Why increase the superannuation guarantee?

The Opposition says that if it is elected, it will retain the Government’s proposed increase to the superannuation guarantee from 9% to 12% of wages. The proposed legislation is integrated into the Government’s mineral resources rent tax package, which the Opposition says it will repeal. The Government says their policy is ‘confusing and chaotic‘ because the Opposition can’t say how it will ‘fund’ the reform.

But what does it mean to ‘fund’ an increase in the superannuation guarantee? Superannuation contributions are part of employers’ wage expenses; they’re not paid for by the government. Increasing the superannuation guarantee means the government mandates that you save a greater proportion of your income for retirement — hardly a policy inspired by the Liberal Party’s belief in “a lean government that minimises interference in our daily lives; and maximises individual and private sector initiative.” Why does the Opposition support this part of the Government’s agenda when it has been so obstinate in blocking the rest of it? And if superannuation contributions are paid for by employers, what does this have to do with the mineral resources rent tax?

What’s not to like about superannuation?

Superannuation is widely credited as one of the “three pillars” of Australia’s retirement income system; a successful product of the Hawke-Keating reform era. (The other two pillars are normal private savings and the means-tested age pension.) Recently, the Association of Superannuation Funds of Australia attributed Australia’s strong economic performance during the global financial crisis to the stabilising influence of the superannuation industry.

Others argue that superannuation is a regressive giveaway to the rich, noting that 50% of the tax concessions on superannuation income go to the top 12% of income earners. Superannuation funds are taxed at a flat 15%, which means contributions attract a tax concession for taxpayers above the 15% marginal tax rate bracket. That means those earning under $37,000 receive no net concession, and those earning under the tax-free threshold actually increase their tax burden by making superannuation contributions. High income earners receive large tax concessions, which they can amplify by using their larger discretionary incomes to make additional voluntary contributions to superannuation.

It is because of this tax expenditure that the Government has linked the superannuation guarantee increase to the mineral resources rent tax. Superannuation tax concessions (including the concessions on the income earned on assets already in a fund) currently cost the budget $27 billion a year — already about as much as the aged pension. According to the explanatory memorandum to the Superannuation Guarantee (Administration) Amendment Bill 2011, the concessions will cost an additional $500 million per year by 2014-15 — when the guarantee has increased to just 9.5%. In subsequent years, the rate accelerates: it begins increasing by 0.5% (rather than 0.25%) per year until it reaches 12% in 2019-20. The explanatory memorandum does not attempt to forecast the cost of the tax concessions so far into the future.

The plurality of superannuation savings (about a third) are held in retail superannuation funds, which perform worse than their non-profit counterparts. Increasing the superannuation guarantee is a subsidy to the financial companies that profit from increased superannuation account balances. And amongst all funds “the best annual returns [are] as high as 7.07 per cent.” Six and twelve month term deposits yielding around 6% have been available to those prepared to shop around for the last few years (although this looks set to change). Does mandatory investment in superannuation funds really offer enough reward to justify the risk of more losses like those suffered in 2008?

Self-managed superannuation funds offer members the ability to take control of their own investments, but the annual administration and tax compliance costs usually amount to a few thousand dollars. This means that self-managed superannuation is only financially viable for those with balances in the hundreds of thousands.

What else does the Opposition support?

The Government’s superannuation legislation involves more than just increasing the superannuation guarantee rate — it also contains a number of initiatives designed to reduce inequality in the superannuation system. The Government proposes to:

  • increase the superannuation age limit to 75 (after which employers stop contributing to employees’ superannuation);
  • introduce MySuper, an accreditation regime for ‘default’ superannuation products designed to standardise fee structures, making it easier to compare fees and promoting competition; and
  • provide a government-funded contribution of up to $500 for low income earners, offsetting the tax disadvantage created by the 15% tax rate.

The Opposition supports abolishing the superannuation age altogether, but its position on the other reforms is unclear. In April 2010 it described MySuper-type reform as an attempt to “dumb down superannuation,” which “could kill the goose that laid the golden egg”. In October 2010 it rightly pointed out that increasing the superannuation guarantee to 12 per cent contradicted the advice in the Henry tax review, which said the superannuation guarantee rate should remain at 9 per cent. It described the effect of an increase as “a 3% cut in take home pay for working families” — yet just three months earlier it said the cost would be borne by employers, citing the Government’s inability to “point to any wage restraint that shows employees are taking superannuation increases instead of pay, that might produce a ‘cost’ to government for missed income tax.” Yet the Opposition has now decided to keep the legislation if elected.

Given its obstructive attitude over the past few months, it is surprising to see the Opposition support Labor’s position on the superannuation guarantee. The case for the superannuation guarantee is much weaker than the economically-straightforward argument in favour of the carbon tax. The Opposition should clarify its grounds for supporting an increase in the superannuation guarantee, and should confirm whether it intends to continue policies such as MySuper or introduce ways to make the taxation of superannuation more equitable.