Tuesday, March 13, 2018
Thanks to Labor, superannuation has failed to
raise our retirement living standards
It’s commonly thought that Paul Keating did us all a favour by introducing compulsory super. But he also introduced the idea that these funds could be raided for political benefit. Labor’s been profiting from your savings ever since.
He had a budget deficit to fill, so he implemented a system that taxed on contributions (thereby bringing forward the tax intake) rather than on benefits upon retirement, which is the increasingly popular method around the world. This was the first time superannuation had been raided in Australia. By doing so, Mr Keating undermined the certainty of the system from inception and made it less likely to achieve its apparent objective of getting people off the pension.
After over 25 years of superannuation funds being raided by grubby politicians, the rate of self-funded retirees remains stubbornly low. Treasury’s current projections are for about 80 per cent of people to retire on a full or part pension by 2055. Mr Keating must accept most of the blame for this mess. Now he has backed Bill Shorten and Chris Bowen to do worse via their latest plan to hurt retirees and pensioners by removing the ability to claim franking credits, which are a refund for tax overpaid from holding shares.
This will hurt low income earners the most. Treasury analysis has found that some 14,000 full-age pensioners and 200,000 part-pensioners will be affected, and more than 500,000 low income earners will lose an average of $1200.
Put plainly, Labor is proposing to introduce a new tax.
Superannuation was meant to be about saving money now to ensure future Australians would have a higher standard of living in retirement, and that as the population ages the budget won’t be drained by people claiming the pension. By forcing people to save early from the day they start working, compound returns (the money you earn on the balance you save and the earnings on that money year after year) – would do the trick. The more you save and the more you earn on those savings, the more money you end up with to fund your retirement.
To compensate for forcing people to commit to these savings, the government offers a sweetener: 15 per cent tax on contributions, 15 per cent tax on earnings from the fund and 0 per cent tax on withdrawals from the fund on retirement. (This 0 per cent rate was last year capped for assets other than the family home up to $1.6 million.)
What people have forgotten is that the sweetener for superannuation was even better before Keating came along. As outlined in the Henry Tax Review, prior to 1988, for those who had super, its tax treatment was more sensible, sustainable and fairer: no tax on contributions, no tax on earnings, and marginal personal income tax rates on benefits paid in retirement.
A tax on contributions and earnings while you are in the labour force work against the very premise of saving early and the benefits of compounding. If Keating had not imposed taxes on contributions and earnings and removed marginal taxation on benefits in retirement, the current problem regarding franking credits would not exist.
The problem is simply this: should everyone get the same tax-neutral benefit from franking credits? Economists would say yes, absolutely. Tax neutrality is important in any modern, functioning economy. This was the intention when treasurer Peter Costello introduced self-managed super funds in 1999. He maintained the tax neutrality of the dividend imputation system so that everyone got the same benefit of imputation credits regardless of their income and regardless of whether they were in an SMSF or an APRA-regulated fund. Significantly, Labor agreed with this policy at the time.
However, under Mr Shorten’s proposed policy, this equity will be deliberately discarded. Large union backed industry super and retail funds would continue to use the franking credits to their advantage in ways that small self-managed funds could not. This inequity is the policy’s intended outcome.
Shorten’s solution supposedly addresses then “unfairness” of the system. But this unfairness was dealt with by the Coalition’s changes to superannuation last year. The $1.6 million-dollar cap, and 15 per cent tax for earnings over this amount, were unpopular at the time – but it was the closest the government could practically come to unscrambling Labor’s egg.
Rather than address unfairness in the system, Shorten’s proposed policy makes the system worse. First, they haven’t done their homework - over 500,000 low income earners will lose an average of $1200 a year. Second, it ruins confidence in the superannuation system. It’s retrospective and unfair - people in retirement made plans 10 to 20 years ago. They have no ability to go back to work to make up the shortfall. They shouldn’t be penalised for following the law.
Third, it favours industry funds, which are mostly run by union bosses and have siphoned off money for Labor campaigns.
People will be forced to move back to the union funds for tax reasons - so any choice remaining will be choice in name only.
Finally, what this really amounts to is another attempt by Mr Shorten to plug a structural hole in budget of his own making, economics and consequences be damned.
Mr Shorten has returned to Mr Keating’s playbook and announced another raid on the savings of everyday Australians. This should come as no surprise given Labor’s history.