Published by Australian Financial Review, Monday 5 September
Published by Winding back superannuation tax breaks will be an acid test of our political system. Not because our major political parties are at loggerheads, but because they largely agree on both ends and means. If we cannot get reform in this situation, then there is little hope for either budget repair or economic reform.
Indeed, superannuation is part of a topsy-turvy world in which the Labor and the Greens are barracking for the government to go further. Any “concessions” Treasurer Scott Morrison makes to these parties will mostly improve the budget position.
The disagreements between the two main parties are small relative to the common ground, as demonstrated in A better super system, Grattan Institute’s paper released today. All three main parties would probably see any of the packages on offer as a material improvement on the current system. Navigating disagreements over detail to get to a reasonable compromise should be a core skill of all politicians.
The Senate maths should help Turnbull and Morrison to do a deal. The government can pass its legislation if either Labor or the Greens agree, irrespective of what the independent Senators think. So the government can choose which of Labor or the Greens offers a package closest to its preference. Both Labor and the Greens will be keen to be seen to be co-operating if the other is going to pass the legislation anyway.
The staunchest opposition to the government’s super package is outside parliament. Some fund managers are still arguing that everyone, including those who are too wealthy to qualify for any kind of age pension, should get tax breaks so that their retirement income is a large proportion of their working age income. Other commentators simply want to use superannuation to reduce taxes on savings in general.
But they are all fighting the last war. Both major parties in Parliament broadly agree that the main aim of superannuation is to provide income that supplements or substitutes for the age pension – and not more.
Given this purpose, none of the government’s proposed new limits on pre-tax contributions ($25,000 a year), post-tax contributions ($500,000 over a lifetime), and tax-free super in retirement ($1.6 million) are too tight.
It is possible to construct scenarios in which someone might breach these limits and yet qualify for an age pension. But these scenarios almost invariably ignore three key facts about our retirement income system.
The first is that most working-age couple households have two incomes. This is increasingly true when women are now more than half the graduates from our universities.
The second fact is that retirement savings are not the same as superannuation savings. Not even close. Even without counting home ownership, most households have as much in assets outside as inside superannuation. This is true for households of all ages, and all levels of wealth and income, as both ABS data and the Melbourne Institute’s HILDA survey confirm. It is not wildly surprising. Most households want the option to use their savings before they retire, so they keep some of their savings outside superannuation.
The third fact is that people in wealthier households tend to spend much less in retirement than before they retire.The wealthiest 10 per cent of households aged over 65 have assets at least twice the cut-off for the age pension means test. They typically earn more than they spend. Rather than consuming capital in retirement, they add to it.
The limits proposed by the government’s package are more than enough for a comfortable retirement given what most households actually earn and save during their working lives, and then spend in retirement. Some people that want more generous limits focus on scenarios that ignore realities. The system they promote would in practice provide big tax breaks to many households with income and wealth well over the thresholds for a part age pension.
Finally, the canard that the proposed superannuation changes cost the government votes needs to die. People with the most to lose still voted for the government. Electorates with more old and wealthy voters tended to swing less to Labor at the last election than other electorates. And a survey by Essential Media before the election showed that the proposals had more support amongst those most affected. That sounds paradoxical but perhaps these people understand the system better, and appreciate that it is unsustainable.
Many of the arguments against the super package seem to be little more than claims that the changes are unpopular amongst a minority of the small fraction of the population who are members of the Liberal Party. If the views of these donors and volunteers can trump the government’s considered position, built on principle, supported by the electorate, and largely supported by other major political parties, then our system of government is in deep trouble. Over the next few weeks our major parties can show that Australia is better than this.