Shorten speaks half truths on super

By Leith van Onselen

Opposition Leader, Bill Shorten, has come out swinging today, claiming that the Government’s decisions on superannuation will drain Australia’s superannuation savings pool of more than $980 billion by 2055, putting pressure on the Aged Pension. From The Canberra Times:

“Last year, the government froze superannuation for nearly 11 million Australians, twice”…

“This decision, combined with their unfair raid on the super accounts of 3 million Australians earning less $38,000 a year, will leave our national savings pool $983 billion worse off by 2055”.

“An average income earner, aged 25, will retire with $100,000 less in retirement savings”.

“How can the government claim a fair pension is unsustainable while trying to wreck our superannuation system – the single best method for easing pressure on pensions and giving all Australians dignity and security in retirement?”

Shorten’s is right to attack the Abbott Government’s cancellation of the Low Income Super Contribution (LISC) – a policy that refunded the 15% tax on super contributions for workers earning less than $37,000 a year.

The former Labor Government’s LISC policy was designed to improve the equity and sustainability of the system, which under the flat 15% contributions tax has meant that the amount of concessions received increases as one moves up the income scale (see below table).

ScreenHunter_6468 Mar. 11 10.41

That said, Shorten’s claim that the Government’s freezing of the superannuation guarantee at 9.5% (instead of increasing it to 12%) is robbing Australians is inherently flawed.

Superannuation concessions are ultimately paid for by employees, not employers, and to raise the superannuation guarantee would effectively have reduced workers’ take home pay, with potentially harmful implications for lower income earners.

The Henry Tax Review was very clear about who pays for super:

Although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth. This means the increase in the employee’s retirement income is achieved by reducing their standard of living before retirement.

Which is why the Henry Review explicitly recommended the superannuation guarantee be retained at 9%, not raised to 12%, so that it didn’t adversely impact lower income earners:

The retirement income report recommended that the superannuation guarantee rate remain at 9 per cent. In coming to this recommendation the Review took into the account the effect that the superannuation guarantee has on the pre-retirement income of low-income earners.

In 2010, as Minister for Financial Services & Superannuation in the former Labor Government, Shorten also acknowledged that superannuation is paid for by employees, not employers:

NEIL MITCHELL:

Okay. When superannuation goes up from 9 per cent to 12 per cent, who pays?..

BILL SHORTEN:

What happens with superannuation is that people’s pay goes up anyway. It goes up each year, by and large. What will happen is that superannuation, the increases to superannuation, will be absorbed as part of people’s pay rises.

…they get a pay rise, of which some will probably go in super, yes…

Between 1992 and 2002, that was the last time super went up, from 3 to 9 per cent… What happened was that real wages increased and super went up. But if you have a look at the years when the super went up, wages didn’t spike. It’s not an extra tax on employers, because the only way that could be is if you assume that employers will never increase the wage of their employees ever.

NEIL MITCHELL:

Okay. So you’re saying that the superannuation increases will be paid for by absorbing money out of the wage increases.

BILL SHORTEN:

That’s the evidence…

NEIL MITCHELL:

Well, so, just to get it clear, business will not be paying an extra dollar, right?

BILL SHORTEN:

No, I can’t see that business will be paying any more in the future than they otherwise would have been if the superannuation changes hadn’t gone through. But what I do recognise is that a portion of what would have been employees’ increases will go into compulsory savings, which is concessionary taxed.

As argued previously, a more equitable and cost effective way to improve Australian’s superannuation system is to:

  1. Abolish the flat 15% tax on superannuation contributions and replace it with a flat concession (e.g. 15%) that is the same for all income earners (with the lowest income earners receiving a rebate). A reform of this nature would not only improve equity by maintaining the progressiveness of the superannuation system, since all taxpayers would receive the same taxation concession, but also boost lower income earners’ super savings, thereby reducing their reliance on the Aged Pension and relieving pressures on the Budget.
  2. Increase the access age to superannuation (from 55 or 60 years currently) so that it more closely matches the pension access age.
  3. Remove the tax-free status of superannuation earnings for those aged over-60.
  4. Reducing the ability to draw superannuation as a lump-sum.

Shorten should focus his efforts on these areas, rather than seeking to raise the superannuation guarantee to 12%, which would merely heighten inequities already present in Australia’s superannuation system and worsen the long-term sustainability of the Budget.

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Comments

  1. GunnamattaMEMBER

    Nice to see Bill clearly articulating a belief in the magic pay increase (anyway)………..

  2. “Shorten’s claim that the Government’s freezing of the superannuation guarantee at 9.5% … is robbing Australians is inherently flawed.”

    It is robbing Australians. If they get the money in wages, they’d pay tax and spend the rest on useless stuff like flat screen TVs, from which they get no benefit.

    If instead they get it in lightly taxed super, then in retirement they can afford to eat real food instead of dog food.

    • There is nothing stopping them from contributing more into superannuation if they want, and getting the beneficial tax treatment. It is their choice. But why the hell should the government mandate it?

      Sounds like you believe in central planning. Do you not believe in giving people choice in how they manage/spend their own money?

      Also, super is not “lightly taxed” for low income earners.

      • “But why the hell should the government mandate it?”

        Because of the moral hazard that if government doesn’t mandate it, people won’t save and will have to rely on the pension.

        “super is not “lightly taxed” for low income earners”

        It would be under the LISC policy.

      • “It would be under the LISC policy”

        Fix the concession system first (i.e. go well beyond the LISC) before increasing mandatory contributions. This would provide more benefits to low income earners than slugging them with another ‘tax’.

      • If you don’t think the Government should mandate money being put into super – then perhaps the current 9.5% rate should be dropped to 5% – or 3% – or even lower. After all, if people want to contribute more they still can…

        Plus this would give people the flexibility to contribute less to super in the early years and use the additional money to boost their home deposit, and make greater use of super in later years where it provides a more effective tax rort.

        What a great idea…

      • At UE at 10.20AM
        Exactly.
        Time to abolish super.

        I’d love my super right now to pay off my house principal.

  3. ResearchtimeMEMBER

    Should raise it to 12%, and onwards to 21% eventually – its almost irrelevant who pays, employer or employee. It needs doing.

      • ResearchtimeMEMBER

        Absolutely – fix flaws by all means – and make it fairer. That should be a priority. And I personally believe that you will always need a pension, because some just fall through the cracks.

        But ultimately, I cannot see any alternative. Transaction costs and malinvestment would occur if you gave it to the government – and the truth is that in a liberal democracy, the money won’t be there when you want it. aka – much of Europe.. But I get your point!

        Now I know that I have posted this recently, and it essentially backs up what you are saying. Confirmation bias and all that… from article posted last week – active fund managers – are they worth it? Numbers below don’t take into account the regulatory hurdles funds have to deal with. But all the same, it raises serious questions. Key points:

        (a) Using data from 1982 to 2010… active funds were more than 99pc correlated with the market as a whole… [that] active investing has to be a zero-sum game (for every gain there is a loss) before fees and expenses.

        (b) After the fees charged by actively managed funds, they found that only about 3pc of these funds outperform their passive peers… expect that 3pc to be just about that good on a purely chance basis…

        (c) Assets in actively managed US funds rose by 38.7pc from 2007 to 2014, while their passively managed peers grew by 169.9pc…

        (d) Buffett’s returns are more due to stock selection than to his effect on management… achieved stunning results early in his career, but perhaps this is the result of a simple strategy that once worked well, not a particular genius… outperformance is the result of skill derived from what he learned from… value investing principles – not chance… On top of this, Berkshire applied leverage – borrowing to boost gains. Easy to explain in hindsight, but the guru pulled it off before others cottoned on…

        I think if you take a macro view and are not too silly, you can beat the market average consistently, and make super profits. I also doubt how safe things would be (mathematically) if everyone relied on passive investments, Mr Market could get things very wrong for a period, and the whole concept of the underlying strategy is that people are buying and selling winners and losers! You win by not making those choices yourself by riding on the coat tails of others – now if everyone did that, there would be no leads to follow…

      • @Researchtime,

        “Transaction costs and malinvestment would occur if you gave it to the government”

        You might want to dial down the crystal ball settings a wee bit, due the increasing transaction costs and malinvestment when stuff is privatized.

        Skippy… now if you want to quibble about the ideological capture of government and how that befuddles some, then you might have a point.

      • ResearchtimeMEMBER

        Look there is a real basis for my scepticism… There has been some talk on this stream that government should take over super. (i) I think that dangerous, much for the same reasons why I think ABARE, RBA, Governments are far behind the curve on whats really happening macro economically. (ii) Some numbers suggest that if you accurately take into account of true Government transaction costs, from when they first assess you, on going supervision, etc, eat up 17-23% of the monies that they pay out in a single year (not really sure how accurate that number is – used during Howard era not to means test some small benefits. Even still, it would be high). (iii) I personally believe I can make more money on the market than any Government agency, especially when you realise that they just allocate monies to existing fund mangers (so the fees are effectively paid anyway – you just don’t see it). (iv) there will always be a risk that monies will be mandated from pensions toward ineffective, pork-pie national infrastructure projects, and we will never see a red cent of return (hello Italy and other parts of Europe). (v) Australian politics is all about the here and now, Government decisions are also. In 40 years time – the country could be broke, and all those pension savings I thought I had have now been given to a creditor nation (its a serious risk in my mind).

      • RT,

        Health care in America vs Australia, Energy, Water supply, MIC, and maybe sometime soon SS. The progression and results speak for themselves.

        Additionally – “Buffett’s returns are more due to stock* [made man by Carlyle – fixed] selection than to his effect on management”.

        Skippy… we can’t go broke, enough with the monetarist-ism. its how we got in this mess in the first place, that and weaponizing it.

    • 21%, Singapore style, is not a bad idea. It can pay not just for retirement but contribute to medical costs.

      If all this ageing population IGR stuff is real, then the only solution is more saving and less consumption.

      • And more IS-LM lead projections, which invariably will lead to a nasty recession, if not out right depression.

        Skippy…. at least Fisher learned from his experiences….

      • “21%, Singapore style, is not a bad idea. It can pay not just for retirement but contribute to medical costs”

        Yes but at least the Singapore Chinese Govt is smart while our Governments have been stupid since pensions were available. The Singapore Govt actually has a FUND that they contribute to & invest into — our system is to take AGE Pension $$$$ from successive generations on a year to year basis !

        How the Fu$% could that work over time ????? It can’t & that’s why we have problems right now.

  4. “will leave our national savings pool $983 billion worse off by 2055”

    That’s a bushel of real authentic frontier gibberish inf’en the ever was….

    Skippy…. budgets – projections out to 2055…. really… ????

  5. “Although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth. This means the increase in the employee’s retirement income is achieved by reducing their standard of living before retirement.”

    Actually this is NOT true. Anoter ken henry fairy story made up, as per his habit, to suit hios own desired outcomes. I don’t have the references just now but, prior to recent years, most of the Super came from employers. Wage growth did not slow while the Super contributions grew. There will always be a dual contribution with the balance depending on who can wield the most power at the time.

    Most who promulgate and promote the higherr Super contributions are not planning on a the concurrent drop in living standard. They just think ‘We can keep living how we are and magically we will have a whole lot of Super!”
    It’s another one of those things pecuiar to Aus – the good old Magic Pudding!

  6. You left fees from your list. 25% of balances according to Murray. So is Shortens omission any worse?

    Lest I be accused of monomania over this, I’d point out that your other suggestions would be so much easier to sell if the benefits of fee reform were included as part of a package. Some sectors, low income account holders, would benefit directly, and have a stake in the reform process. At the moment, without fee reform, there’s nothing in it for them, so they will be passive. Include fee reform, and there’s a whole class of people with a vested interest in seeing things your way.

  7. We wouldn’t need to force people to save in highly financialised and risky markets if we had affordable housing and a modest pension scheme.

    Of course super will not be enough, it never can be.

  8. I am trying to get people interested in running with the idea of using a small percentage of Super for personal banking. The time is ripe for this discussion with Joe Hockey and others suggesting super be used for first home buyers. So why not use it for personal banking?

    Whilst I am against people taking money out of their super for their first home, I am in favour of them being able to borrow small amounts from it. That capital has to work for them over the 40 odd years to have any chance of a comfortable retirement.

    Unfortunately locking anything away from the owner for 40 years leads them to lose connection with it. Most young people don’t ever think about their superannuation until later in life.

    They should be able to use a percentage of their super as a loan for small purchases, under a properly constituted loan agreement between their super and themselves. This would allow them to purchase items for the home, for their kids without having to put these items on the credit card.

    My accountant arrange for us to purchase a new company car for our business using our SMSF before the laws stopped this. We borrowed the full amount and then paid it back over two year at 7% interest. So we paid ourselves the interest rather than the finance company. So I know it can work. We had a properly drawn up finance agreement with appropriate stamp duty, and signed loan documents.

    “For immediate release on March 17, 2014, Sydney: Australia’s credit card debt is set to hit more than $52 billion by December 2014 according to Australia’s biggest credit card comparison website creditcardfinder.com.au*, prompting a warning against the dangers of relying on plastic.”

    According to ASIC, “The average card holder is paying around $750 in interest per year if their interest rate is between 15 to 20%”

    With interest rates from 12% to 20% or more this can hit young families hard.

    Borrow the money from their super to replace that broken fridge, or that unforeseen medical expense for one of their children, and paying say 7% interest to themselves will help reduce these financial burdens.

    The benefits are, they are made aware of their superannuation, they get to use a portion of it during the 40 years it is accumulating, they pay back the loan with interest and this helps their super grow.

    There is no reason why this cannot be set up and work, it only take the will to do it.

    I believe it will help the young people far more than helping with the mortgage. It is the sudden demands for small amounts of cash that create the most problems for young families.

    Thanks for taking the time to read my suggestion. This is an option using in the US I believe with “Whole of Life” Insurance policies.

    http://infinitebanking.org/about/ – Nelson Nash is the primary promoter of this concept in the US, with several book in print.