Superannuation reform may fuel house price boom

The most likely superannuation reforms in the May budget will cut productive investments and further boost house prices.

Through a process of rapid elimination the government is moving towards a superannuation crackdown in the federal budget on May 12. It seems immediate tax reform is out, while the family home remains ring-fenced from all tax collection and so — unfortunately — it is investment within superannuation that is the target.

But in common with so many rushed revenue grabs of the past, the move to tighten the concessions of superannuation will have unintended consequences. This time super reform will push residential property prices even higher, despite the Reserve Bank already voicing concerns in this area (see chart).

Why will house prices rise higher if superannuation is targeted? Because when you quarantine the value of a family home from tax reform then people will vote with their wallets and pour everything they can into their house.

Specifically, if you tax people on their investments (held within superannuation) but not on their family home, it discourages ­productive investment almost entirely.

The wider macroeconomic outcomes here are appalling: capital formation in the economy is drained, while the endless price appreciation of existing housing stock is given further fuel.

Look at it this way. The “tax aware’’ investor might be forgiven for applying the following:

Existing rule: Invest all you can in your home and escape capital gains tax.

New rule: Invest all you can in your home and escape capital gains tax and any future pension reforms.

Treasury Secretary John ­Fraser emerged this week calling for a comprehensive review of superannuation. Such a review may well take place in the fullness of time — but not before the ­Abbott administration rushes to achieve two things in the May budget:

First, the plugging of a tax revenue hole left by an unprecedented plunge in commodity prices, and

Second, the application of remedial work to last year’s poorly drafted, largely unsuccessful budget.

Ironically, it was a Liberal government that went too far in making superannuation attractive in the latter stages of the Howard administration. Successive governments have since drastically reduced the amount you can invest annually inside superannuation.

But it is being left to John Howard’s direct Liberal successor, Tony Abbott, to urgently find savings from the very heart of the pension system.

So what will they do in May? The government is mulling a number of reforms just now and it’s worth noting the most ­important:

1. Scrapping lump sums so that individuals don’t get a “lump” of money on retirement which they may fritter away before turning to the state pension — rather there might be a structured pension where the money is dripped out over a number of years.

2. A tightening of the rules around dividend imputation where some of the biggest dividend payers would not be able to offer as much in superannuation-friendly franking credits.

3. The reintroduction of tax on pensioners. Currently there is no tax paid on any monies in pension mode.

4. A reduction in the number of people who can access paid or partly paid pensions. This will be done by changing the taper rate — the means test on investment income that controls access to state pensions. As investors realise they will be more highly taxed on investment income and not taxed at all on the value of their home, money will pour back into existing residential property.

With the government struggling to get many of its initiatives translated into action due to the blocking power of the Senate, the super reforms will be those that are politically possible.

With that in mind it is clear that the reform we will most likely see ahead of the rest will be a reduction of the access to the pension. As The Australian revealed earlier this week this plan is being driven by rising star ­Social Services Minister Scott Morrison. Crucially, it is also clear that the Morrison plan has the support of the Senate.

Last year there were 260,000 families worth more than $3m drawing $1.4 billion a year from the pension system. Moreover, $500m of those pension funds were going to over 65s with assets of more than $2m. Pensions were never meant to top up the lifestyle of middle-class Australia. Nonetheless, Morrison has immediately capitulated and excluded the value of the family home from his pension access reduction proposals. So we head towards so-called pension reforms that will boost house prices and work against wider investment in the economy. Bismarck — who created the first iteration of modern pension systems back in the 1880s — said politics is the art of possible. Some 130 years later it seems that still holds, especially when it comes to pension reforms.

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