Mexican standoff over super serves no one

BOTH major parties are letting Australians down with the approaches they are taking to superannuation.

The Coalition's refusal to back Labor's plans to increase compulsory contributions from 9 to 12 per cent is unnecessary opposition for opposition's sake.

They say they want to look at other ways of addressing super reform, as Ken Henry did in his tax review. But so far there is no clear indication from the Coalition side of how that might happen. Equally, the government's contributions cap kicks in at too low a rate, punitively taxing super contributions over $25,000 per annum, thereby discouraging people from topping up their super to ensure they and not the state fund them in retirement.

In fact, it isn't just voluntary contributions that are punitively taxed when super contributions hit $25,000 a year. So are compulsory payments.

Governments of all political stripes warn of the fiscal pressures an ageing population will place on Australia in the years ahead. But if they don't fix super, it is the equivalent of warning about an approach tsunami without planning for its arrival.

Like many Western nations around the world, Australia's fertility rate is too low to adequately cover the loss of working-age baby boomers as that cohort of society hits retirement age (which has just started). More innovative ways of managing an older population need to be embraced.

But at the moment the major parties aren't even prepared to provide a bipartisan approach to some of the easy solutions, like the two already mentioned, much less the tougher ways of planning for an ageing population.

Tougher territory might include lifting the Goods and Services Tax. Consumption taxes rather than income taxation is one approach that ensures the taxman gets a better cut from older people (who continue to consume even though their income is generated by savings instead of wages).

That's why economists want a discussion about lifting the GST, even if our politicians are too scared to allow such debate to happen (remember Kevin Rudd and Wayne Swan refused to even let the Henry Review consider changes to the GST).

Policy adjustments that better accommodate an ageing population might include work incentives via tax concessions for older people, both for them directly and for the companies that employ them. Raising the age at which the pension can be accessed is another approach. Two budgets ago, the government did announce that the pension age would be lifted to 67, but not until 2023.

Without doubt the easiest way governments can help older Australians plan for their retirement, as well as ensure that when they do retire the state does not wear the fiscal burden, is by lifting the compulsory superannuation rate.

Compulsory super was first brought in by the Keating government in 1992 at a rate of just 3 per cent, after which it was gradually increased to the current 9 per cent. However, most studies show that for people to retire on an income of about 60 per cent of their salary they need between 15 and 18 per cent super contributions for the full duration of their working lives.

That means we need two policy settings in place: plans to lift the compulsory rate into that 15-18 per cent zone, and before that happens tax concessions to encourage people to voluntarily lift their contributions.

This later point is especially important for people who are over 50 and therefore haven't built the levels of retirement savings the rest of us will reach when we hit retirement age - because compulsory contributions have not been in place for most of their working lives.

But our major parties can't seem to come together to simultaneously achieve higher compulsory super and less punitive caps on contributions. Labor wants to lift the compulsory rate from 9 to 12 per cent. But the Coalition opposes doing so. The Coalition would like to get rid of Labor's contribution cap, which kicks in at $25,000 (if it can find room in the budget), but Labor isn't willing to support such a change.

The worst part about this Mexican standoff is that there aren't even any guarantees that the one major party standing behind each approach will stay in that space in the years ahead. Labor says that it is committed to lifting the compulsory rate to 12 per cent, but only if the mining tax is passed.

The revenue for the transition to a higher compulsory super rate (even though it is employers and employees who pay for the increase itself) comes out of revenue the mining tax will generate, and Labor has been clear that the suite of goodies it campaigned on at the last election will only happen if the mining tax becomes law.

The problem with that is that real question marks exist over the amount of revenue Julia Gillard's newly designed mining tax can generate, not to mention whether it will even be passed by the parliament.

On the Coalition's side, its sympathy for raising the cap at which super contributions get punitively taxed isn't backed up by costings commitments in its budget planning. During the election campaign, the Liberals said they could not guarantee they would be able to do anything about that issue until the budget was in better shape (that is, in surplus with debt paid back). That could take years.

So as frustrating as it is that the major parties can't agree on the importance of both raising the compulsory rate and lifting the cap on contributions, more frustrating still is the very real possibility that both major parties will entirely vacate the space on both reforms if revenue streams in other areas don't add up as forecast.

The need to do something about superannuation shouldn't be tied to other considerations in that way: not a poorly designed mining tax or an artificial desire to get relatively low levels of government debt paid back. It is too important a long-term strategy for that kind of short-term thinking.

The frustration at an industry level is palpable, as indeed it should be in the wider public as well. After all, it is each one of us who are going to find that we can't maintain our lifestyles in retirement if governments don't get these policy settings right.