Scrap superannuation for a universal basic pension

National Seniors Australia (NSA) has called on the federal government to implement a universal pension scheme that isn’t means tested:

National Seniors Australia chief advocate Ian Henschke wants a universal pension scheme that isn’t means tested.

“Review after review complains about older people failing to spend down their capital; they don’t blame the system, they blame the retiree. And then they wonder why no one’s listening,” he told Savings.com.au.

“By setting income and asset limits which restrict you from, first, getting a pension, and second, limiting your entitlement, it punishes you for having more.”

Mr Henschke’s suggestions come on the heels of Superannuation Minister Jane Hume’s call to scrap the legislated increase in the superannuation guarantee. The minister says such increases would only serve to encourage retirees to hoard instead of spend…

The top two pension systems in the world – in The Netherlands and Denmark – both have defined benefits schemes, or universal basic pensions, in place.

Australia’s refusal to implement such a scheme hampers retiree confidence to go out and spend, instead of hoarding cash and assets, says Mr Henschke.

“That’s the beauty of a properly designed universal pension. It takes away the year-on-year risk, but ensures it is fiscally sustainable and fair,” he said.

A universal basic income could, over time, also be good for the government’s bottom line, as it would eliminate the need for massive administration costs.

“It would get rid of the pension assets and income tests, doing away with the need for unfair taper rates, deeming rates and work restrictions, and end the need to engage with Centrelink,” Mr Henschke said in May last year.

“If everyone of pension age received a pension, retirees could just add this to their other income and pay tax. Means testing is costly to administer and leads to perverse outcomes, which are more apparent in the current crisis.

“Asset taper rates unfairly penalise those who save more for their retirement. Income tests undermine ongoing workforce participation and lead to ongoing anger over deeming rates.”

NSA’s proposal makes a lot of sense and could easily be funded by abolishing the compulsory superannuation system, which is overly costly, inefficient and inequitable.

Compulsory superannuation acts like a tax and forces people to forgo current consumption, which is especially pernicious for lower-income earners.

Moreover, because superannuation balances at retirement depend on how long one works and how much they earn, the system inevitably misses lower income earners and those with broken work patterns like mothers.

Compulsory superannuation has also created a massive trough, worth some $30 billion a year, that has attracted snouts across the financial services industry like the big four banks. Australian management fees are among the highest in the world with Australian households spending twice as much each year on superannuation fees as they do on electricity.

Superannuation concessions already cost the federal budget around $43 billion a year and are very poorly targeted to high income earners, who receive the overwhelming majority of taxpayer assistance through the retirement system:

Worse, the recently released Retirement Income Review estimates that the cost of superannuation concessions will dwarf the Aged Pension, and costs taxpayers more in net terms over the long-run:

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 massive costs and inefficiency surrounding compulsory superannuation means there are less funds available in the federal budget to lift the Aged Pension – Australia’s genuine retirement pillar.

Given the obscene cost, inefficiency and poor targeting of superannuation concessions, optimal public policy dictates unwinding these concessions and using the money saved to boost the Aged Pension.

Abolishing the compulsory superannuation system in favour of a universal aged pension has merit and should be given detailed consideration.

Unconventional Economist

Comments

  1. Isn’t a ‘universal’ aged pension already been in place – effectively you get the pension even if you live in a multi-million dollar property?

    • Strange EconomicsMEMBER

      Its formally called the Universal live in a mansion pension scheme ULMPBS. Suits well off liberal politician retirees.Renters don’t vote the right way.

    • chuckmuscleMEMBER

      You are of course, correct. What a complete whinge by the most entitled generation to unfortunately grace this planet with their presence. Having amassed trillions of wealth thanks to generous super schemes, government welfare and giant redistributive asset bubbles, they now want another non-means tested handout from the government because interest rates are too low (no recognition of the fact that the low rates facilitated their giant capital pools). F^&k me.

      Sell some asset you greedy [email protected] to cover your lifestyle, you can afford it.

      Perhaps they should offer up negative gearing and franking credits as some kind of concession and make the universal pension rate budget neutral every year?

      • What entitled generation? The top few percent have certainly been raking it in, but why do you want to pretend that they are typical? According to the Australian Superannuation Funds Association, the median superannuation balance for people retiring in 2015/2016 was $110,000 for men and $36,000 for women. I believe it is up to around $150,000 for men now. Truly vast wealth. In the major cities, some older people have a lot of paper wealth because government policies on immigration, taxation, urban growth boundaries, etc. have made the land under their modest houses very valuable. The only way that they can realise that wealth, however, is to sell up and move to some place where housing is cheap, away from their families and friends. Reverse mortgages have extortionate interest rates. Under the circumstances, most of them want to stay put, and it is a bad look for the government to starve low income people out of their homes. There is no reason why the government could not tax the house and land package when the old people have died — but it might upset the politicians’ rich mates to have their children paying tax on the family mansion.

        It is worth noting that Australia has one of the least generous aged pensions in the OECD.

        https://data.oecd.org/socialexp/pension-spending.htm

  2. What, so they’ve received the benefit of concessionally taxed super accumulation and now want the benefit of a non means tested pension?

    I guess it could be funded by a one off catch up tax on super balances but the screeching might blow out our ear drums.

    • I didn’t get that from the article.

      “If everyone of pension age received a pension, retirees could just add this to their other income and pay tax. Means testing is costly to administer and leads to perverse outcomes, which are more apparent in the current crisis.”

      Sounds to me he was suggesting income out of super be taxed normally – and that only the universal pension bit be free (or actually added to get a total tax position). So it is universal in paying and then the tax system would take it back from those that had too much income.

      Sounds fine – but we need to also fix up the taxation system.

      • Future income on your super assets is one thing, the tax benefits you received when accumulating those assets is another. For an existing retiree to start to get a non-means tested pension they would need to give back some of the benefits they’ve already received. Otherwise they are double dipping.

    • Just switch to the system used in most OECD countries and tax retirement savings in the accumulation phase lightly or not at all. Then tax all income in retirement, including the universal pension if we have one, at normal rates. We could switch over tomorrow. Just give people a tax credit for tax paid in the accumulation phase up to a reasonable benefit limit. Once that is exhausted, they will be paying tax like everyone else.

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

  3. “that the cost of superannuation concessions will dwarf the Aged Pension, and costs taxpayers more in net terms over the long-run:” this is all I need to know

    • There would be enlightened dodgy assumptions and tendentious projections to arrive at that conclusion to make a convention full of real estate agents and used car salesmen gasp in admiration.pandemic envy at the chutzpah.

  4. At least The Netherlands promote home ownership and tax the devil out of property investment, even outlawing the practice in some councils.

  5. Sydney is the main financial centre of Australia. It profits most from super. With no ponzi and no super what would happen to Sydney?

  6. Interesting idea overall, and interesting that it seems to be getting slightly more airtime.

    However, can you stop with that first bloody chart! For the millionth time, letting some keep more of the their EARNED income is not equivalent to handing someone else an UNEARNED transfer payment.

    To suggest that your everyday worker in the 80th income percentile receives more government ‘support’ over their lifetime than the person in the 10th is pure propaganda based on a false equivalency. The 10th percentile basically funds none of their life expenditure, once all other transfer payments and govt services are taken into account multiplied by a 90+ age expectancy, their entire pre and post work existence could well be net negative to tax payers (like all those elderly foreign parent visa holders you criticize).

    • A dollar paid out and a dollar not received have the same effect on the budget, so from the government’s perspective these things are the same.

      • Even StevenMEMBER

        JustinC: I understand yours, but I think you have missed BB_AU’s point.

        You (and Leith) are using the Progressive tax rate as your yardstick, BB is using absolute tax paid as his yardstick. I tend to agree with BB and feel Leith is (perhaps inadvertently) misleading his audience by using that chart.

        Let me give you an example:
        Person A: surfer bum. Never worked a day in his life. Pays no tax, draws govt support.
        Person B: small business operator. Pays tax but has cleverly taken advantage of tax deductions to bring it down to a modest level of tax paid.

        Who is contributing to society?

        EDIT: before some smart Alec suggests the example of Person A instead be changed to a person with functional disabilities, I emphasise this is an illustrative example.

        • No government support and flat tax rates leads to a society like america’s, or a 3rd world country.
          If that is the sort of society you want there are many countries around the world that you can have it in.

          • Nobody argued for either of those, just a very simple point that providing me with a reduction in tax on income earned (in return for placing funds into an ever changing super system for a minimum of 40 years) is not the equivalent ‘support’ as handing someone a cash payout.

            A govt balance sheet might see it that way, but that is irrelevant to the discussion the chart is being used for, which are arguments of equality and utility, after all a govt balance sheet also see’s the office fit out for Barnaby Joyce as exactly equivalent to NDIS, PBS or medicare funding.

        • Surfer bums certainly exist, but most people on the pension have worked hard, sometimes doing hard physical work that wrecked their bodies, for low, insecure wages, which our politicians have kept down by flooding the labour market with migrants and pulling the teeth of the unions. You quite likely benefited from the low wages that they were paid while they working. Nor did they get any incentive for locking up money in superannuation, because their average rate of tax was little more than 15% and sometimes less. The carrot for BB-AU and the stick for them.

          • Even StevenMEMBER

            I appreciate the topic is complex and involves subjective judgements on some aspects. Which is why I said I ‘tend’ towards the view BB has. He is disputing the equivalency that Leith and others have made that $1 of concession is the same as $1 of cash handout. And on this, BB is absolutely right – they are not the same.

            Once we’ve agreed on that, what we find we are instead debating is where each of us sit on the spectrum of morality and equity.

            In short, my issue is that Leith is advocating an overly simplistic picture. BB is quite right to point this out.

  7. It’s an interesting idea but for the last decade the government has done nothing but flame culture wars and spin their way out of scandal after scandal. They don’t do anything and are paid handsomely for it. They can blame the senate all they want but is there any point discussing policy when it will always be a thought experiment with no chance of implementation. Zzz

  8. TheLambKingMEMBER

    The whole idea of super is that governments (besides Scandinavian ones) are terrible at saving money for the future. So they will ‘promise’ to pay you a living wage when you retire, but when you get there they say ‘oops, we spent it all on sports rorts and the entire pension budge on missiles to bomb our main trading partner. So you will have to now work until you are 85.’

    This, like your ABC vendetta really misses the mark. Both just needs some tweaks. The LNP/IPA hate them both because it gives power to their opponents.

    • Even StevenMEMBER

      What? What evidence do you have that super has/is/will be misappropriated by the government? Do you know how super works? Superfunds, trustees, regulators. I can only name one genuine superfund failure in 30 years (and it was ultimately covered by the government so don’t think that supports your point).

      • I think the poster may be confusing defined benefit vs defined contribution retirement schemes? Reading between the lines, perhaps he is suggesting Super is ultimately more’ secure’ as you are not relying on the govt to make good on its (mostly unfunded) pension promises 40 years from now (as many American’s in state based pension schemes are about to find out the hard way).

    • kierans777MEMBER

      Agreed. The pension bomb facing the US is the example staring us right in the face. What happened when the Libs got some extra money in the bank? Middle class welfare. Not saving for the future.

  9. Christopher Kennett

    The main problem is people just retire too early, for either private or public systems. The Super access age and pension age need to be increased to 70, pronto. Allow earlier Super access from age 65 for people who cannot work due to disability.

    Next as Macrobusiness has supported before, we need to allow retirees to more easily eat their houses.

    Maybe we could even limit immigration (diversity limits of 10% from any one country, gender equality limits of max 49% male from any one country should do the trick, plus 100,000 max per year overall) so that entry-level work can be done by 65 year old Australians instead of 30 year old Indians?

    • But our current immigration system currently allows 50 year old Indians to land here and then do low wage, low tax contributing work already. Plus we give them a pension after 17 years of being here.

      • Now now, as the colourful chart above clearly shows….. they are actually receiving less ‘support’ than those greedy Australian’s whom have generated an income over their working life.

  10. A staff member of mine has worked in the Netherlands and said that their pension system is linked to how long you have worked, eg work for 40yrs and get the full pension, work for 20yrs and get 1/2.

    • That should certainly apply to migrants.

      We have migrants arriving at 50, with full benefits on offer.

      • Even StevenMEMBER

        Agreed. Immigrant comes across at age 56, waits 10 years and voila! Age pension for life from age 66 onwards! At least 20 years based on average life expectancy.

        They don’t even have to pay tax during the 10 years they were here!

        Like Willy Wonka’s golden ticket.

  11. NZ pension is not means tested either. Guess where i am returning to at age 60 (need 5 years back there pre 65 to qualify) . 30k per year for a couple really adds up over the 20 to 30 years of retirement.

    • Perhaps UE can elaborate on the NZ system, NZ pension v AU + KiwiSaver vs AU Super. How sustainable is it vs our system? How does the population view it? Are they are any key differences in taxation and expenditure that make it workable for NZ but not in AU?

  12. New Zealand has a universal pensions scheme. A major issue in the Australian system is that people do not feel they are making a “contribution” to the existing pension scheme. Does this then lead to the supposition that they no longer have a “right’ to receive a pension from the government as the referencing to the social security aspect has been subsequently eliminated. It has been effectively merged into the overall income tax assessment that we have today?

    This was not always the case however in Australia. For example the 1946 – 47 Income Tax Guide (price 3 shillings and 6 pence) refers to the “Commonwealth Income Tax and Social Services Contribution” and there were separate schedules for the “Rates of Income Tax” and the “Social Services Contribution” . The publication advised that “The two charges will be assessed and notified together in one Notice of Assessment which will show, in the case of persons liable, the separate amounts payable for Income Tax and /or a Social Services Contribution”

  13. kierans777MEMBER

    > “By setting income and asset limits which restrict you from, first, getting a pension, and second, limiting your entitlement, it punishes you for having more.”

    No mate, not punishing, recognising that you don’t need welfare if you have assets that generate income, or that you can liquidate.

    I’ve long agreed that the Super system needs reform to reduce fees, get rid of tax concessions, etc. However abolishing Super and having a UPS with governments like the Liberals in charge would see the money getting squandered in more tax cuts to the already wealthy.

    If assets means testing is difficult it’s because there’s too many ways to rort the system. Remove those rorts and means testing gets a lot simpler.