Opinion & Commentary
Better ideas than raising super guarantee
The federal government, with the support of the opposition, has legislated to increase the superannuation guarantee’s (SG) compulsory contribution rate from 9 per cent to 12 per cent from next year. In this context, it is timely to reconsider whether compulsory super is achieving the objectives of improving retirement incomes and reducing future demands on the budget from an ageing population.
The SG is motivated by the paternalistic view that in the absence of compulsion, some households will under-save for retirement.
Like most paternalistic policy interventions, the case for compulsory super relies on a fiscal externality. Those who under-save may become a burden on the taxpayer in retirement. Under-saving may be due to moral hazard because of the availability of the age pension and related benefits or a lack of foresight in retirement planning. A well-targeted age pension should not give rise to widespread moral hazard. The high take-up rate of the age pension suggests moral hazard may be a problem, but this is an argument for tightening age pension eligibility and reducing the scope for double-dipping on retirement benefits.
Increasing the SG contribution rate will not by itself solve the moral hazard and double-dipping problem.
Households can save through a wide range of other saving vehicles, including housing and business equity. Moreover, it may be perfectly rational for households to minimise exposure to superannuation given the high information, transaction and other costs associated with super and uncertainty about government policy and taxation arrangements.
Yet compulsory contributions come at the expense of take-home pay, hours worked and employment.
Superannuation succeeds in raising average household saving largely by exploiting the financial constraints faced by low-income workers, who are less able to substitute out of compulsory super by reducing other forms of saving.
Increasing the compulsory contribution rate will increase these pre-retirement financial constraints for low-income households.
The large prospective fiscal gap identified by the Treasury’s Inter-generational Report reflects only a modest expected reduction in future age pension eligibility from the mature superannuation system.
Superannuation represents a large captive tax base and much of the tinkering with its taxation arrangements has been motivated by the desire to bring forward revenue at the expense of long-term private saving.
The government’s budget constraint cuts both ways. Future governments may be increasingly reluctant to forgo revenue by maintaining concessional tax treatment. The tax base represented by compulsory super may end up feeding rather than reducing future demands for government expenditure.
The prospective fiscal gap under the mature superannuation system could be taken as an argument for increasing the compulsory contribution rate, but there are much better ways of improving retirement saving and reducing future demands on the federal budget. The first step should be to extend expenditure tax treatment to superannuation by taxing only benefits, not earnings and contributions. This would put the taxation of superannuation on a similar basis to saving via housing.
The taxation of benefits is far more transparent, affording super greater protection from the depredations of politicians, while making superannuation a more attractive vehicle for voluntary saving. Superannuation benefits given expenditure tax treatment should be subject to mandatory annuitisation to reduce double-dipping and provide support for annuities that offer protection against longevity risk. Compulsion in the decumulation stage of retirement saving should replace compulsion in the accumulation stage.
These reforms would provide for a politically robust system of long-term voluntary saving via housing and superannuation that would more effectively reduce future demands on the budget.
Stephen Kirchner is a research fellow at The Centre for Independent Studies and a senior lecturer in economics at the University of Technology Sydney Business School. His CIS Policy Monograph, Compulsory Super at 20, was released this week.