Superannuation, its detractors and enemies

Taxation of superannuation continues to be a hot-button policy.  But it is  treated as an isolated component of the tax debate, rather than from the perspective of a means both of encouraging people to ensure their own future and to provide the savings necessary to ensure the economy grows to allow such future income streams.

Today, David Leyonhjelm  pointed out that the government’s latest episode of how to tax this savings vehicle is one step forward and another backwards, while Robert Gottliebsen once again draws attention to the excision from punitive new taxes of one privileged group, the most senior public servants – the very ones who are drawing up the policy proposals.

In this debate, as in so many others, the Grattan Institute continues to serve an invaluable purpose in offering policy prescriptions that provide a useful marker in defining what should not be done.   Grattan downplays the importance of superannuation pointing out that it comprises only a small share (15 per cent) of total household savings.  It draws upon RBA research  which shows that the superannuation requirements have resulted in overall savings being increased by 70-90 per cent of the levels collected.  This is just as well since, as the RBA also reports, other household savings are dominated by the investment in the family home, which accounts for 60 per cent of total household wealth, with a mean value per household now approaching $600,000.

There is nothing wrong with savings in housing.  Housing is also prominent in US household savings  (Table B1), though at under 30 per cent rather less so than in Australia.  But housing is fundamentally a consumer durable rather than an income producing investment.  Moreover, Australia’s stated value of investment in housing contains a component that is derived solely from a government created scarcity value; this stems from land-use planning that rations the amount of land permitted to be built upon for housing.  This adds between $200,000 and $300,000 to the value of the median house.  In other words, almost half of the value of the assets that comprise 60 per cent of households’ wealth is created by government regulation.

We can opine at length about the knowledge economy, restructuring and so on but the fact remains that economic growth and therefore income levels is fundamentally driven by savings and investments.  China’s break-neck growth rate is funded by domestic savings ratios of around 50 per cent of GDP; Japan in its pre-1980 growth pomp had levels of over 40 per cent whereas the increasingly sclerotic OECD countries have savings ratios of 18-25 per cent.  Australia is at the high end of this but much of the national savings is funnelled into housing.

Naturally, the savings work better if there is no “guidance” to their direction by governments.  In the main this will direct savings to politically determined and unproductive venues.  This is seen in the decision by Peter Costello’s Future Fund to invest in AGL’s renewable energy fund.  Commenting on this, Costello said, “We invest in it because of the returns.  Those returns happen to be guaranteed by government.”

Government actions and policies will almost inevitably result in such redirections that dilute the return from savings (a rare exception being the Japanese post World War II policy which gave tax relief to household savings in the Post Office saving bank which in turn was incentivised to invest in industry rather than housing).

So.  We have a government superannuation policy that is confirming the natural proclivity of governments to steal income irrespective of previous statements, juxtaposed on policies that divert the level of savings into areas of low productivity (like tax favoured renewable energy) and into housing that has its value artificially inflated by government policies.

Such measures will tend to reduce the nation’s return on savings and savings in toto with adverse pressures both on future economic productivity and on the incentive individuals in a welfare state have to save for the future. But few politicians care.

 

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29 Responses to Superannuation, its detractors and enemies

  1. karabar

    But few politicians care.

    A quotation loaded with a simple Truth. In fact it is the root cause of many of the country’s problems.

  2. Stackja

    Few politicians care because not enough voters care.

  3. Tel

    … the fact remains that economic growth and therefore income levels is fundamentally driven by savings and investments.

    Agree with that, AND the reverse is true: growth attracts savings. The incentive is for mobile capital to search for countries where growth is happening because that’s the best chance of a profit.

    How many investors would be pouring their life’s savings into Greece, Spain, Portugal, Italy right now?

  4. Stackja
    #2163234, posted on October 3, 2016 at 4:06 pm
    Few politicians care because not enough voters care.

    Not quite. Few politicians care because not enough voters understand.

    All these learned tomes are excellent, but none ever translate to something that most voters hear or understand.

    This forum is an echo chamber that ordinary voters never enter.

  5. Bruce of Newcastle

    Taxation of superannuation continues to be a hot-button policy.

    An aspect not much discussed is the restrictions placed upon superannuation savings access. At present we the taxpayer are required compulsorily to ‘save’ a significant chunk of our income into a superannuation account. The funds thus saved are not available until the preservation age, which for most people is 60. So you are trusting the government that those funds you are saving will be available to you 20 or 40 years in the future.

    Which is a big ask when governments change the super laws at whim.

    Now consider that governments everywhere would like to raise the pension age because people “live longer”.

    It seems to me that the risk of the government increasing the preservation age to 65 or 70 is highly likely.

    That constitutes a very significant sovereign risk. If I were entering the workforce today I would try to arrange my affairs so that compulsory superannuation was minimised, because the chance of me actually ever receiving it would be low. The frenetic changes lately lead me to think this. Why wouldn’t they?

    There is nothing wrong with savings in housing.

    The problem of course is people are not stupid. If, say, you are paying 5% mortgage interest rate and have a high income then investing in paying down your mortgage has an effective ROI of 10% before tax. What superannuation account gets 10% return these days?

    Furthermore when it comes to savings what incentive is there for anyone to save anything? Interest on term deposits is fully taxed and does not factor inflation. So the effective ROI on savings is probably minus one or two percent after tax. As I said people are not stupid…they are going to pay off the family home and go on the pension.

    Such is the stupidity of both sides of politics these days that their policy which is supposed to stimulate people to save for their own retirement actually incentivises us piss it all away on the pokies and go onto the pension. And they have a budget deficit problem? Madness!

  6. dalai lama

    @ Tel:

    How many investors would be pouring their life’s savings into Greece, Spain, Portugal, Italy right now?

    There’s an answer to that dilemma, and the EU is working hard to implement it. Namely, “tax harmonisation”, which will mean low growth and high tax everywhere.
    So that will “equalise” the playing field and investors can happily invest in any basket case, because they will all be the same.

    After all, the accepted wisdom amongst most professional economists and government advisors these days is “why save if you can print?”

    Nothing can go wrong if you have your own currency; the MMT crowd say so. /sarc

  7. Noname

    The savings angle continues to intrigue me…as there is a global savings surplus chasing yield… so Australia continues to be able to fund both its Govt deficits and the current account shortfall. The problem is now a lack of jobs that deliver good income prospects from what appears to be an over regulated private sector that sees little incentive to grow…and is actually likely to shrink as margins are put under increasing pressure and the quality of both goods and services falls in response….welcome to socialist capitalism.

  8. dalai lama

    @Bruce of Newcastle:

    If I were entering the workforce today I would try to arrange my affairs so that compulsory superannuation was minimised, because the chance of me actually ever receiving it would be low.

    I can tell you from first hand professional experience that this is precisely what is happening.
    Mind you, neither the Liberals nor Labor even pretend these days that superannuation is to fully replace the Age Pension. If you look at the most recent proposals of how to tax and limit super, it is easy to run the numbers.
    Also, the new Asset Test limits due to come into force from January will ensure that anyone saving into super at the proposed maximum concessional (tax deductible) levels for the last 15-20 years of working life (i.e. the usual situation where kids have left home, debts are paid off etc), will at best attain a comparable income in retirement to that of the Age Pension, while qualifying for no meaningful Centrelink support at all.
    In other words, we are trending toward a system where you either have to be rich enough to not care (i.e. > $2.5 million in investable assets), or poor enough to get everything for “free”.
    I think it’s obvious where this will lead – just as you say.

    If, say, you are paying 5% mortgage interest rate and have a high income then investing in paying down your mortgage has an effective ROI of 10% before tax.

    That’s of course presuming house prices will never go down. 😉

  9. memoryvault

    Mind you, neither the Liberals nor Labor even pretend these days that superannuation is to fully replace the Age Pension.

    That was never the intention. The purpose of compulsory super is to force Australians to save a big pile of money, for the politicians to raid further down the track when their profligate spending gets out of hand. Like now. It has been done once before, and will be done again.

  10. Bruce of Newcastle

    That’s of course presuming house prices will never go down.

    Actually Lama that is even if house prices go down. In Oz if that happens there’s nothing you can do about it, whereas in the US the GFC was made worse because legislation allowed underwater mortgagers to hand the keys into the bank.

    So if you have a home mortgage it always makes sense to pay down the principal since that reduces the interest you are paying. Effectively that interest counts as taxable income at your highest marginal rate. Super, savings or whatever just do not get the same ROI.

  11. Art Vandelay

    This is seen in the decision by Peter Costello’s Future Fund to invest in AGL’s renewable energy fund. Commenting on this, Costello said, “We invest in it because of the returns. Those returns happen to be guaranteed by government.”

    Yet another reason why the gutless Abbott and Turnbull Liberals were reluctant to even argue for minor reforms to the RET.

  12. Beachside

    Yet another reason why the gutless Abbott and Turnbull Liberals were reluctant to even argue for minor reforms to the RET.

    At least Abbott tried

  13. H B Bear

    Future Fund is a nice fat top up for Costello’s parliamentary super while Canberra bureaucrats defined benefit scheme shortfall continues to blow out by tens of billions of dollars because you have clowns like the head of the ABS on $750k a year.

    Taxpayer funded windmills ain’t gonna close that gap any time soon.

  14. duncanm

    I’ll vote for the first politician to state that they’ll change shift all politicians retirement plans to super schemes which are subject to the same rules as the prols.

  15. memoryvault

    I’ll vote for the first politician to state that they’ll change shift all politicians and public servants’ retirement plans to super schemes which are subject to the same rules as the prols.

    Personally I can’t for the life of me think of a single good reason why these people should be in separate funds. They should just be nominating the public fund of their choice, or the one nominated by their EBA, just like the rest of us.

    The only logical explanation for separate funds is so that they can be subject to lurks and perks not available to the rest of us.

  16. Muddy

    All these learned tomes are excellent, but none ever translate to something that most voters hear or understand.

    This forum is an echo chamber that ordinary voters never enter.

    A decent point, particularly the latter. Perhaps The Cat was not designed to educate semi-bogans like myself.

  17. Rob MW

    Thanks Alan, good read. I particularly got a kick out of this line: “We can opine at length about the knowledge economy,……….” Given that the knowledge economy is based solely on owning (or renting) a smart phone and an unrestrained Twitter account it’s hard to see how selling ignorance features so high on the national economic scale. Must be something I missed or something 🙂 “The Twitter Economy”; where lambs become lions only to find that they spent too much to be under educated in reality and itemized as a carried forward loss requiring fortnightly top-ups thru a mandatory profit making wealth redistribution program.

  18. Mayan

    There was no evidence whatsoever that women were being raped after having their drinks spiked.

    Spoken by someone who has never had their drink spiked.

    The only reason I didn’t end up a victim is that I saw a group of cops (it was an inner city area in the evening) doing a foot patrol, and I made my way out of the bar and caught up with them.

    C.L. Let me guess: you’ve never been perceived as prey. If you looked like prey, your might be singing a very different tune.

  19. Mayan

    BTW: it was a close-run thing. Had I not made it back to near my friends, and had I not realised something was wrong, and had I not seen the cops, who knows what would have happened.

    Yes, C.L., drink spiking is a thing. Yes, C.L., there are some men who are scum who would gleefully used drink spiking to commit atrocities.

    You need to grow up, and realise that there are other people in the world.

  20. Mayan

    C.L. “There was no evidence whatsoever that women were being raped after having their drinks spiked. ”

    Spoken by someone who has never had their drink spiked.

    The only reason I didn’t end up a victim is that I saw a group of cops (it was an inner city area in the evening) doing a foot patrol, and I made my way out of the bar and caught up with them.

    C.L. Let me guess: you’ve never been perceived as prey. If you looked like prey, your might be singing a very different tune.

    BTW: it was a close-run thing. Had I not made it back to near my friends, and had I not realised something was wrong, and had I not seen the cops, who knows what would have happened.

    Yes, C.L., drink spiking is a thing. Yes, C.L., there are some men who are scum who would gleefully used drink spiking to commit atrocities.

    You need to grow up, and realise that there are other people in the world.

  21. memoryvault

    BTW: it was a close-run thing. Had I not made it back to near my friends, and had I not realised something was wrong, and had I not seen the cops, who knows what would have happened.

    Reader’s Digest Version

    Mayan went binge-drinking and got right royally, falling down drunk.

  22. classical_hero

    Why is Mayan polluting this thread?

  23. .

    We will never have sufficient national savings, cheap housing or a self-sustaining birth rate as long as we are taxed so heavily. What did Senator Roberts say? 57% of income is taxed overall?

    Good luck saving at all.

    You cannot save, afford a cheap home or have more than 2 children with both parents working under those circumstances.

    Size of government if the core problem we have. Everything else arises from that.

  24. john constantine

    Market performance funds.

    The exact effect on the stock market of a percentage of everybodies weekly wage being dumped into the leading shares is interesting.

    The money has to go somewhere and how can any manager be blamed for the index performance if he simply buys the index every week?.

    Supply and demand.

  25. Tel

    Personally I can’t for the life of me think of a single good reason why these people should be in separate funds. They should just be nominating the public fund of their choice, or the one nominated by their EBA, just like the rest of us.

    The only logical explanation for separate funds is so that they can be subject to lurks and perks not available to the rest of us.

    After 2004, they need to choose a Super fund just like anyone else, or default to Australian Super:

    http://www.finance.gov.au/superannuation/parliamentary-superannuation/new-parliamentary-superannuation-arrangements.html

    Before 2004, at least for politicians, there was no fund. It was explicitly listed as “unfunded”.

  26. Mayan

    Why is Mayan polluting this thread?

    Wrong tab in my browser. It can happen to anyone.

    Well, maybe not to those who don’t believe that browsers have tabs.

  27. Muddy

    #2163329, posted on October 3, 2016 at 6:44 pm

    A decent point, particularly the latter. Perhaps The Cat was not designed to educate semi-bogans like myself.

    The fact that you’re here means that you’re no ordinary bogan, semi or otherwise. 🙂

  28. Kool Aid Kid

    Compulsion is the primary problem. From that flows the flows of capital into managed investment and away from natural choices. The end result is that the people who are supposed to be weaned off pension dependency are actually borrowing more.
    The evidence is that average savers are exhibiting nil net savings benefit.
    What we need is to neutralise all savings incentives and remove compulsion while putting tight income and asset tests around pension so that people can make their own choices with clear signals.
    Government could simply dismantle the whole superannuation construct and lower taxes to give people back the option of saving in ways that fit their needs and choices.

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