Treasurer Jim Chalmers has been accused of reigniting Australia’s “superannuation wars” by declaring the object of super should be “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
That such a seemingly innocuous statement should be capable of igniting such a firestorm of controversy should tell you something about just how bitterly fought the debate on super has been over the years.
To mangle the words of the 1989 Billy Joel hit song: Jim Chalmers didn’t start the fire; it was always burning since – well – since about the late 1970s at least.
Contrary to the increasingly popular opinion of many younger Australians, who have grown up with compulsory super as part of the accepted landscape, Paul Keating didn’t “invent super” in 1992.
What he did, as recounted in the fascinating 2017 book by former Labor MP Mary Easson, Keating’s and Kelty’s Super Legacy, was to – against the advice of Treasury at the time – champion a union push to extend compulsory superannuation to all workers.
In the early 1990s, the powerful Australian Council of Trade Unions ultimately threatened to walk away from the prevailing Accord framework under which wages were set at the time, if compulsory super was not set at a minimum of 6 per cent of all worker wages.
Bill Kelty and Paul Keating fought to get compulsory superannuation up and running in 1992.Credit:Fairfax Media
Superannuation schemes had, in fact, been in operation in Australia for many decades before this, but were limited to mainly white-collar, professional workers. A survey in 1974 by the Bureau of Statistics found 32 per cent of the workforce was already covered by superannuation. Coverage in the public sector was 58 per cent, compared with 24 per cent in the private sector.
As wages and inflation spiralled out of control in the 1970s, the idea took hold among union leaders that they could accept some reduction in the pace of growth of take-home pay packets in return for some portion squirrelled away into superannuation funds, which the union movement soon began to establish themselves.
In 1992, compulsory super became a reality and every Australian worker would have some portion of their wages forcibly removed from their take-home pay and put into super accounts. Keating got it up to 9 per cent, and it has since been scheduled to increase to 12 per cent.
In addition to the universal and compulsory nature of super, Keating also determined that contributions to super should be taxed at a flat rate of 15 per cent, regardless of income.
More than three decades on, the consequences of these two key policy design features – the flat rate of tax on contributions and the universality of contributions – are coming home to roost.
To see how, let’s look at three different groups in society and how super is working for them.
The current design of super means that many low-income earners – who have no feasible prospect of ever accumulating enough private savings to substitute in any meaningful way for the full age pension – still have 10 cents of any dollar they do manage to earn forcibly removed until retirement.
This is money that could otherwise have been scrimped together for a modest home deposit or to fund present consumption needs. Given the centrality of home ownership to a comfortable retirement, many low-income earners may indeed be better off saving for a home deposit, paying the property off and then relying on the age pension.
Most high-income earners are on track for a comfortable self-funded retirement having benefitted from the generous tax treatment of superannuation.Credit:
Of those that do end up on the age pension anyway, many will find it to be a pay rise, given the very miserly rates of working-aged supports like JobSeeker. Super is a dud for these people.
Moving into the middle income zone, workers on higher income tax brackets of 17 cents and 32.5 cents in the dollar (which kick in at $19,000 and $45,000 respectively) do enjoy a modest tax break on their contributions to super.
But for anyone who managed to save over about $250,000 in super as a single person, recent changes to the age pension assets test mean they can actually be worse off in retirement than if they had saved less. Why?
Because higher private savings means they are eligible for a reduced rate of age pension payment. This “taper test” is so steep that for people with savings between $250,000 and $600,000 they actually lose MORE in age pension than they gain in income on their private savings in super. Ouch.
Which brings us to higher income earners, many of whom would be on course for a comfortable self-funded retirement even if super had never existed, by virtue of their higher incomes and savings rates.
High-income earners get by far the biggest dollar benefits from the tax breaks on super. Why? Because they would otherwise pay much higher rates of tax, up to a maximum of 47 cents in the dollar (including the Medicare Levy). Australians can sock away up to $27,500 of their pre-tax income into super and pay just 15 cents tax, which is a pretty handy tax saving, let me tell you. A higher rate of 30 cents on contributions does apply for those on incomes above $250,000, but that’s still a tidy tax saving.
As the treasurer has pointed out, the cost of these super tax concessions is approaching the annual cost of the entire aged pension.
As a nation, we are overdue a sensible discussion about whether Australia’s unique system of compulsory super as it is currently structured is actually helping or hindering the provision of a dignified retirement for low and middle-income earners.
But I won’t hold my breath. These super wars have been burning since the world’s been turning.
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