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How could the Government change super?

by Meg Heffron

Speculation is running wild that the superannuation system will be changed again in the May 2012 Federal Budget – so much so that key lobby groups and professional bodies have felt the need to go on the public record say that it would be a bad thing.

I agree with them on the whole – to my mind the constant fiddling with the system plays to an existing fear amongst taxpayers that superannuation is inherently risky and uncertain from both a legislative and investment perspective.  Given the policy direction Australia has taken on investment risk (ie, creating a system where individuals bear that themselves with only a safety net protection via the age pension) we have more interest than most countries in ensuring that the legislative framework is stable.

I wonder if the problem is that we have several competing philosophies at play in superannuation policy.

For example:

  • the system is compulsory – and yet even compulsory contributions are provided with tax concessions (normally tax concessions are used as an incentive to do something you don’t want to do.  We don’t need any further incentives to have part of our remuneration directed to Superannuation Guarantee contributions!);
  • the system is aimed partly at reducing dependence on the age pension – and yet we have never had a genuine debate about when / how / if at all we (as the taxpayers who ultimately provide funding for everything done in our  name by the Government) will support those who wish to save more than enough to be independent of the age pension.  Even worse – we don’t give those people who do save more the ability to opt out of the compulsory element of superannuation if they want to (remember how in the olden days of RBLs you could opt out of Superannuation Guarantee contributions at a certain point?).  In fact, we don’t even allow people who have already exceeded their concessional contributions cap to opt out;
  • the system is meant to be all about saving for retirement – and yet we don’t force people to take any of their super as an income stream.  In fact, we  no longer even have any age at which a superannuant must start their super pension (remember when that used to be compulsory when you reached 65 and stopped working?).  Doesn’t that send something of a confused message : “Mr Superannuation Member, superannuation is all about retirement but if you’d rather use it as a concessionally taxed investment vehicle to stockpile wealth for the next generation that’s fine too.  Just make sure you don’t actually die with money still in your fund because then we will catch you out and tax it terribly.”

I suspect Governments always feel a little conflicted about how they deal with superannuation tax concessions because the very measure of success of the system (there is a lot of money in it) leads them to question whether they can really afford to give away so much in tax concessions.  But how do you reduce tax concessions for a system in which every voter has a stake?  You make sure that whatever you do can be classified as reigning in the concessions for the wealthy or you pick something that will fly under the radar for most people at the moment.

So what levers does the Government currently have available?

Certainly the concessional cap could be toyed with again.  I suspect that $25,000 is already so low that it is unlikely to change – we are in the truly bizarre position of having trade unions arguing for a higher (or at least unchanged) concessional cap because their members (particularly those in the mining industry) are already bumping into it.  More likely – the $50,000 cap for over 50s will go and the brain snap policy of trying to offer one cap for those who have more than $500,000 in the system and another for those who don’t will be quietly dropped.

Could tax on benefits for the over 60s be reintroduced?  Possibly – but very brave.  Treasury modelling at the time this measure was introduced apparently identified that it wouldn’t cost much.  You do wonder whether anyone thought to include in their modelling the massive change in behaviour that would inevitably result when one particular tax structure was made so amazingly tax effective.

What about the tax rate paid by superannuation funds themselves?  The Henry Tax Review suggested replacing the current system of 15% for accumulation funds and 0% for pension funds (and something in between for those funds with a mixture of the two) with a flat 7.5% for all.  Now THAT would upset baby boomers.  The trouble with this one is that it is probably not a big revenue earner.  In fact, it would probably have a negative impact on revenue in the short term as the additional taxes from pension funds wouldn’t be enough to outweigh the reduction in taxes for accumulation members.  Even Henry expected this measure to be neutral but only over the longer term.

If I had to bet, I’d say increasing the rate of tax on concessional contributions with some link to taxable income.  We’ve been here before – remember the superannuation surcharge?  I wonder how much revenue that collected relative to the amount of administrative cost and confusion it created?

Or what about introducing limits on the extent to which people can save in superannuation so that the tax concessions are targeted at those still at risk of being on the age pension?  No – we’ve been there before too : RBLs.

And that’s the trouble with tinkering with superannuation – it’s been tinkered with so many times that there really are no new ideas under the sun.  Each time the Government looks like it might be heading down one path or another, there are half a dozen groups able to dust off their submission from 1980, 1990, 2000 or 2010 which put forward a range of arguments as to why that idea won’t work.  Even worse, they can now specifically refer to that time in 19xx when it was actually introduced and it didn’t work because…….

 

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