This not-so-super system is costing Australians dearly

The likelihood of a 25-year-old man dying before he turns 65 is more than 9 per cent; for our hardier womenfolk, it’s less than 6 per cent. More than a fifth of men today aged between 25 and 35 won’t make it to 75, according to survival probabilities provided by Rice Warner Actuaries, and neither will about 15 per cent of similarly aged women.

For these hundreds of thousands of people, compulsory superannuation, tragically, won’t be at all helpful. Forced saving has only sapped the quality of their working life without any ­payoff at the end.

It’s worse than simply the forced siphoning of 9.5 per cent of gross wages or salary into ­accounts that are typically ravaged by fees for decades, though.

They are also paying higher ­income taxes. The superannuation guarantee increases costs to the government, which therefore ­requires a higher tax burden. That’s because the cost of the superannuation tax concessions is greater than the savings to the government in Age Pension costs — both now and in the future.

Don’t take my word for it. In 2009, then Treasury secretary Ken Henry’s tax review committee concluded: “An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs).”

You don’t hear this point very often because the super industry is vast and powerful. No one wants to admit the whole edifice of compulsory super offers appalling value for money.

Yet on July 1, 2021, the compulsory rate of superannuation contributions will ratchet up 0.5 per­centage points to 10 per cent, after which it will continue rising until it hits 12 per cent four years later. It’s bad policy, especially in view of the Productivity Commission’s report.

The commission’s draft report into the inefficiency of the superannuation system estimated and catalogued a range of inefficiencies. It was a laudable effort to shift the debate beyond the mindless fight between retail and industry funds over the spoils of a broken system.

It rightly focused on fees. Indeed, the average expense ratio across the nation’s $2.6 trillion pension fund is more than 1 per cent a year. In the US, where saving in a superannuation-style ­account is optional, fees are dramatically lower. The giant US Thrift Savings Plan L Fund, with $US108 billion ($141bn) under management, achieved similar returns at a cost of 0.04 per cent, suggesting we pay $26bn a year unnecessarily.

Even if fees were low, though, would all the bickering and complexity be worth it? No. The Age Pension this year will cost $47bn. In the same year the government will forgo about $18bn from taxing employers’ super contributions at 15 per cent rather than individuals’ marginal tax rates (which typically are much higher).

It will forgo a further $23bn from further taxing those funds and voluntary contributions at 15 per cent (or zero for retirees). It’s hard to ­imagine the additional Age Pension costs coming anywhere near those concessions.

In 2007, 80 per cent of over-65s were on the full or part Age Pension. It is estimated that 80 per cent of over-65s still will be on the full or part Age Pension in 2047, after what will have been 55 years of compulsory superannuation. Relatively more retirees will be on a part pension, however.

So, all that for a greater take-up of the part pension?

Forced saving to fund old age has sound free-market foundations. “Once it becomes the recognised duty of the public to provide for the extreme needs of old age … irrespective of whether the individuals could and ought to have made provision themselves … it seems an obvious corollary to compel them to insure (or otherwise provide) against those common hazards of life,” Friedrich Hayek wrote in Margaret Thatcher’s favourite book, The Constitution of Liberty, in 1960. At that time no major country had privately managed forced saving.

But Hayek didn’t envisage a system that actually made taxes higher overall.

In other words, this whole edifice leaks more in tax than it saves in outlays, even before assessing the benefit of the $30bn a year or so in fees to manage the assets. The government could scrap the entire system, along with all the associate complexity and angst, and cut ­income tax for everyone.

Henry’s tax review concluded: “The superannuation guarantee rate should remain at 9 per cent … This strikes an appropriate balance for most individuals between their consumption opportunities during their working life and compulsory saving for retirement.”

The Rudd government ignored all that advice and legislated to ­increase the compulsory rate to 12 per cent. The industry continues to cheer loudly for 15 per cent.

The Abbott government deserves credit for delaying the rise to 12 per cent but it needs to be scrapped altogether.

To delay would enrage the ­financial services community and the union movement, which are salivating at the thought of ­another 3 per cent of the national wages bill. Even tiny slices are juicy: in the first three months of this year alone employers paid $218bn in wages and super contributions.

Moreover, in a low-wage-growth era, deliberately cutting workers’ take-home wages seems bizarre. Outside the public sector, employer superannuation payments are wages forgone. Whatever compulsory rate the govern­ment legislates, it won’t affect the amount of money business is prepared to pay workers.

In 2013 a group led by super ­expert Jeremy Cooper recommended that the government create a council of superannuation custodians to look at questions such as: Does the government’s investment in the notional tax ­expenditure for super represent good value for money? To what extent are tax concessions used to support inheritances or are dissipated by spending of lump sums?

“It will be important for the council to be able to weigh the ­notional cost of proposed policies against expected future offsetting reductions in the Age Pension,” the advice said. The council was never formed. I wonder why.