Whoever wins the election on Saturday should go back to first base with superannuation. The Hawke-Keating Government set in place some much needed reform of superannuation, but later it could not resist the temptation to increase taxes on it. The initial reform was well thought out. Before 1983 superannuation was an easy vehicle for tax avoidance. Money could be cycled through superannuation quite quickly, thus avoiding high marginal tax rates. The Keating reforms gave tax concessions to superannuation, but quite rightly applied a penalty to bring the tax up to the full marginal rate if money was pulled out before age 55. Further concessions were allowed for people who took annuities and who delayed payments out of superannuation until they were 65. The Keating reform also forced all employers to pay all employees a percentage of their wage as superannuation, ultimately rising to 12 per cent.
But the politicians could not help themselves. Here was a miltch cow. By the end of the Keating Government superannuation was taxed at 15 per cent on the way in, at 15 per cent on the earnings while it was in, and at 15 per cent on the way out. Australia became one of the highest taxers of superannuation in the industrialised world.
The Coalition was no better. First it extended the timing and cut the percentage of salary going to superannuation. They it imposed the surcharge tax on high income earners. The rationale on the latter was dubious. Treasurer Peter Costello argued that low-income earners were getting less of a tax concession than high-income earners, so a 15 per cent surcharge was imposed based on current income – not on how much income one might expect on retirement or how much one had in a fund. Superannuation should be about future income, not present income. If there was an inequity, the answer would have been to give low income earners a bigger break.
This week Prime Minister Howard announced a winding back of the surcharge. Following the pattern of this election, it meant a tiny bit or nothing now and just a little bit much later – just like Opposition Leader Kim Beazley’s roll-back.
The 15 per cent surcharge was imposed in one hit. Mr Howard’s plan will see it wound back to 10.5 per cent over three years. The Association of Superannuation Funds of Australia rightly calls it tinkering.
Governments should address broad, long-term issues. The population is aging. Unless something is done more people will rely on the aged pension which will condemn them to poverty. The drain on future government revenues will be substantial.
The broad aims should be to get as many people to self-fund their retirement as possible. Tax on superannuation – going in, on earnings and going out should be as low as possible. The cost of administration of superannuation should be as low and efficient as possible and should ensure that low-income, part-time and casual workers can easily consolidate their funds. If superannuation is taxed, the administration costs should be deductible.
The tax concessions should taper as the projected payouts (as distinct from current income) go beyond reasonable limits.
Superannuation rules have chopped and changed every election cycle and almost every budget. They are riddled with grandfathered rules that will apply to retirement benefits paid decades into the future.
Some serious work needs to be done on future projections and the cost of not moving towards 12 per cent superannuation contributions in a low-tax regime. Rather than quick-fix electoral bribes, Australia needs a bipartisan retirement incomes policy to avoid the impending drain on the public purse.