Let’s clear the air on superannuation as the two political sides go into spin overdrive

IT’S going to be a long eight weeks of ever-escalating and ever-expanding spin and counter-spin, so let’s get the facts right on what the two sides are promising to do to superannuation, writes Terry McCrann.

Treasurer Scott Morrison’s proposals will kill super over the long term.

IT’S going to be a long, long eight weeks — of ever-escalating and ever-expanding spin and counter-spin, exaggeration and outright lying; so let’s at least get the facts right at the start on what the two sides are promising to do to superannuation.

There are six big points to be made.

First, the claims — especially from opposition leader Bill Shorten — that what the government is proposing is retrospective are false.

Indeed, if what the government is proposing is retrospective, so also is what Labor has promised — because that’s the second big point: they are promising essentially the same thing.

Both want to set a limit on how much you can have in your ‘tax-free’ retirement pot. The government wants to set the limit by the size of the pot; Labor wants to set the limit by the income you can earn from the pot.

In both cases, earnings from ‘anything else’ you have in your retirement pot above those limits will be taxed at the same 15 per cent; which is still — and this is a very significant qualification — mostly an attractively low rate compared with what you would pay on income outside super.

Third point: on one level, extraordinarily; on another level, understandably; what Labor proposes is significantly more generous to high and especially very high-income earners and the genuinely wealthy than Treasurer Scott Morrison’s proposals.

This makes an utter mockery of Shorten’s claim that the government is looking after the big end of town.

Shorten wants to tax people earning as little as $180,000 a year at 49c in the dollar. Yet he is prepared — when the government would no longer — to let people earning much higher incomes pour literally millions of dollars into super where earnings would be taxed only at 15c.

Fourth point: neither policy would have the slightest impact on at least 90 and probably 95 per cent of the public. For the average voter this really is the ultimate hypothetical argument.

That’s — and this is another critically important and disturbing qualification — only as of right now. For what Morrison plans could seriously hurt even middle-income earners. That’s not the case with shadow treasurer Chris Bowen’s plan.

The ‘good’ and the ‘bad’ all turns on Morrison’s bizarre proposed $500,000 lifetime limit on voluntary post-tax contributions to super. These are contributions over and above the 9 per cent (supposedly going to 12 per cent) of your wage and salary plucked away before you see it.

How many could contemplate finding a spare $500,000 — and that’s per person — to throw into super? Obviously, not many of you — and not just now, but over your lifetime. With one crushing qualification we’ll come back to.

But how many of you could find a spare $180,000 every year to throw into super? And to repeat, that’s per person.

But imagine a down under Donald Trump able to put $180,000 for himself, for his wife — or indeed, each of his wives, plural — and each child into super, every year. Even if that person started pouring in the money at age 20, they could pour tens of millions into super and the earnings on all of it would be taxed at just 15c.

Shorten says that’s fine, while insisting that those who don’t have the odd $10 million sitting around to go into super, should be paying tax at 49c in the dollar once their incomes hits $180,000.

So we have this bizarre situation, as our colleague at The Australian, Judy Sloan, partly noted on the Catallaxy blog.

Morrison says you mustn’t be allowed to use super for tax minimisation and estate planning. But it’s just fine to do exactly that, and to an unlimited extent, with negative gearing. Or, I’d add, the family home.

What Sloan didn’t point out was that Labor proposed the exact opposite: to ban tax minimisation and estate planning via negative gearing on property — but to leave it open-ended with super! It’s a weird (and not very logical) world.

Further, despite what her colleague, the estimable Henry Ergas, wrote in The Australian yesterday, Labor’s ‘pot limit’ is far more generous than the government’s.

Ergas claimed that someone with a retirement pot of $2 million would pay more tax under Labor’s proposal. He got there by assuming “for simplicity” a 10 per cent return on the super balances.

What planet, or decade, is Ergas living on or in? Where you can get 10 per cent essentially risk-free? He’s done a version of Treasury’s “assume a can-opener”, which in normal circumstances he’d be ripping to shreds.

Chris Bowen’s proposals won’t hurt those on middle incomes.

Labor’s ‘tax-free pot’ equals Morrison’s $1.6 million at a return of around 4.7 per cent — or nearly double what you could actually get from a Commonwealth bond. The Labor ‘tax-free pot’ is much bigger than Morrison’s.

And it would come with a huge additional benefit. While Morrison’s tax-free pot has to be run down, and runs down rapidly as you get older as you pay your pension out of it. You can’t top it up; indeed it’s designed to go to zero. Hopefully in sync with when ‘you do’.

With Labor, you can keep topping it up provided you have money in the ‘other (15 per cent taxed)’ super pot. You could keep earning $75,000 tax-free for so long as you or your spouse lived.

But the fifth point is that they are not that far apart. We could live in hope that good sense will prevail and they agree a bipartisan approach — but only after taking realexpert (that is to say, non-Treasury) advice.

The $500,000 lifetime limit is too low and inflexible; the $180,000 every year is too high. An appropriate midpoint would be $1.5 million to $2 million, properly indexed.

It especially needs to be able to accommodate — and indeed encourage — ‘oldies’ to sell their $1 million or $3 million family homes, downsize, and put a big part of that into super. Self-evidently, that can only be done in one hit, late in life.

Instead Morrison wants to encourage people to stay in their big tax-free family home; and indeed put any spare savings into a negatively geared second property.

The sixth point is that all these limits need to be properly indexed; and that actually creates huge problems. That brings us to the seventh and eighth points. Hopefully out of this total mess we can end up with true-bipar–tisanship and a guarantee (for what it’s worth) to never fiddle with super again.

The dumbest feature of what Morrison proposes is that it would kill super over the long term. We’d hand out tens of millions in tax incentives and direct millions to investment managers in fees — and for most people, the sensible thing on retirement would be to cash it all in, spend it or hide it, and go on the old age pension.

Originally published as Let’s clear the air on superannuation as the two political sides go into spin overdrive