Lifting super rate best way to solve burden of ageing

IF Rudd and Swan fail to build on Keating's legacy, they will be known as reform laggards.

IF EARLY leaks from the Henry Review into Australia's taxation system are to be believed, changes to compulsory superannuation have been left off the table altogether, not even included for the usual political horse trading.

The government continues to stall on making public the full review, despite Treasurer Wayne Swan having been given it late last year and parliament resuming next week.

The reason for the delay is simple: Swan and Kevin Rudd are busily going through the report's details to try to decide which recommendations to act on and which to ignore.

Rather than ending the uncertainty and putting citizens and businesses out of their misery by making the recommendations public, the government is drip-feeding parts of the report into the public domain to test opinion, while no doubt doing their own formal polling and focus-group work to decide what to act on.

I am afraid that is how modern public policy decision-making is done by our political class. Once upon a time, politicians acted on instinct (heaven forbid even on principle). But these days, our political leaders prefer to follow the public's will, rather than shape it.

How ironic that the Prime Minister started the year talking up the burden of an ageing population, yet the comprehensive review into taxation will not even consider increasing compulsory super to levels that would alleviate some of that burden.

Before the 2007 federal election, the architect of compulsory superannuation, Paul Keating, who legislated for it in 1992, suggested that if he were to return as prime minister, his first move would be to lift the rate from 9 per cent to 15 per cent.

He said the unwillingness of either side of politics to look at the issue was a "failure of imagination". I couldn't agree more.

With the possible exception of Gough Whitlam, Keating is the former Labor prime minister who causes the most acid reflux among Liberals when his name is mentioned.

Keating was certainly a divisive character during his parliament-ary career, and his penchant for a witty turn of phrase used to drive his opponents crazy.

But even in Liberal circles he is credited for the work he did as treasurer in transforming the Australian economy in the 1980s.

As the complexities attached to our ageing population become more and more evident, Keating's willingness to legislate compulsory superannuation contributions will come to be seen as his greatest achievement.

Equally, the failure of current politicians to build on Keating's legacy (if that is what happens) will consign them to the title of reforming laggards.

Rudd won't be known just as the prime minister who missed his opportunity to give Australians the mechanism they need to adequately save for retirement; he will also be known as the PM who raided the Future Fund set up to fund public-servant pensions, which will become an increasing drag on the budget to pay for his national broadband scheme.

A double attack on the nation's capacity to deal with an ageing population, yet Rudd continues to talk up the costs of ageing in areas such as health care.

The National Centre for Social and Economic Modelling at Canberra University has suggested compulsory super-annuation is the single most important factor in alleviating wealth inequality in Australia; and it does so without economically stifling high marginal tax rates.

But to have the egalitarian effects a traditional Labor government should be looking for, the compulsory super rate needs to keep pace with the needs for an ageing population.

Investment advisers will tell you a retirement income of 60-70 per cent of your pre-retirement salary is needed if you want to maintain your standard of living in your post-working life.

The logic is that by the time you retire, you won't have to be putting money into such things as a mortgage or your children's education.

But with house prices continuing to rise and banks starting to move to longer mortgage periods of 40 years instead of 30, assumptions about working-age costs evaporating in retirement are not as certain as they once were. (When housing in Japan became unaffordable, banks instituted intergenerational loans.)

According to the government's own estimates, saving 9 per cent of one's income over 40 years, as per the current compulsory super rate, will give you a retirement income equal to about 30 per cent of your pre-retirement wage. In other words, half of what you need. It is a clear indication of the need for government action to lift compulsory super contributions.

The public is aware of the gap between retirement savings and retirement needs and investment group IOOF has found that more than a third of people don't think they will have enough money in retirement to maintain their current lifestyle. Although incentives are in place for people to provide additional voluntary contributions above the compulsory rate, not enough people take advantage of them, and those that do are generally not from the lower end of the earnings spectrum: the quotient who will depend on the aged pension if their self-funded retirement income is inadequate to live on.

The government is tuned in to the burden ageing may place on the economy in the years to come.

Lifting productivity rates, pushing back the retirement age and providing tax incentives for older Australians to continue working past retirement age are all worthwhile ways of tackling the problem, but so is lifting the compulsory superannuation rate, which is why it should be seriously considered as Keating has argued for many years.