Andrew Leigh had a piece in the AFR talking about super. Once you strip away the bumpf and obligatory ALP speak he is making a good point.
Contributions to super should be tax-free, not just for low income earners, but for everyone. He argues for low income earners, but I argue for everyone. Income from super should be taxed as regular income. This means that the 2006 Howard government super reforms need to be revisited. In practice this means the government needs to spend money not raise money so I suspect nothing will be done.
Thanks for doing that, Sinc. If I try to read that drivel, it’s like Gillard etc speaking – I just switch off. I suppose that’s the intended effect.
If they really do have good points to make, why bury them in shit?
ar
11 Oct 12 at 8:01 am
Why does anyone take this idiot seriously?
Rabz
11 Oct 12 at 8:05 am
1. Once again Leigh does not address the probity issues that Judith has noted in her articles about Union super funds.
I don’t like the idea of anything that encourages more money to go into that financial twilight zone.
2. It is best for all that Labor is making people wary of the morale hazard of investing in super. After the experience with this government only a moron would believe that the money is super will not be “got at” by a future lefty government who has spent too much.
Token
11 Oct 12 at 8:17 am
Prof. Davidson wrote:
In other words, tax on super should be a direct expenditure tax, which has a consumption base instead of an income base.
To which I would add: Why stop at super?
Of course, the idea of an across-the-board direct expenditure tax was once championed by another Labor luminary who writes for the AFR: Mark Latham.
Gavin R Putland
11 Oct 12 at 8:26 am
Not disagreeing with anything you’ve put here Sinc, but the last thing that should be encouraged is this government changing super provisions.
Driftforge
11 Oct 12 at 8:53 am
Whatever the system should or should not be, superannuation mandated by the government is a form of long-term contract with contributors, over decades. As such, changing the system to the cost of contributors constitutes breach of promise. It should not be touched retrospectively in any way, and that includes increasing taxes on income from prior contributions.
Any government wishing to do this should fully explain its intentions, and go to an election for a verdict.
braddles
11 Oct 12 at 9:19 am
Are you sure he is making good points? Leigh seems to be saying that:
1 it is a good idea to make tax a bit more progressive
2 savings performance will be enhanced if the govt gets more involved in the choices
3 the low paid will benefit if more of their present meagre income is saved.
I suppose you’ve actually done the pollies trick of ignoring the question that was asked and answering the one you actually wanted!
Pedro
11 Oct 12 at 9:40 am
Doesn’t work Sinc. Breaks down as soon as you consider how to handle lump sums. People don’t trust super fund managers to faithfully send you the income stream for 40 years and not go bankrupt or abscond to the Cayman Islands.
Unless there is a super insurance scheme untouchable by the government meddling (in your dreams!) people will want their own money in their own hands thank you very much.
Bruce
11 Oct 12 at 9:55 am
Judith Sloan recently observed (as many others have) that increasing super contributions or concessions for lower income earners merely reduces their later entitlement to the pension. So net-net, they aren’t a great deal better off, but the budgetary cost of supporting them is shifted from later to now. Maybe this is a good thing, maybe not.
As for getting rid of tax-free super payouts, I think the ship has sailed on that one. Tax-free super has with any luck become the third rail of Australian politics. Perhaps this was Costello’s finest moment (Ken Henry seemed to think so in his leaked speech) – it should help ‘starve the beast’ over the next few decades. But perhaps there is a case for gradually increasing the age for full access to super (eg lump sum payouts) from 60 to perhaps 65-70 over the next 20 years or so.
The biggest reform that needs to happen to pensions is tightening of the assets and income test to make it truly a fall-back. At the moment, a couple can own a house of any value and still get the full pension if they have $273k of other assets. They can get a part pension if they have $1.05 million. Crazy. The advent of reverse mortgages and similar products should mean than homes should be taken into account in eligibility for pensions and fees for nursing homes.
Sleetmute
11 Oct 12 at 10:10 am
Leigh’s last two paragraphs are the most interesting. His point about women benefiting most from Low-Income Superannuation Contribution schemes is well made.
He also highlights the Coalition’s opposition to the increase in superannuation contributions from 9 to 12 per cent, whilst at the same time their members benefit from the 15 per cent parliamentary scheme.
1735099
11 Oct 12 at 10:12 am
At its simplest superannuation is a tax advantaged savings plan.
Costello’s removal of Reasonable Benefit Limits and tax payable on withdrawals significantly increased the scope for misuse of superannuation against the wider national economic good, as the washing of income through “transition to retirement” incoming planning demonstrates.
The removal of tax on super contributions and fund earnings, with withdrawals taxed at ordinary income tax rates would go a long way to acknowledging super as simply deferred earnings. Some form of tax on lump sums to discourage double dipping on the pension, coupled with meaningful assets and income tests on the pension would start to get close.
Unfortunately I too suspect Costello has somehow entrenched in peoples’ minds the idea superannuation withdrawals should be “tax free” much to the detriment of the overall intentions of the regime.
H B Bear
11 Oct 12 at 10:27 am
Yes, people should not be able to qualify for means tested services simply because they choose to keep a significant proportion of their assets tied up in a non income producing manner.
Nursing homes are a bit more complicated situation where you have on person of a couple who has to move into a nursing home and another who doesn’t. But I’d have no problems with a deferred HECS like scheme for these sorts of situations.
I think the only reason to give superannuation a tax break is because it ends up “locked up” for many years. Otherwise you’d give similar tax breaks to any money which wasn’t immediately spent.
And so the tax break you get from locking it up should be proportional to how long you’re not going to be able to access it. The closer you get to retirement, the smaller the tax break you should receive. None of this “sell the investment house just before retirement and put it into super to avoid CGT – then access it a year or two later”. That’s just tax avoidance.
Chris
11 Oct 12 at 11:11 am
I agree nursing homes are a bit more complicated. But forcing the other partner to downsize to help pay for the homed partner’s care is not a crime in my view.
Sleetmute
11 Oct 12 at 11:38 am
I disagree Sinc as that would disadvantage one group of people (those on a Contributory Promise Plan) compared to those on a Defined Benefit Plan. If a Contributory Promise Plan superannuation fund’s income is taxed, the final payout is reduced.
If a Defined Benefit Plan superannuation fund’s income is taxed, it has no impact on the payout figure as that is predefined according to a formula based on final salary, length of service, etc.
So, one group of people will retire with a diminished retirement payment, the other group would not be impacted in any way, though their employers would have to top up the fund to satisfy the predetermined requirements.
old bloke
11 Oct 12 at 11:43 am
Old bloke,
as a member of a defined benefit scheme, I pay around 5% of my income into it and pay tax (albeit at a slightly reduced rate) on the final pension I receive. So the money is taxed on the way in and on the way out as well. Then again, most defined benefit schemes are now closed to new entrants and many like myself, find ourselves locked into our current occupation. (My scheme is commonly known as the golden handcuffs)
Tator
11 Oct 12 at 11:58 am
Longer term no and its certainly money they should be forced to spend rather than getting the government to do it so they can increase the inheritance their kids receive. But there’s already quite a bit of stress for someone when their partner needs to move into a nursing home let alone having to deal with buying and selling a new place to live. Which they may not stay in very long at all anyway as they’re probably pretty close to moving into a nursing home myself. Thus my suggestion of a deferred payment scheme.
Chris
11 Oct 12 at 12:14 pm
From Andrew Leigh’s article.
“those of us on higher incomes are able to save more than disadvantaged Australians. This becomes a wedge over the course of a lifetime.”
No it doesn’t. The richer people are individually, the better off those around them are.
Everyone knows you don’t go to the pub with friends who don’t have any money
Even the so called “disadvantaged” know this. They are disadvantaged not “stupid”.
In general, superannuation in Australia disadvantages the disadvantaged because they lose access to capital which could have been put against their debts (they are disadvantaged after all).
Indeed, mandated super (or SGC) is such a loser of an idea that the government has to force contributions on their behalf. That “disadvantaged” people are less likely to contribute to super doesn’t mean they don’t know any better (as many of those in favor of mandated contributions imply), they simply have other priorities.
The libertarians and free market economists which post here should know this.
Scott
11 Oct 12 at 12:19 pm
I am financially poor – in that I work for a pittance, but against that I have my assets (hopefully not totally destroyed by Ludwig) that I can cash in at retirement. I doubt I will ever qualify for a pension, and isn’t this how it should really be? Poorer people will always require some sort of pension, but the slightly better off will contribute to their retirement in some way – only because they are better off. Is this forced savings on people who probably would save anyway? Shouldn’t they be allowed to reduce debt when they are young and save harder when they are older (house paid off, kids educated)? My grandmother did it this way, my mother did it this way and in spite of the government, I am doing it this way. All that money sitting in Superannuation funds would surely be better circulating through the economy rather than through the likes of Craig Thompson’s expense account. Or is it already circulating through a different part of the economy – other investments – and is that worth more than circulating through the consumption side? We are told that people will need more and more to retire on as we live longer, that current super will not be enough, pretty soon we will be at such a high contribution rate it will affect actual living in the present.
Of course, when I say I, I mean we.
Helen Armstrong
11 Oct 12 at 1:00 pm
There is one benefit in that if a person becomes bankrupt their superannuation is protected. However I’d agree that for low income people that superannuation does not help them. They get a very small or no tax benefit as their tax rate is low anyway (one argument why the tax benefit should probably be a discount on the marginal rate you pay rather than a straight 15%)
Often they’d be better off having the cash in hand now and there’d be no greater financial risk to the government as they will end up getting the full aged pension anyway because of their low incomes.
You used to be able to withdraw your super contributions you made during the year at the end of the financial year if your income was very low (I used to do it when I was a student and only working during the christmas uni holidays). Perhaps that should be allowed again.
The people who the government wants to force to save are those middle and high income earners who may be eligible for the aged pension if they do not save throughout their lifetime or go on a big spending spree post retirement.
Chris
11 Oct 12 at 2:26 pm
chris
It was worse before Howard removed some of the taxation. It was regressive for lower income earners.
.
11 Oct 12 at 2:39 pm
Chris – ‘None of this “sell the investment house just before retirement and put it into super to avoid CGT – then access it a year or two later”. That’s just tax avoidance.’
No; its good tax planning. Anyway its limited by the amount you can concessionally contribute – $25,000.
eb
11 Oct 12 at 4:05 pm
Following Sinclair’s advice, I was left with
Samuel J
11 Oct 12 at 4:48 pm
And I have argued many times that increasing the superannuation guarantee to 12 per cent is a big mistake.
Samuel J
11 Oct 12 at 4:51 pm