Keating’s recalcitrant baby is in need of restraint

The notion that our system of compulsory superannuation is the envy of the world is a myth.

Former prime ministers Bob Hawke and Paul Keating at a Labor campaign launch in 2016.

Most people think Paul Keating has four children. In fact, he has five. The fifth is compulsory superannuation: super for short.

Keating loves superannuation like a daughter, overlooks her faults, always makes excuses for her misdeeds and will never abandon her. That’s what fathers do.

Personally speaking, super­annuation has served me well as a long-term worker on an above-­average salary. We also continue to have the clearly inequitable ­arrangement whereby public ­sector workers are treated more generously than those in the ­private sector, including the lucky ones on generous defined benefit schemes, most of which are now closed.

The truth is that public policy rationale for compulsory superannuation was always weak; it has become even weaker as time has gone by. Governments need to have extremely compelling reasons to make a policy interven­tion compulsory, having rejected other options that could induce similar outcomes.

There are many retirement models around the world. Ours is among the costliest and most ineffective. The notion that our system of compulsory superannuation is the envy of the world is a myth perpetrated by the superannuation industry, including funds, fund managers and various hangers-on.

A government with any guts would bring on a comprehensive review of the system of forcing people to forgo current consumption, pay extremely high fees and charges, and in most cases just to knock off their entitlement to a full Age Pension. There is little doubt a fearless and clear-headed analysis of the full effects, including the costs of the assoc­iated tax concessions, would come to the conclusion that the system is a failure and should be discontinued.

Take the self-serving research released this week by the Association of Superannuation Funds of Australia that the system of compulsory superannuation is saving the taxpayer about $7 billion out of the total annual outlay on the Age Pension of close to $47bn. What was not included in this analysis is the fact the annual cost of super tax concessions is well in excess of this sum. On one estimate, the figure is more than $38bn a year.

Now there are reasons to think that the true value of the tax concession (think 15 per cent contributions tax for most super members and 15 per cent earnings tax) is not as high as this figure. But there is no doubt the cost of the tax concessions far exceeds the savings that are made on the Age Pension. In other words, it is an extraordinarily dud deal, fiscally speaking. But none of these mere details seem to fuss the father of superannuation, who says the superannuation contribution charge should be ­increased ­immediately from the current figure of 9.5 per cent to 12 per cent. Indeed, Keating says the charge ultimately should be as high as 15 per cent, with a further longevity levy of 3 per cent or so on top of that figure.

To say that this advocacy is ­bizarre is to understate the point. Bear in mind that every 0.5 percentage point increase in the superannuation guarantee charge costs the budget about $2bn a year. Such an impost is likely to have ­serious consequences for Labor’s Chris Bowen and his claim of fiscal ­responsibility in the event he ­becomes the federal treasurer.

What Keating is saying is that workers should be happy to forgo an extra 2.5 percentage points of their wage to be locked up in super until they ­retire. At a time of low wage growth, this is likely to be as popular as rotting fish in the fridge. (As for Keating’s bizarre claim that employers somehow will pay for the ­increased super­annuation charge, he may care to review his ear­lier proposition that the incidence of the SGC is borne by workers, not ­emp­loyers, a proposi­­tion that is universally accepted.)

But let us assume for the purpose of argument that it is highly unlikely that a government any time soon will abandon the system of compulsory superannuation. Of course, a Labor government will seek to turbocharge the system to favour its mates in the industry super funds who are baying for the increase in the SGC.

There are several aspects of the way the system operates that are especially egregious, adversely ­affecting young and low-paid workers in particular. The Productivity Commission in its work on superannuation has high­lighted several of these worrying features, including: the opt-out ­arrangements for insurance products attached to superannuation; the high fees and charges, ­especially for those with low-balance accounts; the tendency for young people to have multiple ­accounts; the default ­arrange­ments whereby modern awards direct workers into industry super funds at the expense of all other options; and the deficient governance model of industry super funds that was acknowledged by the Cooper review, commissioned by the former Labor government.

In theory, the government had devised a series of solutions to some of these problems, most of them quite sensible. To be sure, they were being fiercely resisted by the self-interested superannuation industry, but the net effect would have made many members better off. They included a maximum charge of 3 per cent on low-­balance accounts of less than $6000 and zero exit fees; opt-in ­insurance for new members aged under 25 and for members with low-balance accounts, again less than $6000; and the transfer and consolidation of inactive low-­bal­ance accounts to the Australian Taxation Office. Also on the legislative agenda was the requirement that industry super funds have one-third of their trustees to be independent as well as having an independent chairman.

Here’s the thing: none of these initiatives has come to anything. The government has been too afraid to present the bills to the Senate for fear of them being voted down. It has preferred inertia.

It has been a bad look for a government that had been prepared to expose some of the worst aspects of the system of superannuation. Even some of the more technical changes that Labor would have agreed to have not been implemented, partly because there was a reluctance on the part of the government to split bills.

Under the passing parade of ­responsible ministers during the past several years, the key performance indicator for the government on this score is 0, on a scale from 0 to 10. It has achieved absolutely nothing and the super industry is delighted that the scope to overcharge, dupe and rip off members is left intact. That young people pay more than $3bn in insurance through superannuation, mostly unwittingly, to subsidise other members is an outrage, but this feature will stay ­intact for the foreseeable future. When it comes to the default ­arrange­ments that give a leg-up to the industry super funds by providing guaranteed liquidity, the government hasn’t even landed on a policy position.

There is no doubt that it should reject the Productivity Commission’s daft best-in-show funds ideas, to be selected by an independent panel. The obvious solution is to use the Future Fund as the ­default fund for new workers who don’t nominate a fund they wish to join. These workers would then be able to stay with the Future Fund in the event of them changing jobs.

It’s not clear whether this sensible solution even has majority support with the Coalition cabinet. In any case, the government will not have the time to execute any change — another lost opportunity when it comes to reforming superannuation.

Given that the retail funds have shot themselves in the foot and are largely undeserving of the support of members as well as the ­unfavourable outlook for self-managed superannuation (think the tax imposts of this government — thanks, Kelly O’Dwyer — and Labor’s proposed changes to cash refunds for franking credits), the future is rosy for industry superannuation funds.

So hang on to your hats as their dominance increases and we are hit with increasing superannuation contribution rates.