Universal pension better than compulsory superannuation

According to The Australian’s Judith Sloan, Australia’s current retirement income system is a costly one that contains a range of inequities. One alternative would be to combine a universal pension with voluntary savings, which is essentially the New Zealand model. Sloan argues that such a model would likely cost taxpayers less than the present system, while creating a competitive savings market that would result in lower fees than under compulsory superannuation:

The combination of a means-tested Age Pension and compulsory superannuation with generous tax concessions results in a costly system generating a number of inequities…

It’s a great deal for the superannuation funds and the sub-industries that hang off them — but that shouldn’t be an objective of policy.

The alternative of universal pensions topped up with voluntary savings would, in all likelihood, generate better outcomes for most retirees as well as cost the taxpayer less. And having a competitive savings market would mean much lower fees than compulsory superannuation throws up. (More than $30bn is lost in superannuation fees each year, with some management fees more than 100 basis points of the value of assets under management.)…

Consider the universal pension idea. Everyone gets a certain amount on reaching a specified retirement age. Ideally, the qualifying age is adjusted to reflect increases in longevity.

All that bureaucratic faffing about, deciding whether someone is eligible for the Age Pension and at what rate, disappears. These cost savings alone would be substantial. And all that game-playing and manipulation on the part of older citizens to get the best deal out of the Age Pension would be for nought…

All things being constant, it is estimated the cost of the Age Pension will be eclipsed by the cost of the superannuation tax concessions. As the Retirement Income Review concludes, “government expenditure on the AP as a proportion of GDP is projected to fall slightly over the next 40 years. [But] the cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of AP expenditure by around 2050.”

In other words, compulsory superannuation saves taxpayers nothing in net terms; in fact, it costs them.

Well said. Compulsory superannuation acts like a tax and forces people to forgo current consumption – a particularly pernicious outcome for lower-income earners. It has also created a massive trough, worth some $30 billion a year, that has attracted snouts like Australia’s four major banks.

Superannuation concessions currently cost the Budget $43 billion a year and are very poorly targeted to high income earners, who receive the lion’s share of taxpayer assistance:

Moreover, the Retirement Income Review estimates that the cost of superannuation concessions will dwarf the Aged Pension, and costs taxpayers more in net terms:

As the superannuation system matures, the cost of superannuation tax concessions is projected to grow as a proportion of GDP such that by around 2050 it exceeds the cost of Age Pension expenditure as a per cent of GDP (Chart 12). This is the result of growth in the cost of earnings tax concessions…

To the extent that superannuation tax concessions are contributing to higher superannuation balances of lower- to middle- income earners, they help to reduce Age Pension expenditure. But the main influence behind the growth in superannuation balances is the SG. Tax concessions are largely concentrated among higher-income earners who are close to and above preservation age. Across the income distribution, the lifetime cost of superannuation tax concessions is projected to outweigh the associated Age Pension saving (Chart 13)…

By extension, the current superannuation arrangements mean there are less funds available in the federal budget to lift the Aged Pension.

As noted above by Judith Sloan, New Zealand has a voluntary superannuation system that works very well. In fact, several years ago I met Bill English when he was Finance Minister and we discussed superannuation in some detail. English was reluctant to implement an Australian-style compulsory system precisely because he believed it would lead to inefficiency and ticket-clipping by the industry, while draining the Budget of revenue. Moreover, with a universal Aged Pension and no compulsory super, New Zealand has a savings rate similar to Australia’s. This speaks volumes.

There are few better rent-seeking industries to be in than superannuation. Abolishing the compulsory system in favour of a universal aged pension has merit and should be given detailed consideration.

Unconventional Economist
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Comments

  1. ErmingtonPlumbingMEMBER

    “Universal pension better than compulsory superannuation”

    Of Course it is.
    Have we past the point where the Tax concessions on Super exceeds the Pension yet?
    Like most Govie policy good for a few but a rip-off for everyone else.

    • Wait I was coming here to say
      Of course it is.
      Just UBI it all for gods sake or at least one welfare payment that everyone can access without endless assessment. the problem is, too many old people enjoy the virtue of counting every penny and making their meagre budget stretch a mile. They love the penury and love knowing it’s imposed on millions of others even more and love the govt that they’re making all the sacrifices for. Try getting rid of this in a country of frugal Nordic types. it’s not just the wealthy who don’t care about people in poverty whose votes you have to change.

    • Becomes moot after our lot of pollies go off to Schwab/WEB/prince Charles/Bill Gates/ Biden/ etc. Build Back Better Davos at the end of January. to discuss dealing with the public anger forecast by Schwab, the universal basic income, the retirement of all debt and universal vaccines. And forecast of You will own nothing, rent everything, and be happy. Pauline Hansen did try to stop it or at least open it up, just got abused by one brain would be lonely, vicious Jacqui Lamby ex back injury alleged malingerer and military driver. So if it’s a goer our pollies are ready set go for it. Don’t know how they will deal with losing all their neg geared rental properties and going on basic income.

    • So a pension of 20,000$ pa means tested looks better for Australia? Damn hard to live on 20k though they get a handful of postage stamps free from the post office.
      Given the push for land tax which I would bet big on to keep increasing over the years that will have to be paid too out of the 20k equivalent by those who save what could have been super to theoretically buy a home against overseas competition, and money launderers still blessed by our govt. If renting then land tax will be a rental component.

      I don’t get the whinging about tax, loss of taxable opportunities by govt, Cutting tax increases economic activity an lifts all the boats. The identification in comments with the govt getting its hands on more tax more blood out of us, is the
      victim protecting the abuser a well known psychological dysfunction.

    • Good comment. Another advantage is that we would save $1 billion at least every year on the enormous bureaucracy needed for all the means testing. That is just for the aged pension.

  2. Well said Leith.

    The simple fact of the matter is that for many Australians – and almost anyone under the age of about 55 – Super no longer makes sense. I was recently chatting with a guy in his late 50s who has been slapping the maximum amount into his super for 30+ years and who has been told by his accountant that he would be lucky to fund maybe 7-10 years of post retirement life. And he is of a generation which could buy an abode for relative peanuts (25 years ago) and has been in employment all the way through, on something akin to average income (maybe 60-70k now).

    For any kid out there in their mid 20s, they are looking at a world where they can either pay rents for a whole life, or can rent the money to pay off a mortgage their whole life (and still probably never actually own an abode), where incomes can expect to be nailed to the floor for probably a decade from here (at least) and where actual employment is likely to be increasingly casualised/uberised, all against the backdrop of an economy which is basically a bubble and everyone inside the bubble is globally uncompetitive.

    The question for them is not ‘How am I going to fund an existence in a post retirement world?’ it is ‘how am I going to fund an existence, and will I ever be in a position to retire?’ or maybe ‘can I afford to have a family?’ For far too many two income households (on average incomes) the answer to that is increasingly ‘no’.

    Then there is the likelihood that these working poor are likely to have the living bejeesus taxed out of them – and those taxes are funding perks for a generation (in general) that could afford their own abodes in greater employment security and (for a subsection of that generation (the affluent) which could afford to do it on their own anyway…

  3. yeah…nah

    super just needs a few tweaks.

    Tweak 1:
    “Superannuation concessions currently cost the Budget $43 billion a year and are very poorly targeted to high income earners, who receive the lion’s share of taxpayer assistance:”

    the tax concessions should be spread more evenly so high income earners don’t get the lions share.

    A flat tax rate concession for the compulsory super contributions etc.

    Just needs some constructive thinking.

    Tweak 2:

    the existing best interest duty needs to be enforced:

    https://www.theklaxon.com.au/home/westpacgouge

    Edit: not saying they are the only 2. no doubt would be 100’s of improvements which could be made

    • A flat tax concession rate would still see a significantly larger portion of concessions going to the wealthy since they also contribute more money, as well as getting a greater concession.

      • This is true bjw678.

        A worker on $40k is in the 19% tax bracket. So if there’s say $4,000 going into their super and say it’s tax free that’s 19% of $4,000 about $800 as a tax concession. Whereas someone on $150k pa having $15k going into their super.. even would be they only get an $800 concession to be the same as the $40k worker.

        My hunch is it’s fair if the tax concessions slow down once any worker has built up a big enough balance. Some workers will get there more quickly.

  4. A universal pension is one way of removing the perverse incentives created by the pension assets test and exemption for place of residence. There would be no penalty for downsizing or an incentive to hide your assets in a large home.
    But I suspect in the end it would still collapse under the pressure of inflating land prices. Like most of our social safety net, it is just treating the symptoms caused by our reluctance to tax land.

  5. Diogenes the CynicMEMBER

    Shouldn’t the system tax super money on the way out not on the way in? Tax it at the marginal rate and you eliminate a lot of the issues.

    • Tax is a very funny thing. As a young fellow I never could figure out why some people could salary sacrifice and others couldn’t? Why a conference in Spain could be a tax deduction? Why one type of income is taxed at a different rate than others? Even after all the explanations offered it still comes across like the arguments put forth for lighter penalties for white collar criminals. There may be a notion of fairness somewhere in the tax system, yet the application fails the oft referred but little tried pub test. Though it isn’t a very good test in this instance given the all the tricks and dodges I’ve had described to my poor, cubicled, PAYG self by tradies at the pub.

    • That is just what most OECD countries do. They tax retirement savings lightly or not at all in the accumulation phase and then tax withdrawals in the pension phase as normal income. This helps lower income people build up a reasonable balance and does not give a massive benefit to the rich, who (in our system) get a big discount on their normal tax rate in the accumulation phase and are then able to enjoy a tax-free income in retirement.

      https://www.oecd.org/daf/fin/private-pensions/Tax-treatment-of-retirement-savings-Policy-Brief-1.pdf

  6. With such a massive flow of funds into local (east coast Straya) super money managers, the likelihood of corruption and poor outcomes is just too high yet we persist on this path as the small group that controls the laws of the land enjoy such extraordinary benefits.

    Here’s Westpac behaving just like a crime family that ‘knows’ it has full impunity.

    Staggering that ASIC has not closed WBC’s doors for good but ASIC is on their team, sadly.

    https://www.theklaxon.com.au/home/westpacgouge

  7. One of the current issues with the system is you can lump sum withdrawal the lot at age 60 if retired and 65 even if not retired. I hear stories of many still carrying a mortgage on their primary residence going into retirement with the plan that they are just going to use the super to pay that down/off lump sum as soon as they are eligible. Many then qualify for at least a part pension since equity in your main house is not included in that means testing. So it is just another tool to prop up the housing ponzi – especially since often that mortgage balance may be tied to a bank of mum and dad gift to their kids to get them on the housing ladder too…

  8. TheLambKingMEMBER

    The trouble is that the LNP are not in it for Australians. They don’t care about your retirement. Their hatred of Super is actually a hatred of Industry Super Funds and the power they have. The Industry Super Funds are largely Union controlled Funds. And they hate the control they are now having over things like renewable energy targets and making boards (like Rio) more socially responsible. They love the private Super funds.

    So yes, Super needs an overhaul – but like Bloke said above it just needs a few tweaks. And yes, like most things the Unions touch it seems to be surrounded by corruption and cronyism – unlike big business which seems to be surrounded by cronyism and corruption 🙁

    Making people save is a good thing. Most people won’t do it unless it is forced. And the next choice is do you want ‘a 1% super increase with no pay rise’? or do you want ‘no super increase with no pay rise’? So I say a 1% Super increase is a good thing!

  9. With stagnate wages, more income being spent on primary residences, and a growing cohort of low skilled low income migrants (including a large group coming in at middle age) – how can there not be a significant or full pension being offered in the next few decades?