there is still no detailed policy report showing that net economic and social gains flow from forcing employees to hand over a growing slice of their salary to the richly rewarded fund managers in the nation’s booming financial sector.
The funds invested are worth $1.2 trillion, providing an income stream of $18 billion a year. Many billions more will flow from the move to 12 per cent compulsory contributions.
The bottom line?
Based on figures in Treasury’s tax expenditure statements, the increase in super contributions to 12 per cent is likely to cost the budget at least $8 billion a year when fully implemented in 2019. Even before then, the combined budgetary cost of the age pension and the super tax concessions is likely to hit an annual $100 billion. Yet the budget papers estimate that lifting compulsory contributions to 12 per cent of salaries will add a tiny 0.4 per cent to national saving by 2035. Left to their own devices, there is no reason why most people couldn’t do as well as that. (Emphasis added)
We do need policies to support savings and retirement incomes. Time to put our thinking caps on and perchance be brave.
I don’t think we’ve had a thread specifically on superannuation before. On the Henry Review open thread derrida derider @ comments 5, 39 and following did give the issue the rounds of the kitchen.
So what do you think?
(My apologies for the double-posting of comments on that thread. Computers are contrary beasts.)
I tend to think that forcing people to save a bit for their retirement (as a general principle) is on balance a good thing for the country. Of course its the case that a significant subset of people would be inclined to do this anyway, or would appreciate the flexibility to better control the extent and direction of their contributions.
Certainly I think there is a case for allowing people to use their super to a limited extent to get a foot in the door of the increasingly impossible housing market.
Thou speaks arrant nonsense.
Where doth one get ones welfare state when economic heresy has destroyed income tax.
Have the money-lenders taken over Larvatus Prodeo???
My favorite state of Ireland did covet Toohey’s “International companies would flock to our shores” and have paid dearly for their sins.
Satan’s land of Iceland too did quest that – “International companies would flock to our shores”. Iceland is now plunged into everlasting darkness.
Do not let accountants starve. Keep the money-lenders outside our temple.
I know what you’re getting at; improving policies around saving is a genuinely good idea. But it’s that pesky free will thing, all I could imagine is a large section of the public spending all that extra money on pies, and then when they get old asking the government for help.
Then again there isn’t much money that we earn that gets taxed 3 times, no tax advantages could ever be derived from it, and it can’t be used for things that might be good for your life and a good investment (say like your house, sure technically you can do it, but there is a lot of fiddling to get that working).
It might be time to have a serious think about how we approach super, but maybe not how compulsory it is.
It’s not so much about frittering away ones money on pies, but when you’re on a below average household income there is always someone there with their hand out. If there isn’t a bill outstanding there will be car trouble, medical or dental bills / specs / school uniform / shoes and the list goes on… Compulsory superannuation works for me because the only way that money will not get sucked into the car/dentist/school vortex is for me not to have access to it!
Now that we are allowed to choose our own super fund it’s improved – the super fund chosen by our company had massive fees and charges.
You’re all missing the big draw for companies here. If we dropped compulsory super then it would be less impost on business as they could either drop payrates so the employee would still get the same cash in hand or just freeze wages for a few years.
And of course trickle down would take care of the rest. Yay capitalism.
Some people would say that having legislation making it compulsory to wear a seatbelt infringes their rights but the alternative is society having to pick up the pieces when s**t happens. Similarly we have to encourage people to fund their own retirement and not just fall back on the public purse. So compulsory saving infringes your freedom of choice but it also saves the rest of us funding your choices when they fail to bear fruit.
I think a government run super scheme is the way to go. A guaranteed modest interest rate could be provided with the funds available for important infrastructure projects, locally, and perhaps to banks so that they would need to rely less on o/s borrowings. Peeps funds should be insulated, as far as possible, from the madness of the market and greedy middlemen.
What alternatives would you suggest, keeping in mind the goal of making sure people have at least some savings on retirement, and being aware that most people will use their savings if possible (dental work is expensive!)? Changes such as being able to pick your own super fund and same-sex couples being able to access super if one partner dies have certainly improved the fairness and flexibility of superannuation without addressing the basic model.
Toohey appears to be mssing the point that the employer *wouldnt* give you the equivalent in pay if they didnt have to pay the super.
ie, its not forcing the employee to sacrifice their pay – its forcing the employer to progressively fund pay “retirement leave” for the employee.
The fact that (some) employees also contribute is incidental to that basic fact about super.
Of course the Unions signed up to it!
My sole objection is that you’re often forced to invest in the sharemarket rather than less risky things like cash.
Compulsory superannuation isn’t the only way to raise saving, nor is it the only way to provide retirement incomes. An equally obvious way would be to raise taxes at the same level as compulsory super, and fund a non-means-tested pension for everyone. For a relatively high income earner, retirement’s going to be fine anyway, even without the higher super payments. For a low income earner, they’ve got few assets to fall back on anyway, and will also have a low super payment, perhaps supplemented by a low pension. Good luck paying capital city rents on that.
Let’s not forget that the superannuation tax break is essentially regressive – there are certainly some reforms to be had here:
Such estimates project out only a couple of years are notoriously inaccurate. A projection about conditions in 2035, a quarter of a century into the future, isn’t worth the paper it’s written on. As a check for this, think back on what 2010 was supposed to look like in 1985.
It is undoubted that superannuation distorts tax revenue and expenditure. Right now, the 3-year rate of return on this huge corpus of money is looking a bit sick, thanks to the GFC. Three years ago, the rate of return looked pretty good. Projections based on today look bad. Projections based on 2007 looked a lot better.
Participants in superannuation schemes are now offered a huge range of investment vehicles that all do essentially the same narrow range of things. However, anyone can now easily be aggressive or conservative and hedge and speculate on the rise and fall of the $A by shifting investment strategies. It is up to participants to educate themselves about their options.
And the first thing participants should learn is how much their funds managers are skimming off the top of their contributions. The fact that many of these funds still operate is a monument to the laziness of Australian wage and salary earners.
Another benefit brought to Australian workers by the spivs of the ALP under the auspices of the Accord.
I think Labor Outsider has argued before (and sorry if I’m putting words in his mouth) that if you want to increase national saving, increase national saving more directly.
In other words, run a bigger surplus and put the proceeds in a sovereign wealth fund.
[Abolishing company tax] always had zero chance of being adopted, but wasn’t an altogether silly idea
Yes it was. Company tax is absolutely essential as an anti-avoidance instrument. Otherwise every small businessmen (or anyone that could vaguely make themselves look like a small businessman) would incorporate and all sorts of income would be classed as “retained profit”. With dividend imputation, dividends to domestic shaeholders are anyway just PAYG-style temporary instalment of income tax anyway (every dollar of tax on a franked dividend paid to an Australian resident comes off their personal income tax).
That said, it is not at all clear that a real tax on profits would be progressive in its incidence. There’s US research (some of it by moderate lefties too) indicating that most of it gets passed through to workers and consumers in a mildly regressive way.
Ok I get it:
No tax
No health care
No retirement benefits
No social security
No roads
No sewers
No water supply
No roads
No railways
No nuffink; just a man and his dependent females, alone in the world clawing a living from anarchy and chaos.
While the last Chicago School corporation stalks the face of the earth; the corporation they call Mean Brutish and Short.
Huggy
Of course a large amount of the trillion dollars in super funds is invested in Australian companies.
I wonder what the effect would be if that money were not there, but had to be sourced elsewhere?
Toohey treats the money as if it had no other purpose in the Australian economy.
As far as tax is concerned, I personally reckon it would be better to tax it a zero going in, but at full rates going out. That way, there would be no way of avoiding the tax, and if there was any left at the end of the superannuant’s life, it could be taxed fully – in effect a death duty. Under this scenario, the tax would be collected when the worker was no longer working and ameliorate somewhat the aging crisis we are supposed to be going to have.
dd @ 15, thanks for that. It’s obvious when you point out the opportunities for avoidance.
marks, if super is invested overseas it can also be beneficial to our economy as far as I can see. It brings profits of overseas operations back to Australia and improves our balance of payments.
I don’t know enough to have a position on whether super should be compulsory and if so how much.
My suspicion is that current policies heavily advantage those who have a deal of spare cash and could make their own arrangements. Costello allowed huge amounts of money to be put into super on advantageous terms and now if you are over 70 you can pull it all out again, or leave it there to generate a tax-free income.
Even the middle class, free of supporting offspring, are laundering significant amounts of money through salary sacrifice to avoid tax.
My general approach would be to cut back on middle and high income privileges and try to make provisions for the less well of more advantageous. It’s not much fun being a straight out old age pensioner in terms of discretionary spending.
PS I’m getting bored with pointing out the things that Toohey is saying about compulsory super (as well as other problems he never gets to). So I’m not getting into this.
dd @ 19, a shame, but understandable. I’d recommend to others that they have a look at dd’s comments in the previous thread linked in the post.
For some time now I haven’t rated Toohey as a commentator outside defence (I don’t know enough to have an opinion on that score) but his article did open up the topic to some extent and provide some interesting information.
You can create incentives for saving (or disincentives for spending) by having more consumption taxes (GST, carbon tax etc). One way to get a carbon tax might be to reduce company and income tax rates and replace with a revenue neutral carbon tax. Though I suppose, if carbon emissions start going down then you have a revenue problem.
We could eliminate the need for so many accountants by simplifying the tax code (both company and personal).
Compulsary super is one of Australia’s best features for low income earners. I never thought about this, until I became a low income earner in a country where I now have to save for my retirement under my own steam.
“Compulsary super is one of Australia’s best features for low income earners.”
If they have a steady full time job. For the rest who change jobs regularly it is a dogs breakfast of leaked funds.
Yes, keeping track of funds for the casualised workers is a nightmare- that’s what happened to me when I lived in Australia, and it’s something that really needs to be addressed.
Scott it is indeed quite a disgrace that nothing has been done for those you mention, who need the funds most, having funds lost or pissed up against the wall in administrative fees. The answer would be to have one account run by the government that was carried around from job to job.
The ability to choose your own super is having a positive effect for younger people managing their super, at any rate – all three of our most recent employees have brought their own super funds with them, so there’s no disruption and no doubling of fees as there was for me 10 years ago.
I think Toohey is exactly right when he says “forced to hand over a growing slice of their salary to the richly rewarded fund managers“. The obvious solution is a state-run scheme like the various industry funds but bigger. Perhaps they could invest in state-owned infrastructure and pocket some of the ridiculous profits currently extracted by McBank. We could call it “The Australian Government Inc” to distinguish it from the clowns in Canberra.
Personally I’m in the well-paid middle classes who miss the good old days under Howard when I could salary sacrifice everything over $49k and pay sweet nothing in tax while my super grew and grew. When I arrived here in 2000 I couldn’t understand how such a blatant rort could exist (and why so few Australians were taking advantage of it). But shutting down tax dodges is the right thing to do. I’d much prefer a simpler system where there were lower rates and fewer loopholes. And tax returns were less than 100 pages long. The NZ system where they’re allowed two sides of A4 and a 12 point font strikes me as a good legslative requirement.
(the NZ system is not actually that clear-cut, unfortunately)
What DD said about the corporate tax proposal …
In broad terms, the best way for a state to raise revenue is to diversify so as not to have all the sources in one pool and allow the players to game the system too much. So you have some income, some corporate, some value-added etc … If it turns out that super acts as a kind of a tax, then that’s OK.
I suspect that not taxing what was going in beneath a certain threshhold and making amounts above that progressively less concessional and taxing more coming out probably strikes the right balance.
Since much of the need for retirement income/assets is bound up with ensuring you have a dignified place to live without nworking, I don’t see how you can look at this without examining housing policy, which IMO is a mess.
I also think yopu need to re-examine the ways in which older people are supported in the workforce. Making it feasible to extend people’s working lives sounds like win-win to me. Inclusive societies should not be giving people the idea that they should stop working when they reach some arbitrary retirement age and should also be looking to improve the quality of life of all the citizenry, including therefore, the quality of life of people older than 60. Creating a framework in which people could defer retirement and keep non-cash benefits associated with being over-65 and, by claiming later when they do finally cease paid employment, get, ceteris paribus, a better pension + annuity sounds reasonable. Anyone who really believes they aren’t fit to work full/part/any time and can substantiate that could still qualify for all the existing support but I’ve no doubt that if we can get the health system right then 25 years from now there would be a great many who’d be happy enough being in paid employment at 75 or 80. (Disclosure: in 25 years I will be 77 years old)
We need to continue serious work on managing and improving the health of older people, and in preventing/reducing the impact of “lifestyle” diseases from the time kids start developing life habits.
I read years ago that the tax breaks are now costing the government more than running a decent public pension scheme. Is this true?
Our Superannuation is a magnificent policy. Well done ALP. Most of the rest of the world look on with envy.
For those complaining about investment choices/fund managers/returns etc – you have choice of both fund and investments. Superannuation is a tax effective structure – the investments within the structure are a completely seperate issue. I just don’t see what you have got to complain about except getting off your backside and sorting it out.
OK, I’ll bite. sg@29, yes its true. Alister @10′s idea of a non-means-tested age pension funded by getting rid of the super tax concessions would actually save the government billions and would improve overall saving incentives to boot.
It was an option that was seriously canvassed at the time compulsory super was being considered, but the ACTU wouldn’t have a bar of it because the economic illiterates genuinely believed that “super will come out of profits, not wages – the bosses will pay” (plus, of course, no cosy industry fund trusteeships for union bureaucrats).
Of course if you had a universal age pension it would only be an election or two away before we’d hear whinging about “middle class welfare” – a term that consistently frames the issues in a misleading way.
I thought my memory wasn’t failing me dd, but why did you start your comment with “OK, I’ll bite”?
So if the current tax breaks are costing more, an alternative spending plan would be… a non-means-tested age pension, and put the remaining savings into a better parental leave plan, so that the relative size of the tax-paying vs. pension-bludging population becomes more favourable.
Right?
Part of the problem is that we have this quaint idea that money is “real”, we can collectively save for the future and that saving for our old age reduces the burden on younger generations. Think about it. The greater the savings/purchasing power of the old the harder the younger generation will have to work to provide the goods and services the affluent old can afford to buy.
If we really want to reduce the burden on the young we can do this by spending money now building up our intellectual and physical infrastructure so that the country will be able to produce goods and services more efficiently in general as well as that related specifically for the old.
Long winded way of suggesting that the alternative sto super be seriously considered.
Yes, John, that’s an important insight. The resources to pay for an older population will have to be found from the resources available at the time, not from today’s resources. Money as a society-wide longterm store of value is an illusion in that sense. There will have to be an actual person alive then, not today, to look after us in the nursing home – and that is a job elsewhere that is not being done by that person.
If the whole world started madly saving money for retirement the rate of return on that saving (ie the rate of return to capital, ie profits) would drop markedly. Economic growth would slow (actually, for the reasons Marx identified, it may also become more unstable – ie more booms and busts). Those who want to artifically boost saving, though, assume that we Aussies will be the only ones doing it.
At the time Keating’s superannuation scheme was introduced super was a privilege that was not enjoyed by all workers. Managers, professionals and coal miners tended to get it while other, less senior workers didn’t. Part of Keating’s aim was to create a fairer system that included all workers but part of it was to reduce the percentage of older people needing a pension.
Unfortunately, this self funded pension system is on e that inherently pays a higher “pension” to those who were better paid during their working life. Worse still, Costello turned it into a massive tax avoidance system that the much better off could really take advantage of.
At the end of my working life the rules would have allowed me to put almost all my pay into super as long as I could afford to live off my savings – not something someone on the basic wage could afford.
@ Lefty E I agree totally, exactly what I was thinking, during the last 2 stock market crashes (or close ones) I’ve lost 60% of my super, this happens too often for it to be classed as a viable savings / retirement investment, needs to be a LOT more safe than it is.
Exactly @ 36 – your superannuation doesn’t need to be invested in shares if you don’t want it to. Tell your fund to invest it in cash instead if you’re getting close to retirement and concerned about volatility. If your fund doesn’t have a cash option you can transfer your super to one that does.
The problem with choosing a more conservative investment option for your super is that you are still paying significant management/admin costs for a savings scheme that is not dissimilar to putting your money in a fixed interest account, which would be pretty much cost free. Admin costs for cash and conservative options are lower than other fund options, but still more than can be reasonably justified.
When I was employing people, I found the superannuation scheme depressing. Part-time workers are particularly disadvantaged by it – if you earn less than $37,000 [so say a 2.5 or 3 day a week job] the tax rate for super is no less than your ordinary tax rate. So, you are losing 9% of your income, you are paying admin/management fees and there is zero taxation advantage. It’s also 9% of your income that you can’t use to pay down a mortgage or other debt – so when you add what they could save in interest by financing debt to the scenario – it’s a lousy scheme for low-income workers.