Why super could be part of the fallout from Election 2019

Published by Australian Banking Daily, Tuesday 21 May

The Coalition’s victory on Saturday took many by surprise.

Some will no doubt see it as a vindication of vigorous lobbying campaigns by special interest groups on negative gearing and franking credits.

The only problem with that theory is the facts: electorates disproportionately affected by these policies appear to be those that tended to swing toward the ALP rather than the reverse.

Instead, the over-arching pattern seems to have been that electorates with lower levels of education and less certainty about their economic future tended to swing toward the Coalition.

The short-term implications for the finance sector are that no one will need to be fighting a rear-guard action in Parliament to preserve franking credit refunds. And mortgage brokers can probably breathe more easily.

The short-term priority for the government will no doubt be implementing the new First Home Loan Deposit Scheme, a government guarantee for highly leveraged mortgages that won bipartisan support in the last week of the campaign.

This will not be an easy scheme to implement. It could create many of the moral hazards that ultimately brought the US housing market unstuck in the global financial crisis. But its saving grace is that it’s capped to just 10,000 new buyers a year.  The government would be well advised to keep it that way.

But the longer-term implication of the Coalition’s 2019 victory may be a very different agenda for superannuation.

The ALP had nailed its colours to the mast on increasing the superannuation guarantee to 12%, and its responses to the Productivity Commission’s review of superannuation costs seemed to focus on “cutting the tail” of under-performing funds. As with many issues in the election campaign, the Coalition is less committed.

Rethinking the increase to the Superannuation Guarantee is a distinct possibility. There’s no obvious reason to increase compulsory contributions. Grattan Institute work has shown that retirees are already the group of Australians least worried about their financial situation, and that across the income distribution, people are likely to have enough money to fund a lifestyle in retirement at least as good as they enjoyed while working, without any increase in the guarantee.

And there are good reasons not to increase compulsory superannuation contributions. The increase will take about A$20 billion a year out of workers pockets as employers respond by increasing wages less. And it will impose significant net costs on the budget for decades.

In happy economic times, with strong wages growth and budget surpluses these problems might seem manageable. But the Morrison government doesn’t seem to have been re-elected into this world. Economic growth in Australia has been very slow for the past two quarters – and actually shrank per capita in the past quarter.

Escalating trade tensions between the US and China won’t help, and the short-term stimulus to the US economy from very large tax cuts will start to roll off over the next year or so. It’s no surprise that the RBA has started to pull back its economic growth forecasts, and rate cuts now appear on the way.

Slower economic growth would result in both lower wages growth and more difficult budget outcomes. In addition, the budget assumes cost control much tighter than in the past. Confronted with political reality, the government may be tempted to improve the bottom line by delaying the increase to the Superannuation Guarantee. It should at least set up a review of retirement incomes, as recommended by the Productivity Commission, to see if they’re necessary.

The government will also have to respond to the Productivity Commission’s report on the costs of superannuation administration and management. This is one of the largest productivity opportunities in the Australian economy. Australians spend more having their superannuation managed and administered than they do on energy. It seems plausible that the system could be run for materially less than A$30 billion a year, and reducing costs (while producing similar outcomes) is the very definition of productivity improvement.

The industry will no doubt argue that all that is required is for a few bad apples to be taken out of the system. But every lawyer knows that any attempt to enforce standards about “reasonable costs” and “adequate performance” will end up in court. And courts are always reluctant to allow a regulator effectively to terminate a business, particularly if it is on the basis that it did not meet an inherently vague standard.

That is why a government eager for productivity opportunities would be much better to run with some version of the Productivity Commission’s “best in show” recommendation that would be less vulnerable to legal challenge.

It’s no surprise that this proposal has united the industry in opposition: it would reduce the number of players and drive down prices. Inherently the number of (fund) losers would vastly outnumber the number of (fund) winners.

But of course the economy and Australian workers would be winners – and in theory the system is supposed to put their interests first.