Few benefits in lifting the superannuation guarantee

The economic and moral case for lifting the superannuation guarantee to 12 per cent will soon totally unravel.

Treasurer Josh Frydenberg and Senator Jane Hume. Picture: NCA NewsWire / Daniel Pockett

The economic and moral case for lifting the superannuation guarantee to 12 per cent should totally unravel during the next few months, following release of the new 648-page review of the retirement system.

Whether the political case has been torpedoed, though, will depend on whether the Coalition has the skill to take on the superannuation sector and its political wing, the Labor Party. Facts aren’t on the sector’s side, but time is: without further legislation the gradual increase to 12 per cent will start automatically on July 1 next year.

Lifting the superannuation guarantee is a bad idea for two main reasons. First, it costs the government — that is, taxpayers — an absolute fortune, which means other taxes need to be higher than they otherwise should be.

And second, the overwhelming bulk of people are on track to have a comfortable retirement already. They don’t need another 2.5 per cent of their income taken off them while working.

Let’s take the first point. The savings to government in lower Age Pension outlays from lifting the superannuation guarantee to 12 per cent — because fewer people become eligible for a pension — would be dwarfed by the extra cost of super tax concessions, which are already approaching $40bn a year.

Indeed, the report finds that these tax concessions will grow to exceed the entire cost of the Age Pension itself by 2050.

Think about that: the leakage of tax revenue because of the super system is on track to become so great the government could pay the Age Pension twice over and still have money left.

And this cost-benefit analysis ignores fees, already well more than $30bn a year, which would be higher still if the superannuation guarantee goes to 12 per cent.

“The reduction in total fees borne by members (from staying at 9.5 per cent) would be larger than the projected increase in Age Pension expenditure,” the report notes. How is it sane policy to intervene on such a grand scale into people’s lives if the policy doesn’t actually save the government any money, even in the long run?

It’s not, unless you believe people aren’t saving enough and need to be micromanaged by the state.

But even there the report finds the case for going to 12 per cent is weak.

For a start, people are barely touching the superannuation money they have been compelled to save at a rate of 9.5 per cent, let alone 12 per cent.

“Data provided by a large superannuation fund found members who died left 90 per cent of the balance they had at retirement,” the report says. “When retirees die, most leave the major­ity of the wealth they had at retirement as a bequest.” Good luck to people leaving inheritances to their children, but why should we have a vast, complex system of tax-preferred saving to support it?

Speaking of inheritances (which we increasingly receive later in life, in our 50s), advocates of more super typically ignore them and indeed all other forms of savings that retirees have built up, such as equity in their home.

“Withdrawing $5000 a year would mean that retirees still have about three-quarters of the value of their home at age 92, for a house worth $500,000 at retirement,” the report says.

About 15 per cent of retirees on the Age Pension own homes worth more than $1m. When people realise that all their assets are available to fund their retirement, rather than just the income streams they generate, there is no problem with under-saving at all. And this is doubly true in the wake of a historic house price boom that has left the over-60s the richest generation in history.

“Most people die with the majority of wealth they had when they retired,” the report says.

The report found that all income groups up to the 60th percentile could expect retirement incomes equivalent to about 70 per cent of their pre-retirement income as is, from drawing down their super and Age Pension income alone.

For higher income groups the forecast “replacement rate” is a little lower than 70 per cent, but who cares? There is nothing stopping them (or indeed anyone else) from putting an extra 2.5 per cent into super while they are working. And even if they don’t, it’s hard to see how ensuring well-off people are still as relatively well off in retirement as they were in their working lives is a concern of government.

The constant focus on how much money goes into super (the pre-eminent concern of the sector, to be sure) has meant the question of how — or even if — it’s spent in retirement has been overlooked.

If there’s one compulsory rate that should be increased it’s the set of minimum drawdown rates that compel retirees to withdraw between 4 per cent and 14 per cent of their super savings each year, rising with age.

Too many retirees, the report finds, see these rates as recommendations, leaving them with far too much in savings when they die.

“If the SG remained at 9.5 per cent, and retirement savings were used more efficiently, most people would achieve 65 per cent replacement rates and most would also achieve higher replacement rates than with the SG at 12 per cent (at current drawdown rates),” it concludes.

Compulsory superannuation is the worst policy for the lowest paid at 9.5 per cent, let alone at 12 per cent.

Right now, the bottom 30 per cent of earners are on track to have a replacement rate well above 100 per cent. That means they get a big pay rise when they retire.

That makes no sense: it should be obvious such individuals need the money when they are younger and trying to buy a house, or pay off a mortgage.

All this makes Labor’s trenchant support for increasing the superannuation guarantee bizarre; it hurts what used to be the party’s primary constituents, the lower paid.

Moreover, it would supercharge the subsidy to the financial ser­vices sector.

In her new book The Deficit Myth, American academic Stephanie Kelton, a thought leader on economic policy for the left, expresses horror at repeated Republican proposals for “a system of privatised personal retirement accounts that would put Wall Street money managers in charge of workers’ retirement income”.

Yet that is exactly what Labor and the Greens want in Australia.

Labor will vigorously defend its superannuation legacy, but it will be for reasons of pride or self-interest. A universal flat-rate Age Pension, without any of the complexity of super, is a far better model.

The burden of proof should be with those who seek to take others’ money by force. The government’s review has made it much harder for the sector to satisfy that burden.

Don’t expect that to change the debate too much, though. As writer Upton Sinclair once said, it’s difficult to get a man to understand something when his salary depends on not understanding it.