Photo: ldpercy/ Flickr
IT IS now clear that the union movement made a bad mistake when it backed the introduction of the compulsory superannuation scheme devised by Labor’s Paul Keating, urged on by the ACTU secretary at the time, Bill Kelty. To this day, there is still no detailed policy report showing that net economic and social gains flow from forcing employees to hand over a growing slice of their salary to the richly rewarded fund managers in the nation’s booming financial sector. Appointed by the super fund trustees to “invest” the money, these managers usually focus on taking huge punts on the financial markets. Simply swapping the ownership of existing shares and fancy financial derivatives between fund managers and other market players creates little of economic value, however – unlike direct investment in productive new capacity.
Several younger union officials now say privately that they believe the majority of their members would be better off if compulsory super contributions were paid instead as a normal part of salaries, letting all employees decide how best to allocate their income over the course of their working life. Many could make a well-reasoned decision to enjoy a better standard of living while working rather than forgoing income now in an attempt to have extra money in their old age.
Given a choice, many members of the workforce would probably put more money into raising a family, paying off a mortgage, upgrading their educational qualifications and so on. But compulsion robs them of that choice. The cost of the tax concessions for super – heavily biased towards high-income earners – also robs the government of tens of billions of dollars a year that could enhance well-being by funding tax cuts, education, child care, health and transport infrastructure.
Some older union officials like to portray money diverted compulsorily to super as a free gift from employers. It is not. It is money that could otherwise be paid as wages – a point that the superannuation minister (and former Australian Workers’ Union secretary) Bill Shorten candidly acknowledges. Everyone is compelled to put 9 per cent of their salary into a super fund, and now, despite financial sector lobbyists having given up hope of winning an extension of compulsion, the Labor government has decided to lift contributions to 12 per cent.
If the government decided instead that employers should pay the existing 9 per cent as part of a normal salary, this would boost by $43.60 the take-home pay of someone on the minimum wage of $570 a week. Those on average weekly earnings of $1260 a week would get around $80 extra; those on $1800 a week would get an extra $102.
Although it’s easy to dismiss this option as too politically difficult, boosting disposable income by scrapping compulsory super could prove electorally popular with households that find it hard to make ends meet. Everyone would still be free to contribute to super, which, as discussed below, could remain an attractive savings vehicle for many Australians. But the finance sector would scream that the end of compulsion would mean that people would not have “enough to live on” in retirement.
No one is suggesting that saving should be forbidden – merely that people should be free to decide how much they want to save and in what form. There is no reason to believe that retirees won’t continue to own more assets, on average, than those still working. Without compulsion, even low-income earners would still be likely to accumulate assets, often in the form of their home, and be eligible for the age pension. In terms of what the government considers “enough,” the age pension sure beats the Newstart Allowance paid to those who lose their job; at present, the single rate for the age pension is $123.20 a week higher.
In any event, many people don’t feel they have “enough” to live on while working – a period when their expenses are usually higher than in retirement. If they prefer to get access to more of their income while they’re working, mainstream economics suggests that the choice should be left to them. The finance sector would argue that the cost of the age pension would rise if less money went into super. But, as the Henry tax report makes clear, the combined budgetary cost of the age pension and the tax concessions on super rises with increased contributions. If you want to save the budget billions of dollars – and increase take home-pay – scrapping compulsory super is the way to go.
The performance of the fund managers over the past decade hardly suggests that governments should force people to give them another cent. The Australian Prudential Regulation Authority recently released figures showing that the average nominal annual super fund return over the ten years to 30 June 2011 was a pathetic 3.3 per cent. Given that the average annual increase in the CPI over that period was 3.2 per cent, returns only beat inflation by the slimmest of margins. Australians would have been better off putting their money into government bonds and term deposits, or reducing their mortgage or upgrading their educational qualifications or those of their children.
Returns from super might improve over the next ten years. Then again, they might not. Contrary to the nonsense peddled by supporters of the efficient markets hypothesis, no one knows what will happen to financial prices in a radically uncertain future. As an assistant governor of the Reserve Bank of Australia, Guy Debelle, explained in a speech on 31 August last year, a key problem in the recent financial crisis stemmed from the financial world’s failure to accept the distinction between risk and uncertainty made early last century by two economists, Frank Knight and John Maynard Keynes. In Debelle’s assessment, financial institutions and regulators mis-assessed risk by ignoring Knight and Keynes’ convincing conclusion that risk is quantifiable and uncertainty is not. “Ultimately,” Debelle said, “the future is uncertain, in the sense that it cannot be quantified.” In these circumstances, it is hard to see how governments can justify compelling Australians to hand over a significant slice of their income to super funds whose future returns are inherently uncertain.
But the government remains committed to compulsion and to the recommendation of Jeremy Cooper’s review of Australia’s super system that all funds be obliged to adopt a “forward‐looking, risk-targeting framework” to “provide members with a proper indication of expected future returns.” Cooper is demanding the impossible.
Once tax obligations have been met, policy-makers usually prefer to let people decide for themselves how to allocate their income. But compulsory super seems to be generally accepted – without any solid back-up analysis – as a “good thing.” Nevertheless, some Liberal party politicians are starting to wonder how compulsion fits into their philosophical framework of supporting individual liberty. The finance sector’s massive lobbying power seems likely to ensure these doubts are not converted into policy.
Contrary to a key goal of the economic reform agenda in Australia, compulsion can distort the efficient allocation of resources. Thanks largely to government compulsion, fees paid to fund managers and administrators now amount to about $18 billion a year. Billions more will flow from the move to 12 per cent compulsory contributions. Other industries can only dream of receiving a similar leg-up. In effect, the government has ordered dump trucks to line up each morning and tip millions of dollars through the front doors of the super funds. Even the motor industry would willingly swap its generous assistance package for one in which the government decreed that all Australians must buy a new car from a local manufacturer every year, regardless of whether they had better things to do with their money.
In contrast to the silence of most other economic agencies, the Productivity Commission drew attention to the problems of compulsion – without specifically criticising Australia’s $1.2 trillion super system – in its recent draft report on aged care. “Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings,” said the commission. “In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home, which is a tax effective savings vehicle and offers social benefits).”
The commission’s report also rejected calls to encourage extra savings for aged care by introducing the type of tax concessions applying to super. “Such subsidies,” it said, “perform poorly on equity grounds as they offer the greatest benefit to those with the greatest capacity to save (being also those most likely to have the capacity to contribute to their own aged care in the future).”
The tax concessions on super provide no advantages for those on incomes up to $37,000, but certainly help those on higher rates. At present, someone on the top tax rate of 45 per cent only pays 15 per cent on their contributions. The same rate applies to fund earnings before age sixty. Abolishing compulsion would mean that contributions would now come from after-tax income. If it were seen as desirable, incentives to contribute – including retaining concessional treatment for earnings in the fund – could be maintained.
Based on figures in Treasury’s tax expenditure statements, the increase in super contributions to 12 per cent is likely to cost the budget at least $8 billion a year when fully implemented in 2019. Even before then, the combined budgetary cost of the age pension and the super tax concessions is likely to hit an annual $100 billion. Yet the budget papers estimate that lifting compulsory contributions to 12 per cent of salaries will add a tiny 0.4 per cent to national saving by 2035. Left to their own devices, there is no reason why most people couldn’t do as well as that. •
Brian Toohey writes each month about national affairs for Inside Story.
12 Comments
Brian is very dismissive of the obvious issue of the costs to the budget of aged pensions for those who spend to the limit and have no option but to go on the pension at retirement. Has he any data on what the taxpayers currently save through self-funded retirees and part self-funded retirees? That data would have to factored into his thesis.
While not dismissing Brian Toohey’s argument about the dead weight loss of fees taken by fund managers, it strikes me as a lttle too economically rationalist to say that Governments shouldn’t be in the business of mandating behaviour such as compulsory superannuation.
The key test should be whether the benefit to community in generating a large savings pool and enabling retirees to be partially self funded outways the cost of the policy in terms of loss of personal freedom amd transaction costs associated with saving. It certainly is the case in health policy that we accept as a community the impost of the Medicare levy to achieve universal coverage.
Ironically, the US has the mirror image of this debate: There is broad acceptance of compulsory saving in terms of social security taxes but widespread rejection of the idea of any mandates in the area of health policy.
While I agree with Toohey that there are issues with the Australian superannuation system: in that giving money to the nation’s financial sector for them to gamble with is not the right way to go – the argument that scrapping compulsion will lead to better results is incorrect. What Toohey has done is identify a problem and then provided a more problematic solution.
The rationale behind compulsion is a sensible one. The level of financial knowledge required to invest these savings correctly is too high, and the average Australian should not have to be skilled in finance just to be able to have a retirement income. As such, the saving is made compulsory and the investment decision made for people. It is all good and well to say people can save and invest for themselves, but the reality is, many can’t. And the point of the system like Australia has in place is to protect the most vulnerable, whilst also allowing those with the financial knowledge greater control should they choose to exercise it.
However – while this is the good intention behind the policy, it does not work this way. The problem is what these financial institutions do with the money collected. As Toohey points out, the average nominal super fund return barley out paces inflation. So the majority of Australian’s are left with a pretty hopeless savings/investment vehicle, while those with the know how can build upon their savings by making more sound investments and as such increasing their retirement funds.
This is where the Cooper Review comes in. It is designed to rectify the issue at the core of the Australian system – that the average Australian is punished for inactivity – for not making a choice to invest their superannuation funds more wisely (i.e. choosing investment options etc) and instead leave it up to the superannuation funds in their default accounts (which are the worst performing). Working with the recommendations of the Cooper Review, in particular the MySuper recommendation, would mean that Australian’s with even little to no knowledge of finance and investing can still rest easy knowing that they will have sufficient funds come retirement.
Compulsion is not the problem here. The problem is assuming that people have the ability (and the time) to understand and process the relevant information to make informed investment and savings decisions.
I am surprised by Brian’s position on this matter and wonder if he has been listening to the employers too much – who of course hate the idea of a compulsory additional expense to employ staff.
My understanding of the primary goal of compulsory Super was to provide some relief for the burden the pension system would have had to bear when the flood of baby-boomers entered the pensionable age-group.
They are just beginning to do that now, so it will be interesting to see if there is any evidence of such a benefit to the Commonwealth Budget.
good article, refreshing to see some analysis of super, the sudden drop in balances over the last few years is just plain rubbish economics… to see less money in a fund for retirement than what has gone into it is a super fund indeed!
Frank: The Henry tax report stated that the increased cost of the tax concessions for super more than offset the savings on the age pension. 50 per cent will still be getting get the pension by 2050. A leading actuary, the Mercer advisory group’s Darren Wickham, released projections in 2009 showing that the cost of the concessions on a 9 per cent contribution rate (minus revenue from super) will more than double to around 2.4 per cent of GDP by June 2045. He also calculated that the concessions cost more than twice the additional cost of the age pension without the super system.
Joseph: The main deadweight cost stems from compulsion – it assumes people would not have better things to do with the money the government forces them to put into super. What matters for an economy is productive investment in new capacity and most of the money going into to super is not used for this purpose – it is used to buy and sell shares etc in existing assets. A high savings ratio is no panacea, as Japan has discovered. In any event, the gain for net national savings generated by super is trivial. The budget papers estimate that the lift in compulsory contributions from 9 per cent of salaries to 12 per cent will generate a lousy extra 0.4 per cent in net national savings by 2035.
Various studies show that the big drivers of productivity in Australia would be extra participation of women in the workforce (for example, via lower costs for child care etc) and more public spending on universities. The huge cost of tax concessions is of no value to low income earners and takes money away from areas such a universities and child care. Compulsion stops people spending money in ways that can increase their financial position in retirement – for example, on paying more off their mortgage. The key point, however, is why not let them decide for themselves how much they want want spend and save at different stages in their life? Why is it so important for governments to force them to be a position to consume more in their old age if they would prefer to spend more while raising a family etc?
The Medicare levy is a form tax that goes into consolidated revenue to help pay for part of the costs of health care, the age pension and so on. As I made clear in the article, I have no objection to tax payments being compulsory.
Notwithstanding the argument that super funds haven’t garnered much in excess of CPI in the past decade, the core idea that people make at least a partial provision for their retirement income over the course of their working lives seems eminently sensible. Before compulsory, portable, protected superannuation accounts, many people, myself included, had windfall spending sprees with lump sum payouts from the closing of superannuation accounts. My own impending retirement prospects would have been considerably rosier, financially, had those payouts been retained.
That’s not to say that there aren’t difficulties with the system as it stands.
Fund managers, in their search for higher returns (and fees?), engage in a game of financial chess, moving squillions of dollars from one stock to another, one financial derivative to another, only on the basis of the short-term return available. As Toohey notes, this activity is of little economic value directly. More worryingly, it may be influencing those who run the great private engines of our economy.
With listed company managers apparently judged primarily on share prices and shareholder return, decisions on how to operate, structure and develop listed companies are based on how the equity market will view the changes, rather than on building productive, long-term assets. So we see counter-intuitive results like stocks being sold down because a profit result or forecast is less than “the market” thinks is appropriate.
There is currently debate over the merits of a one-off levy to fund infrastructure replacement through flood-affected parts of the country and suggestions of a disaster fund. Why are we not ensuring that a good proportion of the $18 billion being poured into superannuation each year is going into productive assets and nation building rather than just shuffling numbers on a trading screen?
It’s not the concept that’s flawed, but the uses the money is being directed to.
At the 1937 federal election, the United Australia Party had promised to introduce a system of national insurance that would provide medical cover and pensions for working people. The scheme was to be funded by contributions from government, employers and employees. Menzies, who had helped draft the policy, was an enthusiastic supporter of the scheme. For him it constituted good social policy and, once adequate superannuation funds had been accumulated, promised to relieve taxpayers of what was likely to become an intolerable burden in the future.
Unfortunately the United Australia Party’s coalition partners were not nearly so keen about the proposal. Although a National Insurance Bill was passed, Country Party ministers continued to resist its implementation, arguing that the money was needed elsewhere, particularly to provide for ‘adequate defence’. After a series of stormy meetings, Cabinet succumbed to Country Party threats and decided to repeal the pension provisions of the Bill. Menzies immediately resigned from the ministry.
If the UAP policy had got up can you imagine the level of National Savings or the size of the pension requirement on Government.
We would not be talking about the burden of an aging population on the nation. Indeed, we would all be looking forward to a productive retirement putting those savings back into the economy.
Instead those relying on the pension these days are staring down the barrel of increasing poverty.
I never thought I would say it; but, Bob Menzies was right!!
Good article Brian and I agree with your conclusions.
However, I don’t think you understand what the efficient market hypothesis means: “Contrary to the nonsense peddled by supporters of the efficient markets hypothesis, no one knows what will happen to financial prices in a radically uncertain future.”
The efficient market hypothesis says exactly that, that is one knows what will happen to future prices.
From wikipedia: the efficient-market hypothesis (EMH) asserts that financial markets are “informationally efficient”. That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.
Brian, I would be interested to hear whether you support any form of retirement incomes policy or would be happy for this to be a matter left entirely to the individual. My view is that it is not the policy of compulsory saving that is objectionable, rather it is the compulsory transfer of risk from the state to the individual.
I have always been comfortable with the idea of saving for retirement. And I had no problem with the mandatory nature of the scheme, given how we have been through an era of spending every available cent, no matter how well we can justify some of that expenditure – for example on housing or education.
What I do have a problem with is the (mis)management of many schemes. I am almost 70 and have been retired for nine years. I have been part of two schemes but so far have drawn a pension from only one scheme – the CSS. I had hoped the other would increase in value so that if I lived until 94, as my mother did, I would be able to fund myself.
But in 2008 my industry scheme lost 25% of its face value. Since then it has bounced along at levels between that loss and 5% above the loss. When I think of what I went without in order to salary sacrifice extra contributions plus the payment of the superannuation surcharge applied at the time of my retirement I can only wonder at how superannuation was oversold and under-managed. And how the greedy people now “managing” many funds continued to be paid high salaries for very poor performance – just like the banks really.
If the money had been in a bank account, it might not have gained but neither would it have lost 25%. It reminds me of the old saying – economics is neither a science nor an art: it is at best an inhumanity.
Social Justice should demand that the Compulsory Superannuation Contribution Scheme should cease,as it favours high income earners to the detriment of lower income earners, the self-employed,and the rest of the community.Despite the fact that it was brought in with the best intentions. It could be replaced by a New National Welfare Contribution Scheme to initially fund the NDIS and Age Pensions. This could take the form of a 9 per cent Contribution from all taxpayers collected by the Taxation Department as was done by the original scheme introduced by Ben Chifley in 1948 and supported by Bob Menzies. There are conflicting claims as to who makes the Superannuation Contribution, employer or employee,but in the end it is a cost to Business and passed on to the Consumer. Under the scheme I propose it would save Business going to 12 per cent and the ultimate 15 per cent. This would help make industry more competitive and help employment. The Productivity Commission Report showed that the Medicare Levy brought in $8.2 billion in 2009-10, a figure projected to rise to $8.47 billion in 2010-11 and $10.5 billion by the 2013-14 financial years. Based on the above figures, if 1 to 1.5 per cent can raise the Medicare Levy a proposed 9 per cent National Welfare Contribution Scheme could raise at least $54.64 billion. Therefore,I suggest that a National Welfare Contribution Scheme,administered by the Taxation Department,would be a better alternative to Compulsory Superannuation because it is neither regressive nor inequitable.
To support my proposition, I quote from David Richardson in the Canberra Times on August 7 2012:”The amount the Federal Government spends on Superannuation Subsidies is forecast to hit $45 Billion in 2015-16″
Financial facts to consider-:
$45 billion could be saved eliminating the Superannuation subsidies.
$54.64 billion could be raised from a 9 per cent National Welfare Contribution Scheme.
$99.64 billion total to fully fund the NDIS and the Age Pension.
Ben Chifley envisaged the Age Pension for all persons at age 60 or 65 so hopefully the Means Test could be phased out over an appropriate period of time.
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