Paul Keating’s super lies debunked again

Former Prime Minister and architect of Australia’s compulsory superannuation system, Paul Keating, headlined Alan Kohler’s four-part special on the future of retirement, aired on ABC’s 7.30 Report.

In this report, Paul Keating erroneously claimed that Australia’s ageing population would make the current Aged Pension system unsustainable without increases in the compulsory superannuation guarantee (SG):

PAUL KEATING: This is one of the critical points. When I started this 35 years ago, 6.7 people between 15 and 65 carried the retirement burden of everyone over 65.

Today that’s 3.7 and by 2030 it will be 3. So you have got three people by 2030 looking after every one over 65 where before there was 6.5 people.

So that burden means that you want superannuation to be able to withdraw the burden on the pension, so the few taxpayers left in the system are not carrying it…

This is why nothing beats self-provision, nothing beats self-provision.

The Grattan Institute’s Brendan Coates has demolished Paul Keating’s claim, noting that lifting the SG to 12% would actually worsen the long-term sustainability of the federal budget:

The Retirement Income Review also concludes that the legislated increase in compulsory super from today’s 9.5 per cent of wages to 12 per cent will exacerbate rather than alleviate the budgetary costs of an ageing population, making the Age Pension less sustainable in future. Treasury projects that increasing compulsory super will cost taxpayers more in super tax breaks than it would save from spending on the Age Pension through until 2055. And even then, 35 years of accumulated debt — more than 2 per cent of GDP — would need to be paid back before taxpayers ended up ahead.

That’s right, the Retirement Income Review explicitly concluded that any cost savings for the Aged Pension would be more than offset by higher superannuation concession costs:

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…

Across the income distribution, the lifetime cost of superannuation tax concessions is projected to outweigh the associated Age Pension saving (Chart 13)…

Modelling by actuary firm Rice Warner similarly concluded that lifting the SG would create net costs to the federal budget over both the short and long-term:

“Our modelling shows that the legislated increase in the SG will not have much impact on the Age Pension for many years but will reduce it by about 0.1% of GDP in the second half of this century on current means testing settings. Conversely, the tax concessions from the increase are more immediate and they will average about 0.22% of GDP throughout this century”.

As did the Henry Tax Review:

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).

As did modelling from the Grattan Institute, which estimated that raising the SG to 12% would cost the federal budget an additional $2 billion per year and would far outweigh any benefits from lower Aged Pension payments:

Cost of lifting the superannuation guarantee

Lifting the superannuation guarantee would damage the federal budget.

Clearly, Paul Keating has it back-to-front. The high cost of Australia’s compulsory superannuation system (over $40 billion a year) is preventing the Age Pension from being lifted.

Raising the SG from 9.5% to 12% would only make the situation worse.

Disclosure: The MB super fund stands to gain from the SG increase going ahead, since it would mean having larger funds under management. Nevertheless, MB opposes the increase on public policy grounds.

Unconventional Economist


  1. Ritualised Forms

    Posted this a week or so ago but it goes here still….

    Off the top of my head I can no longer think of Superannuation – as we currently have it – as serving any real purpose apart from pampering a mainly older and mainly wealthier section of society.  I was a keen supporter of Superannuation as Keating proposed it back in the late 80s, and tend to be a beneficiary of the arrangement, but I think it makes almost no sense for anyone younger than me, and anyone not in a scheme delivering reasonably certain outcomes at relatively low fees (including many older than me).

    The original game plan was to take people off the public pension by getting them and their employers to save for their retirements themselves, and in the course of organising that, creating a pool of investment funds which could support an Australian economy which was then being prepared for competition and exposure to global markets.

    Along the way the supporting struts of this concept were kicked out.  Nobody ever clearly defined what super was for, so what was originally intended for pensions and living expenses in later life evolved into ‘wealth’ management – where it was about maximising the assets and avoiding the payment of taxes, and shelters to facilitate this, and returns.  This particular gate was left open by the way, right from the get go, it was possible simply shunt funds into superannuation schemes, have those funds be treated concessionally by the tax system and then reclaim the funds from super.  This appealed to the wealthier of course.

    Then there was an ideological struggle which is still in play, with the mainly conservative governments post 1996 trying to break the domination of the pro Union (or Union dominated) industry ‘superfunds’ – which in the main tend to deliver observably superior returns to members (ie ordinary people contributing to those funds) with less fees and greater ancillary supports than the ‘retail’ funds (mainly big banks and insurance companies – often closely linked to dubious activity of the type identified with the Hayne Royal Commission, invariably charging greater fees, and generally delivering more parsimonious returns) the conservative ideology has maintained would provide superior returns. 

    Despite the stance of the current government there is a fairly solid argument that the large super funds could be amalgamated into one mega fund which would be the default fund for all Australians, and that this would likely deliver superior outcomes for contributing Australians.  The freedom of choice mindset when it comes to superannuation, is closely linked to the freedom to be ripped off, or the freedom to rip off the government by minimising tax schools of thought.

    That of course leads us to the phenomena of SMSFs.  Initially brought in to try and wean some off the dominance of the large industry funds they are now the ‘go to’ option for any self respecting accountant trying to foster ‘investment’ in anything from property speculation through to eucalyptus plantations, or all in share plunges on the company of choice, and many of which have provided a nice receptacle for the offtake of JobKeeper not directly needed to live, and for which many of those same accountants have been structuring their clients finances to maximise entitlement.

    From there, there is a concomitant discussion phenomena of lump sum versus annuity which feeds back into the loop of nobody ever having clearly stated what superannuation was actually for.  Most Super funds enable a lump sum payout, which is often taxed concessionally.  Nobody has ever determined to remove access to the government funded old age pension for those who have had access to annuities or lump sums beyond a particular limit.  That means that those in a position to access very significant sums through superannuation accumulation are still entitled to a government funded pension, or social welfare supports if they take a lump sum, splurge on whatever they think appropriate, or are encourage to stash it somewhere where it doesn’t count as income or may not look like theirs, and are encouraged to put their hand out.  This isn’t the case for most people of course, particularly those in the larger industry funds which are influenced by the Union movement, but it is a widespread enough phenomena for many to be perfectly aware of it, and for an entire industry of accountants to be cultivating.

    Even beyond all that there is the positioning of the Australian economy.  Back in the 1980s there was a range of enterprises who were actually thinking that with better investment and a more agile workforce with better training they could compete globally. Superannuation was originally designed to facilitate and support that more competitive and exposed Australia.   Fast forward to 2021 and Australia is the ultimate economic bubble experiment powered by the mining lobby – home to the worlds most expensive people, the worlds most expensive land, and deploying the worlds most expensive energy.  Anyone controlling large volumes of members funds would need to look again at the business case for investing anything in a competing Australian business, and if that is the case then speculating in real estate and pampering the well to do is probably as plausible a use for superannuation as anything else.  But it doesn’t really help Australia or Australians do anything all that much.  Rather it holds them to ransom.

    None of that delivers anything of significance to anyone under their mid 50s (on an ordinary income, may be younger for those on higher incomes, and may be much older for those on lower incomes, particularly if they don’t own their own homes).

    The dizzying heights to which house prices have been driven – by policy, including superannuation – has rendered accumulation in superannuation a particularly feeble post retirement support mechanism – in relation to accommodation needs.  The death of incomes growth over the post mining boom era, and the look the other way approach to fixed inflation sources (starting with energy costs) means that ordinary Australians trying to support ordinary families on ordinary jobs are being ground between rising real costs and declining ability to service those for a range of standard family outlays.  The lack of purpose about what super is for and the enthusiasm Liberal politicians (in particular) have for white anting a system which even implausibly eases working lives post retirement, and deforming it into a vast tax avoidance scheme, sees them come up with proposals to shake off 10 or 20 grand here and there to cover their other policy failings (eg Housing, Covid spending support).

    That brings us to the nub of Leith’s posts. Superannuation makes increasingly less sense for more Australians.  When Keating talks about it he is talking about something which takes people off pensions, when in fact the vast bulk of the budget cost is attributable to those who arent building pensions or annuities but are crafting bequests, assets, wealth bases – and often using quite overt tax avoidance to do so – and then at the end still retaining a right to put their hand out for some form of government support.  And therein is the fundamental flaw of Australian super.  I am doubtful it can actually be fixed now, but if it was to be then surely there would have to be limited inputs with taxation concession, limited tax avoidance in the accrual stages, limited lump sums, and limits to the ability to retain a public, budget funded, right.  I dont think either side of politics will go there.  That is despite the fact that for most superannuation no longer enables accrual of something which enables a debt free retirement,  it is most unlikely to fund an existance for the average Australians post retirement needs, and it doesnt reduce budget funded pension outlays required by government.  It may still have some part to play, but it surely needs some clarification, regulation, and focus, to be of any use to the vast majority of Australians. 

    That backdrop to this of course is the Hamlet like figure of Keating.  Super was his baby, and the one he thought would anchor his place in the pantheon of social reformers.  It should have done but hasn’t.  Has he been going mad or has the world he crafted for his genius been deformed by those following?  He comes out to talk to his own younger self in the media from time to time, to try and convince himself, and us, it all still makes sense, increasingly maddened by what he must surely see of his bequest in the world of today.  When the acid test comes – as surely it will – superannuation, as we know it, will be blown away in the winds of history as simply another manifestation of an entitled age

    • He likes to note that sometimes politics requires good ‘salesmanship’. With knowledge of salesmanship you would have thought the issue of fees would have been better set up.

  2. I think this is one of those unhelpful situations in which Keating is right that a 12% rate of super contribution would be a good thing but Leith is right that the current system is deeply flawed to the point of no longer being fit for purpose.

    Peter Costello, who will one day be regarded as the worst Treasurer Australia has ever had, twisted the system beyond being recognisable as a genuine retirement system.

    If the Coalition had either morality or courage, they would reinstate reasonable benefit limits (of ~$1.6m), force all dollars above that amount back into personal (i.e. marginal tax rate) accounts, tax concessional contributions but with a 15% tax credit (refundable to non-tax payers) and open the Future Fund to the masses (using the platforms as a front end with a maximum charge of ~25 basis points).

    At that point, Keating’s logic would work fine.

    • I'll have anotherMEMBER

      You can’t say Keating was right if the current system says he isn’t.

      I can declare, we can do with 0 income tax without affecting public service. All we have to do is sell all privately held land to a foreign country to fund it.

      If the system to support the budget doesn’t exist, he is wrong.

    • Good points with issues ignored or discounted by media, MB and Grattan Institute in their analysis of super and presenting as negative. Assuming existing settings for tax breaks on wealthy would continue, employees can have pay rise or super rise (not and/or) and the most flawed aspect is the egregious ignorance of changing dependency ratios with increasing cohort of retirees vs. declining working age cohort in permanent population (with tax base supported by churn over of temps in the NOM).

      Those opposing super are doing the bidding of libertarian ideologues, LNP, IPA, business, retail banks (moving out of super) etc. while having the surplus income or wealth for self funded, to require neither a pension nor super in retirement.

    • Strange EconomicsMEMBER

      Costello as Treasurer did the most actions of any Treasurer for wonderful benefit of rich baby boomers by distortions – there should be a statue of him in front of the Melbourne club, surrounded by boomers in Porsches.
      – he formed the Future Fund only to pay off the excessive defined pensions of public servants. He removed tax on super pensions – which only benefits people with a large super fund, and best of all the CGT discount which turbocharged the property market.

  3. johnoconnorMEMBER

    From Keating’s maiden speech:

    The other basic social ill facing Australia – it is a by-product of the situation to which I have been referring – is the problem of workers having two jobs. How many men are working at two jobs? I am not sure whether such statistics are available. How many men are working 60 hours a week? Would we not all agree that the 40 hour week is a joke? The 35 hour week is an even bigger joke. It is bad enough for the working man to be dragged away from his home at night when he should be with his wife and family but it is even worse when he has to send his wife out to work in order to make ends meet. The honourable member for Adelaide referred to the exorbitant cost of housing and to the restrictions placed on young married couples seeking to buy a home. Husbands have been forced to send their wives to work in order to provide the necessaries of life. Young mothers have been forced out of their homes by economic pressure. We must not forget that this Government has been in office for 20 years. It has had the duty and the opportunity to rectify the present situation. Family life is the very basis of our nationhood. In the last couple of years the Government has boasted about the increasing number of women in the work force. Rather than something to be proud of I feel that this is something of which we should be ashamed. The shortsightedness of the Government’s policy was borne out by the headlines in this morning’s newspapers. The number of unfilled jobs has increased by 6% while the unemployment figure has fallen by 10%. How can we have national growth without people? How can we survive without a population? Is this Government doing anything about child endowment? Is it doing anything to put the working wife back in her home? It is not. It engages in a lot of claptrap. It denigrates the Labor Party for its constructive proposals.

    The Government hopes to be able to offset the present population situation by immigration. It is time we considered the enormous cost of bringing migrants to this country. We must bear in mind this cost when we consider the cost of subsidising Australian families. We could have a system of subsidies paid to families on a sliding scale according to the number of children they have. For example, on the birth of a fourth child $1,000 might be deducted from the mortgage on a home; $1,500 on the birth of a fifth child. These figures may sound high but they are not when we compare them with the cost of bringing migrants to this country. After all, the best migrant is the infant Australian.