Scrap compulsory super, liberate Australians’ wages

The government should make superannuation voluntary. The 25-year experiment forcing people to part with a sizeable chunk of their pay is failing.

If the Morrison government hopes to distinguish itself, it will need a policy that deals with the fundamental gripes of our time — stagnant wages and housing affordability — in an immediate, tangible way.

No more promises of tiny tax cuts in seven or eight years, after who knows how many others have taken a turn in the Lodge. No more creating new “ministers for cities” to ease congestion using non-existent constitutional powers over roads and zoning, or talk of giving obscure regulators “greater powers” they’ll never use.

The government needs a policy that reflects liberal values and makes a political ally of the royal commission into financial services rather than the chief manufacturer of ammunition for the Labor Party.

It needs a policy that boosts real wages significantly today.

Not only does such a policy exist, but it would save the government so much money it could cut income tax to boot, fuelling a virtuous cycle of economic activity.

Almost everyone would be ­better off. So just what is this dream policy? The government should make superannuation voluntary. The 25-year experiment forcing people to part with a sizeable chunk of their pay is failing.

This would hardly be an ­extreme position, merely what the Liberal Party took to the 1993 election. Let workers decide whether they want to avail themselves of tax-favoured saving.

If they’d prefer to have their wages upfront to help buy a house or pay for childcare, let them. Some might ask their boss for 9.5 per cent of their pay right away, some might keep 5 per cent going into super. The choice would be theirs.

Making super voluntary has so many other advantages it’s hard to know where to start.

First, giving people choice is a thoroughly liberal thing to do. ­Second, despite tax concessions that sap tax collections by tens of billions of dollars a year, compulsory super has barely reduced reliance on the Age Pension.

In 1993 we didn’t know what the result would be of forcing lower and middle-income workers to save in accounts they wouldn’t track and didn’t understand. We now know it has provided an immense and growing pot of money for the financial services sector to feast on without saving taxpayers money in the long run.

Perhaps there’s a reason few countries have adopted Australia’s system of privately managed compulsory saving since then.

If there’s one point that needs to be made until we’re blue in the face, it’s that the cost of superannuation tax concessions far outweighs the reduction in Age Pension outlays.

In practice, the government could abolish super and cut income taxes dramatically. This is the great untold secret of Australian public policy.

In 2009, then Treasury secretary Ken Henry’s tax review committee put it clearly: “An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs).”

Third, any wages taken upfront would be taxed at normal rates, so the government’s tax take would increase, providing funds to cut the marginal income tax rates.

Who would lose from this ­policy? Superannuation funds and the financial services sector — and significantly so. The world’s biggest ticket, riddled with holes, might start to shrink, or at least grow more slowly.

Competition would increase dramatically because those who chose to keep putting money into super would pay more attention to their fund’s fees and performance than those who didn’t. This is why fund management fees are so high in Australia compared with any other major country.

Voluntary super also would destroy an insidious myth. Workers would come to appreciate that superannuation comes out of their own wages. The present compulsory arrangement perpetuates the fraud, convenient for some, that it comes “on top” on their wages.

No, it doesn’t. No government can force businesses to pay more for their workforce than they want to. Sure, it can require them to slice and dice the payments into various tranches — super, income tax and the like — as much as it wants, but it can’t alter the total amount the private sector will dedicate to wages. When the compulsory rate rises to 12 per cent, as it will in 2025, workers’ take-home pay may even fall.

As the energy wars move into their next phase, it’s important to remember a family with a combined superannuation balance of $300,000 pays more in fund management fees than for electricity — even after the recent surge in power prices. Taking money out of individuals’ future income automatically may be a whole lot easier than collecting payments for electricity bills out of their disposable income today, but it’s no less damaging to their wellbeing.

The Turnbull government was unable even to mandate having some independent directors on the boards of all super funds — to be fair, a largely symbolic proposal. Some senators were too scared to pass the bill for fear of political retribution, in particular from trade unions affiliated with industry funds. That an elected government couldn’t even make cosmetic changes to superannuation fund boards speaks to a growing power imbalance that voluntary super could help redress.

Liberal leader John Hewson lost the 1993 election with the boldest set of policy proposals from an opposition yet. It was too much for the electorate to digest but the time is ripe for one of them.

The drip feed of stories about greed and malfeasance from the royal commission provides a helpful backdrop. Labor, rather than use the commission to berate the government, would have to defend the sector’s fitness to manage workers’ savings. The finer points of industry and retails funds, of which financial institutions have performed better, would be lost on most voters.