Jim Chalmers superannuation

Chalmers’ purpose for superannuation is to unite it to Labor’s worldview

The super wars are back! Well … strictly speaking, they never left us. But after a brief hiatus where both parties pretended not to have any plans to change our retirement system (also known as an election campaign), we are back to fighting over the $3+ trillion super system.

Labor proposes to legislate a new purpose for super: “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

Despite providing an accompanying consultation paper, it is maddeningly unclear what this actually means in practice. This grand language is completely at odds with Labor’s insistence that changes of substance are off the table.

This dichotomy between word and action, and the multiple plausible meanings, closely resemble the Treasurer’s recent ‘values-based capitalism’ essay.

The government may simply have a communication problem; but it’s more likely they are either trying to keep thing vague to appeal to everyone, or laying the groundwork for the very changes they are avowing.

On that score, it doesn’t seem coincidental that both the Treasurer’s essay and the purpose of super use the language of sustainable and inclusive growth. One of the few clear things in this mess is that the Treasurer wants super funds to invest in nation building and socially useful projects.

He argues this should only be done when the best financial interests of fund members coincide with a social purpose — but there are important caveats to this.

First, the government is flagging the use of co-investment and partnerships in these projects. This essentially allows the government to use super as leverage to pursue their agenda: the government funding and certainty is there to make these otherwise marginal ‘inclusive’ projects appear profitable.

Second is the continuing attempt to broaden the understanding of financial interest to include what are effectively non-financial considerations, or at best second-order economic considerations like wellbeing and clean energy.

It is worth noting that the obligation to act in members’ best financial interest is pretty much the only thing holding back the floodgates of members’ super money into a raft of sub-optimal, ‘socially acceptable’ investment schemes and vested interest boondoggles. Especially when you consider the government’s moves to overturn the transparency reforms of the previous government.

But this is far from the only concern with the coming bout of super wars. Reference is continually made to the “unsustainable” and “unfair” $52 billion in super tax concessions.

The fact is the concessions seem to cost so much for two reasons. First, the figure is cherry-picked, and represents an alternative taxation model for long term savings that would be deeply punitive from both a historical and global perspective.

It assumes super would be taxed at full marginal rates on contribution and for any earnings. Super would be an extremely unattractive investment under these conditions, though of course compulsion would ensure the money continued to flow.

Such a system would however be deeply inequitable — to use the Treasurer’s words. Which is why any proposal aiming to fix this ‘loss’ of revenue predicts relatively tiny returns in comparison.

Across the world, long-term savings are taxed differently to income, especially long-term savings that are quarantined from access for retirement. For example, when super concessions are assessed against an efficient expenditure-tax, benchmark, their cost shrinks by something like 80%.

Second, Australia’s tax system is highly dependent on income tax, and high income earners pay most of it. As a consequence, when high income earners are forced into a savings vehicle that is essentially designed for those on average income, the volume of concession appears large.

This of course is the problem caused by forcing everyone to contribute the same portion of their income towards their retirement, regardless of their personal circumstances or income.

It’s also why men have larger balances than women, another problem of ‘equity’ often raised alongside the cost of concessions.

There are solutions to these problems that do not involve the government raising taxes on everyone and redistributing that money to balance up super balances.

The first would be to move towards a model where super was untaxed on contributions and earnings, but taxed fully as income in the withdrawal phase. Those with higher balances, and therefore more income in retirement, would then pay more. Taxing contributions at marginal rates but leaving it untaxed thereafter would have a similar effect.

But these options would cost the government too much money, so they won’t consider it.

Another option is to recognise that some people would be just fine in retirement if they contribute less than the soon-to-be 12% of their income. Indeed, for someone with a balance above the concessional cap in retirement, it would be better if they are free from further compulsory contributions.

These simple measures would keep a lid on the growing cost of concessions and reduce the possibility that overly large balances may arise (although this problem is largely a legacy issue rather than a live one).

Ideally, this would be accompanied by broader tax reform that would lower the tax burden on savings in general, but especially savings other than the family home, making non-super investments more attractive.

However, the system is heading in the opposite direction. Super is already cannibalising all other forms of saving: strictly quarantining access to super as compulsory contributions grow will become a bigger and bigger problem.

Labor has given no sign it will consider anything that would lessen the burdens of compulsion and taxation on members. Deciphering the vague language and conflicting statements implies the path is towards increasing contributions and increasing tax: using super as a vehicle to fund more redistributive spending.

Ultimately it seems the bottom line of the Treasurer’s purpose for super is to unite it to Labor’s vision and worldview.

Simon Cowan is Research Director at the Centre for Independent Studies.