Federal budget exposes super’s sneaky insurance

You’re paying for insurance policies you probably don’t even know about.

You could be paying for insurance policies you probably don’t even know about.

Last month I discovered I was paying $1.40 a week for total and permanent disability cover, and a further $1.08 in death cover through my superannuation fund. I promptly cancelled them.

It turns out I’ve been parting with about $130 (in today’s money) a year since I started working on a Woolworths checkout at 15. Including forgone returns, I’ve easily parted with more than $4000 for something I was never asked to buy, didn’t want and don’t need. If you’re a baby-boomer you’ve probably forked out far more. I’d suggest checking your fund.

The sneaky “opt-out” nature of life insurance policies provided in superannuation is one of the great lurks, siphoning billions of dollars a year in premiums out of the super balances of Australians into the financial services industry.

Scott Morrison’s seven-year tax plan has sucked up the bulk of the attention since Tuesday’s federal budget, but it’s Financial Services Minister Kelly O’Dwyer’s changes to superannuation that are more formative and beneficial.

No minister since super became compulsory in 1992 has dared challenge this system whereby unwitting super fund members are signed up to products without being asked in a salient, transparent way. Some free market!

From July next year, one of the carriages of the world’s longest gravy train — compulsory superannuation — will be decommissioned. Funds won’t be able to sign up members to life insurance policies automatically for members who are under 25, or have a balance under $6000, or for any ­account that hasn’t received a contribution for 13 months.

Based on 2016 analysis by Treasury, that could lop $3 billion a year off the value of premiums — or about 35 per cent of the total — currently collected from superannuation funds. A big slice of this flow is money for nothing, given only one insurance policy can be claimed in the event of death or disability, even if more than one policy is held (say, in a different super fund).

There are 6.5 million people holding 9.5 million low-balance accounts, according to the government.

Moreover, the government will ban “exit fees” and cap the annual administration fees that can be charged at 3 per cent for funds with balances under $6000 in super. That will save members a further $622 million a year, the government estimates.

There is much more to do on the super front, though. For instance, why not make life insurance “opt-in” for everyone? And what about making super contributions “opt-in” too, thereby allowing workers to earn more up front if they wish.

Also, the monthly income level at which employers must make compulsory contributions for their staff, $450, hasn’t been indexed since the early 1990s. Had that been indexed, it would be about $830, or over $200 a week today, helping to curb the proliferation of inactive and ignored accounts. There are 15 million super members in Australia and 24 million accounts — ridiculous.

In the long term, O’Dwyer’s reforms will save taxpayers more than the Treasurer’s seven-year tax cut plan.

The extra super savings will compound and grow into bigger retirement balances, while the proposed changes to income tax will be eroded by bracket creep. A young worker in typical circumstances might now expect to have an extra $57,000 in retirement as a result of these changes.

The tax reform package, meanwhile, has been billed as a major reform. Perhaps it is by comparison to recent pitiful efforts, but even if the whole seven-year plan were implemented overnight, the system would still be a dog’s breakfast.

The $140bn of tax cuts over a decade, rightly and overwhelmingly skewed to higher income earners who pay the bulk of tax, are welcome. But the same confusing system of deductions, overlapping rates and thresholds of offsets and the Medicare levy would remain.

For all the talk of an emerging “flat tax” — the plan is for the 94 per cent of taxpayers earning between $41,000 and $200,000 to face a marginal rate of no more than 32.5 per cent by 2024 — the schedule will still look more like the Blue Mountains’ Three ­Sisters.

In fact, from next year the number of income-tax brackets will increase from eight — yes we currently have eight, not the five the income-tax schedule suggests — to 10!

The introduction of yet another “offset”, the Middle Income Tax Offset, to join the Low Income Tax Offset, creates more weird kinks and complexity.

University of Queensland economist John Humphreys yesterday worked out the proposed tax schedule for next year, noting it would have three regressive kinks where the relevant marginal tax rate would drop as earnings rose — at $27,500, $66,700 and $125,300.

The actual tax schedule must include the Medicare levy and the withdrawal of offsets, where relevant. Earning an extra dollar entails not just the ordinary income tax but the potential loss of 1.5c of an offset as well as the 2 per cent Medicare levy (which, by the way, has nothing to do with Medicare). Just because they have different names doesn’t make their effects any less real.