What is it with the Abbott Government that has made it so quick to shun sensible superannuation reform?
Yesterday, the Productivity Commission (PC) released a research paper, which made the eminently sensible recommendation to raise the preservation (access) age of superannuation to 65 – a reform that would bring it more into line with the access age for the Aged Pension and save the Budget an estimated $7 billion a year.
The PC also reiterated that Australia’s ageing population will greatly increase the demands on the retirement income system, the Budget, and younger working Australians, thus making reform of the super system absolutely essential:
…the proportion of the population aged 65 or over expected to increase from one in seven today to around one in four by 2055. By 2055, there will be less than three individuals of working age for each older Australian (figure 1(i)).
The demographic transition underway will give rise to major social and economic change as more Australians make calls on the Age Pension and the health and aged care systems (figure 1(ii))…
The Government’s opposition to reform has been derided from nearly all and sundry, with The Australia Institute’s Richard Denniss the latest to highlight the Coalition’s Budget ineptitude:
Our Prime Minister is promising to never solve the fastest growing problem in his budget. According to Treasury, the cost of tax concessions for super will grow from $33.5 billion this year to more than $50 billion by 2019, at which point it will be costing more each year than the age pension it was supposed to take pressure off.
Just how tax concessions to people who are too rich to get the pension will take pressure off the cost of the age pension is the great unasked question in Australian economics. But not only is the cost of the tax concessions enormous, they’re growing far faster than the cost of the age pension.
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The Abbott Government does, however, have one supporter in former Treasurer Peter Costello, who has once again called for no changes to superannuation on the grounds that people need certainty:
“Give it certainty. I think during the last government there was something like I counted up 33 different changes in budgets and mid-year reviews to superannuation. People just don’t trust superannuation as being a long-term vehicle anymore. They know the rules are going to vary from year to year. They’re afraid to lock voluntary money into the system, which is why it’s just running on the compulsory contributions at the moment. And, you know, if you want to put money away for 20, 30 or 40 years, you gotta have some certainty it’s going to be there when you retire and I think the Government’s got to give it some certainty.”
Maybe, just maybe, politicians wouldn’t have to mess with superannuation if Costello hadn’t meddled with it first and made the whole system both unsustainable and inequitable.
In 2005, Costello also introduced generous ‘transition-to-retirement’ rules, which effectively allows those aged over 50 to lower their income tax – affectionately described in the industry as the super saver’s version of “having your cake and eating it”.
The Productivity Commission yesterday slammed Costello’s’transition-to-retirement’ rules, noting that they “appear to be used almost exclusively by people working full-time and as a means to reduce tax liabilities among wealthier Australians” and called for a review of their “efficacy and sustainability”.
Finally, in 2006, Costello reduced the tax rate on superannuation earnings for those aged over 60 from 15% to zero – a move dubbed by Saul Eslake as “one of the worst taxation policy decisions of the past 20 years”. As a result, younger Australians must pay full income tax on their wages/salary earnings and 15% tax on their superannuation earnings, whereas older Australians get to pay absolutely nothing.
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It is precisely Costello’s meddling with superannuation that has greatly worsened the equity and sustainability of the retirement system, undermined the progressiveness of the tax system, and blown major holes in the Australian Budget.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
