Slow increase in the guarantee a lost opportunity

THE government's changes to super in response to the Henry review act as a microcosm for this administration's entire approach to governance.

THE federal government's changes to superannuation in response to the Henry review act as a microcosm for this administration's entire approach to governance. Its heart is in the right place, but timidity reduces the boldness of its actions.

Wayne Swan nevertheless deserves an enormous amount of credit for pursuing changes to superannuation contributions when the Henry review's recommendations didn't go there.

While the government's selective picking of winners and losers out of the review to help its re-election was a sure sign of more political cowardice by Kevin Rudd on the back of his ETS capitulation, the government's commitment to an increase in the super contribution level ensures Labor's standing as the party doing the most to plan for an ageing population.

On January 27, in response to leaks from the Henry review suggesting compulsory super wouldn't be looked at, I wrote: "If Rudd and Swan fail to build on Keating's legacy, they will be known as reform laggards."

I was referring to Keating's 1992 introduction of compulsory super, which in time he increased to a 9 per cent rate (and had Keating won the 1996 election, he was committed to increasing the rate to 15 per cent).

John Howard, prepared to reform and implement policy in so many areas -- industrial relations, gun laws, the waterfront and the Goods and Services Tax -- never considered lifting the compulsory super rate.

The Rudd government's decision to lift the compulsory superannuation guarantee from 9 to 12 per cent is a very good one. Everyone in the super industry knows that 9 per cent contributions aren't anywhere near enough to ensure Australians are able to retire on incomes commensurate with their work-life earnings. Most estimates suggest somewhere between 60-70 per cent of one's working-life salary is needed to maintain one's standard of living in retirement. The government's own estimates suggest superannuation savings of 9 per cent of income for 40 years (averaged out) will leave people with retirement incomes of approximately 30 per cent of their working-life wage.

So lifting the compulsory super rate by one-third will get most Australians to well over 40 per cent of their working-life salary in retirement, so long as they save super at that rate for a full 40 years. (Economic modelling suggests there is an exponential return to savings from percentage increases in the super guarantee.) It isn't the end of the debate about lifting compulsory super rates, but it is an important development after a decade and a half of inaction.

If Labor is now acting on super when the Coalition failed to, and if increasing the compulsory rate is such an important way of alleviating the cost pressures on the budget from overuse of the aged pension as our society ages, why am I still accusing the government of timidity on this issue?

The timeframe on which Rudd has committed to introducing the increase from 9 to 12 per cent is a decade. It only starts after the next term of government in 2013-14, with a 0.25 per cent increase, finally getting to the 12 per cent target in 2019-20.

Given that we are continually regaled with doom and gloom predictions about the bite on the budget from the ageing of the population, it would have been nice to see the government take a more courageous decision to enact the super increase straight away, or at least in half the time it is committed to (and starting earlier than 2013-14). An easy way of doing so would have been to shelve this year's tax cuts and put them into super instead, followed by subsequent employer contributions to get to the 12 per cent rate.

Apart from the need to get more money into people's super savings sooner, the other danger of the decade-long move to lifting the compulsory super rate is that it could easily become a casualty of changing budget pressures in the years ahead, especially if a change of government led to a rejigging of priorities. The government's justification for taking its time with this vital reform is that doing it slowly and incrementally gives employers time to factor the super changes into ongoing wage negotiations. But 10 years' worth of incrementalism is just too long.

The government has provided short-term assistance to older workers looking to get more money into their retirement savings by allowing workers approaching retirement to top up their super by up to $50,000 (another good move). It has also moved the age until which employers are required to pay super contributions for workers from 70 to 75. Low-income workers have also had the tax structure of their super altered to make their contributions more substantial, by up to $500 a year (two more good moves).

The super industry has also welcomed these moves, but in two of the three cases they are simply short-term mechanisms to help out baby boomers who haven't secured adequate retirement savings since super went compulsory.

By leaving younger workers out of the 3 per cent compulsory top up for the next decade, the government is limiting Generation X and Y retirement savings for longer than it should (on the back of the Howard government doing so for 12 full years).

Just think how much better shape Australia would be in to handle the ageing of the population in 2020 if Howard had lifted the compulsory super rate in 1996 as Keating intended to, and if Rudd built on that 15 per cent figure with a further 3 per cent in fast time in his first term.

We could all look forward to retiring with the same standard of living we enjoy in our working lives, and the added stability for financial markets, with all that money from super funds sitting in domestic investment instruments, would help ensure as a nation we stay insulated from future global financial tremors.