Voluntary super idea derided, but think it through

Former prime minister Paul Keating came out swinging last week after I wrote a column suggesting the idea of voluntary superannuation had so much going for it: higher wages, more choice, lower taxes, reduced financial parasitism and weakened vested interests.

Notable commentators Alan Kohler and Terry McCrann saw merit in the idea, which was also popular with our readers.

Keating, though, one of the architects of superannuation, said it would be a “national tragedy” if a system that had “transformed the Australian economy and was envied by the rest of the world” were “dismantled”. It certainly has transformed the living standards and job security of the financial services sector, which is bigger in Australia as a share of the economy than any other developed country. Who could doubt that it is envied by anyone working in financial services — what could be better than being able to “manage” 9.5 per cent of the people’s earnings, especially those whose low financial literacy guarantees they pay little attention to why you charge them?

On the only occasion citizens were given a chance to vote on something similar to the Australian system, in New Zealand in 1997, more than 90 per cent of people voted against it.

Another foreigner, Nicholas Morris, a Brit, has just written a book warning other countries to avoid it: Management and Regulation of Pension Schemes: Aus­tralia — A Cautionary Tale. So, at the very least, there’s no global consensus.

Given top billing in The Australian Financial Review’s Chanticleer column last week, Keating said voluntary super would be “destroy­ing an irreplaceable national asset, largely for ideological reasons”.

Ideology has nothing to do with whether superannuation costs the government money, or not in the long run. Keating is right that union-influenced industry funds have performed better than their retail rivals. But this tiresome debate between two powerful vested interests misses the more important question of whether either group should have claim to a slice of the national wage bill.

The question is whether the value of the super tax concessions, of which the two biggest were $34.6 billion last year, are worth it. The Henry tax review almost a decade ago suggested the foreseeable saving in age pension outlay was much lower than that. In 2013, the report A Super Charter: Fewer Changes, Better Outcomes, sent to former treasurer Chris Bowen, also seemed to agree.

Chanticleer itself worried that bosses wouldn’t hand over the 9.5 per cent under a voluntary super arrangement. But why would they care whether they sent the cheque to a super fund or their employees? The existing default arrangement to withhold 9.5 per cent would remain. In any case, for 1.5 million self-employed workers, super is already voluntary.

Conversion to a voluntary arrangement would be simple. The new Morrison government could keep the entire extraordinary complexity of superannuation in place except for one thing. There’d be a short online form employees could fill out, print and give to employers requesting some or all of their superannuation be paid as wage or salary.

It would be quite exciting for lower-income workers in particular. As one former Treasury secretary pointed out to me, the potential increase in pay would be nearer 10.5 per cent, not 9.5 per cent. That’s because employers are obliged to pay 9.5 per cent of the total remuneration as superannuation. You can do the maths.

I called on experts this week trying to find flaws in my proposal. Geoff Carmody, a co-founder of Access Economics and former senior Treasury official, said the argument that super boosted national savings — one of the industry’s favourites — was a “complete furphy”. “At the end of day, people with compulsory super will draw it down; as the population ages, people will be dis-saving the stock of savings during their working lives,” he said.

By the way, the latest set of national accounts show households’ savings fell to 1 per cent of disposable income in June, the lowest rate in a decade. Former New Zealand prime minister Bill English, referencing compulsory super, recently pointed out that Australian households were far more indebted than those in New Zealand. It’s almost as if people are vaguely aware of their super and accumulate debts to offset it.

Carmody agreed the value of superannuation tax concessions outweighed the savings in Age Pension payments. “An age pension for all is a cheaper, fairer, simpler and more efficient option than the present means-tested Age Pension plus compulsory super/tax concessions mess, and the interminable fiddling thereof,” he said.

Is it “conservative” to want voluntary super? I’m not sure. It is certainly a way you can help those on lower incomes and who receive little of the tax concessions. The 2014 financial system inquiry found about 55 per cent of the value of superannuation tax concessions flow to the top 20 per cent of households ranked by income.

For them, super is likely to be a modest lump sum at age 60 that goes towards paying off the mortgage or a big holiday before going on the pension. The bulk of people will never be able to save enough in a lifetime to match the annuity value of the Age Pension.

Indeed, higher income earners would be mad to elect to have their super upfront. It makes you wonder if superannuation was in fact a way to lower the top marginal tax rate without enduring the political pain of doing so explicitly.

So, by all means, let’s keep spouting unverifiable platitudes about how “great” mandatory super is. But we do not have to believe them.