The Government is being coy about any proposal to change superannuation arrangements … certainly more coy than before the election when it ruled out any major changes to superannuation. Now a leaked Cabinet submission suggests that major change is at least on the table, if not very likely.
The Government should tread very carefully in this area. It should not sacrifice long-term aims to build up savings and reduce reliance on social security for the sake of the short-term desire to deal with the Budget deficit.
Under present arrangements, employers and employees will steadily increase their contribution to 9 per cent and 3 per cent of salary respectively by 2002-03, and the Government would match the employee compulsory contribution. So that in seven years’ time all employees would be racking up superannuation at the rate of 15 per cent of income. Employees’ compulsory contributions are made after ordinary tax at the marginal rate is paid. Employer contributions are taxed at 15 per cent. Once the money is in a fund and starts earning interest, that interest income is taxed at 15 per cent.
As a package this is a sensible way of building up savings. It requires input from employees, employers and government in the form of forgone tax. The benefits are that more people will be able to fund their own retirement. If anything, the present scheme should be requiring higher levels of compulsory contributions from employees. Australia must engender a culture of saving.
The leaked document suggest the Government is thinking of treating the employer contribution as ordinary income and taxing it accordingly. Several things would flow from that. It would be a breach of election promise, but that does not mean much in the context of so many breached promises. It would reduce employees’ post-tax earnings and will result in compensatory wage claims. It would push people into higher income brackets for purposes of means-tested payments, HECS and determination of marginal tax rate. It would stop many people from making a salary sacrifice to boost their employer contribution because most of the tax disadvantages would disappear. It would result in substantially reduced incomes on retirement.
The document suggests also that employee contributions would not be compulsory. Many employees would foolishly stop contributing. Further the document suggests that the government contribution would cease. Access to funds would be restricted to those over 65 (at present 60). The only concessions would be that the tax rate on the earnings of superannuation funds would be cut from 15 to 12 percent and the first $100,000 taken out would be tax-free (instead of the present 15 per cent) if taken as a pension.
Overall the proposal would not be in Australia’s interest. It would cast many employees on middle incomes into a twilight zone where upon retirement their superannuation benefits are just enough to means test them out of social security but not enough to provide a liveable income in retirement.
These proposals appear to be a bloody-minded wrecking of a sound long-term national scheme. It should not matter that it was a Labor scheme; if it is a good one it should be maintained. The proposals put in the leaked document send the wrong messages: savings do not matter; attempts to save will be met with higher tax; the Government does not care about savings; people on lower and middle incomes can wait for the pension.
The proposals are short-sighted and the Government should have none of them.