Keating’s superannuation monster is out of control

By Leith van Onselen

The Australian’s Judith Sloan has continued her commendable attack against Paul Keating’s compulsory superannuation monster, describing it as “one of the costliest and most ineffective retirement models in the world”:

Most people think Paul Keating has four children. In fact, he has five. The fifth is compulsory superannuation: super for short…

There are many retirement models around the world. Ours is among the costliest and most ineffective. The notion that our system of compulsory superannuation is the envy of the world is a myth perpetrated by the superannuation industry, including funds, fund managers and various hangers-on.

A government with any guts would bring on a comprehensive review of the system of forcing people to forgo current consumption, pay extremely high fees and charges, and in most cases just to knock off their entitlement to a full Age Pension. There is little doubt a fearless and clear-headed analysis of the full effects, including the costs of the assoc­iated tax concessions, would come to the conclusion that the system is a failure and should be discontinued.

…there is no doubt the cost of the tax concessions far exceeds the savings that are made on the Age Pension. In other words, it is an extraordinarily dud deal, fiscally speaking… But none of these mere details seem to fuss the father of superannuation, who says the superannuation contribution charge should be ­increased ­immediately from the current figure of 9.5 per cent to 12 per cent. Indeed, Keating says the charge ultimately should be as high as 15 per cent, with a further longevity levy of 3 per cent or so on top of that figure.

Spot on. Raising the compulsory superannuation rate would create two deleterious outcomes:

  1. It would reduce worker’s disposable incomes; and
  2. It would cost the federal budget dearly.

On the first point, Paul Keating explicitly acknowledged that compulsory superannuation is paid for by employees, not employers, in a 2007 speech:

“The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost. Indeed, in each year of the SGC growth between 1992 and 2002, the profit share in the economy rose…

“In other words, had employers not paid nine percentage points of wages as superannuation contributions to employee superannuation accounts, they would have paid it in cash as wages”…

As did Bill Shorten when he was Minister for Financial Services & Superannuation in the Gillard Government:

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…

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.

Whereas the Henry Tax Review noted similar and explicitly recommended against raising the superannuation guarantee:

“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”…

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”.

On the second point about the costs to the federal budget, the below chart from Grattan says it all: “both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments”:

Whereas the Henry Tax Review similarly acknowledged that compulsory superannuation is costing the federal budget more than it saves in Aged Pension costs:

“An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs).”

In short, tax concessions on superannuation already cost the Budget an inordinate sum, and are growing rapidly. And raising the superannuation guarantee to 12% – as already legislated – would mean they become an even bigger ($2 billion a year) Budget drain over time. It’s an unambiguously dud deal for both workers and taxpayers.

About the only winners from such a policy would be the superannuation industry, which would get to ‘clip the ticket’ on more funds under management and earn fatter profits.

At a minimum, the legislated increase in the superannuation guarantee needs to be junked, combined with root-and-branch reform to the way concessions are distributed to make them more progressive.

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