Hypocrite Peter Costello whinges about super complexity

By Leith van Onselen

Former Treasurer Peter Costello continues to whinge about recent reforms to superannuation, complaining that they have increased complexity which he argues is eroding the public’s confidence in the system. From The Australian:

“With growing complexity, extreme complexity, people will shy away from (the super system). And I think they are right to shy away from it because you never know what the rules will be,’’ he said.

Costello then warned that Australia’s credit rating could be downgraded and urged the Government to undertake reforms to strengthen the Budget position:

“I think the prospect of a downgrade can and should be used to galvanise public opinion to know that international people outside Australia are registering concern about our financial position,” he said. “This should be taken as a message to the public that we need to change our ways.”

Mr Costello’s hypocrisy never ceases to amaze. He complains that superannuation is a complex system and people need certainty, as well as the need for budgetary reform, and yet never acknowledges that he made a raft of costly changes as Treasurer that made the retirement system far less sustainable and equitable, costing the Budget billions.

Let’s recall the key deleterious changes to superannuation made by Peter Costello.

First, in 2005 Costello eliminated the 15% contributions surcharge on high income earners, thus ensuring high income earners received an even greater share of superannuation tax concessions (see below table and chart).

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Second, in 2005 Costello also introduced generous ‘transition-to-retirement’ rules, which effectively allowed 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 recently 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”.

Third, 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”. 

This followed Costello’s decision in 2001 to introduce the “Senior Australians Tax Offset” (now called the “Seniors & Pensioners Tax Offset” or SAPTO), which allowed a couple who has reached Aged Pension age to earn a ‘rebate income’ of up to $28,974 each ($57,948 combined) for the 2015-16 year without paying income tax.

As a result of these changes, younger Australians were required to pay full income tax on their wages/salary earnings and 15% tax on their superannuation earnings, whereas older Australians in many cases paid absolutely no tax.

Indeed, the latest Household, Income and Labour Dynamics in Australia (HILDA) survey, released in July, showed just how inequitable Costello’s reforms to superannuation were. As noted by Professor Helen Hodgson:

The more concerning finding for policy makers is that wealth inequality has increased, and that superannuation holdings and investment properties are factors in this inequality. HILDA data shows that in 2014 the mean superannuation balance of the top 10% of people aged 50 to 69 was $991,268, up from $650,619 in 2002, compared to $210,798 in 2014 for the sixth to ninth decile and $13,719 for the bottom 50% (although a significant number of retirees in this age group do not have any superannuation balance).

There is a strong correlation between high superannuation balances, income and non-superannuation wealth. People in the top decile have access to higher levels of income to make higher levels of concessional contributions, and the ability to find the funds to make non-concessional contributions into a tax preferred investment environment.

As has been noted previously, the current superannuation system allows high income and high wealth individuals to over-accumulate in tax preferred superannuation, which increases wealth inequality as well as intergenerational inequality.

The Government proposals to restrict the level of contributions and to reduce the amount that can be retained in a tax free environment are important tools to address increasing levels of wealth inequality in our community.

We should also remember that Costello greatly loosened the assets test to qualify for the part Aged Pension and the Commonwealth Health Card, thus further worsening the Budget.

It is precisely Costello’s meddling with the retirement system that has greatly worsened the equity and sustainability of the Budget and placed Australia’s credit rating at risk. It is also why Australia’s politicians have had to introduce remedial measures (admittedly too soft) to unwind some of Costello’s largesse.

Peter Costello should stop lecturing us about reform. He has done enough Budget damage already.

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Unconventional Economist
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  1. ceteris paribus

    People won’t shy away from superannuation because of the piddly changes recently proposed. If you are earning well, super is still money for nothing. He comes out publicly with this advocacy to “leave super alone” like clockwork, every three months. What is going on here?

    • Circa 2006.. Somewherin the leafy suburbs.

      Begins whistling softly; ”We’re in the Money’.

      “Bully Lillian!” ” I’m reading through Costello’s proposed changes and I just can’t believe our good fortune!”. Peter is a ‘top bloke’ I say, I say.” He’s a fool, though as we’d have voted for him anyways. I wonder why he felt the need to ‘bribe’ US?”
      “Not only will we pay no tax on our super earnings or income, we’ll now receive a part age pension as he’s halving the ‘taper’ rate.” ” How about that, Lil?” ” About bloody time we got our due, I say, I say.”

      Lillian (who never quite felt comfortable with her current wealth as she knew it came about off the backs of others) replied: ” I don’t like it that we’ll not be paying our way. Who is supposed to pick up the slack?” She knew there would be no sensible answer from her husband. She knew this plan would punish those younger and her intense dislike of Costello and those like him (including her dolt husband) began to grow.

      Costello Budget Speech (2006)

      Mr Speaker, tonight I release a plan to simplify and streamline superannuation. This plan represents the most significant change to Australia’s superannuation system in decades. It will sweep away the current raft of complexity faced by retirees, increase retirement incomes, give greater flexibility as to how and when superannuation can be drawn down, and improve incentives for older Australians to stay in the workforce.

      At the core of the plan is the proposal to exempt Australians aged 60 or over from any tax on their end benefits where these are paid from a taxed superannuation fund. This would apply from 1 July 2007. There would be no tax on a lump sum. There would be no tax on a superannuation pension. This would be the most direct way of cutting through the complexity of the current system.

      Reasonable benefit limits would be abolished. Age based limits would be abolished. A simple universal contribution limit would apply. People would not be forced to draw down on their superannuation. The self-employed would be able to claim a full deduction for their superannuation contributions. The self employed would be eligible for the Government co-contribution. It would be easier for people to find and transfer their superannuation between funds.

      It is also proposed to halve the pension assets test taper rate from $3.00 to $1.50 per fortnight for every $1,000 of assets above the free area with effect from 20 September 2007. The current taper rate of $3.00 means that a retiree loses more age pension than they earn on their additional savings if they do not achieve a return of at least 7.8 per cent a year. This is a large disincentive to save for retirement.

    • FFS Claw, Gen X+Y have been a majority of voters since 2001. Gen X were a big part of the electorate from 1996.

      That is, in an electorate where both parties get between 45-55% of the vote, Gen X has had the opportunity to influence the outcomes for the past 20 years, and with Gen Y has had a majority of electors since 2001.

      If you want to blame anyone, why are you studiously avoiding those who have had a majority of the voting power?

      At some point, youth kept out of housing, and robbed by super fees are going to have a “Hang on a fuxking minute!” epiphany. I suggest that those demographics that have been influential, if not controlling the agenda for the last twenty years will be their first targets.

  2. Just like housing would be fixed with one action, 40% deposits, the super system could be fixed with one action, maximum 25% lump sum withdrawal of balance at ceasing meaningful work over the recipients lifetime.

    • Nicely put nyleta regarding 40% home deposit alternative. Super issue needs more thought, in regards to its generosity vs spanking the unemployed.

    • I’d go further:

      Annuity only.
      Fees halved and the savings go to the taxation office.
      Work towards a tax free accumulation, but full tax on withdrawal system.

      None of this is hard, a junior Actuary could knock something up in an afternoon.

  3. Leith,

    You’re very fond of saying this:

    “Third, 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’.”

    Sadly, it simply isn’t true.

    You pay no tax only if you’re in pension mode and that works whether you’re over 60 or not.

    • Michael sadly it is you who is wrong. Tax is payable if you receive pension payments and are below age 60. You receive a 15% rebate so amount of tax depends on your marginal tax rate.

      • ceteris paribus

        Michael and Ramsay, I think what you are both pointing out is sort of right. The way I would express it is as follows: 1. If you are over 60 and your super is still in the accumulation phase, you pay tax on earnings. 2. If your super is in the pension phase/mode and you are over 60, you pay no tax, either on earnings or withdrawal.
        I don’t wish to be pooling ignorance – so someone please correct me if I am wrong.

      • Yes, but if you are still in the accumulation stage, you pay 15%.

        Also, fees work out at 1% of balances. So, for average returns of 5%, that works out at a total cost inside super of 35% of earnings. Wow.

  4. Costello’s reputation as a good treasurer has never been deserved because of two things:
    1 Private debt explosion that offset the reduction in public debt
    2 Setting up the superannuation rort for the high income earners where the cost of superannuation is higher than Whitlam’s pensions for everyone over 70(?) and some say even higher than pensions for everyone from 65.
    Keating was the best macro economic Libertarian treasurer Australia ever had.

    • matthew hoodMEMBER

      Keating was the reason Costello and Co could do what they did without a Labor offering an alternative. Curtin and Chifley weep at what he done.

  5. The REAL Tax Elephant in the room is the BIG one that MB almost NEVER talks about.
    Multi National Tax avoidance – It should be the Number one Tax dodge to tackle.
    Why should citizens be paying at whatever level they’re on while these mega bullies pay SFA !!
    Why is it NOT being addressed ?

  6. adelaide_economist

    Howard and Costello really were shockers and the passage of time just makes it ever clearer.