For a columnist, the trouble with taking leave is that something really interesting or important is likely to happen while you’re away from the keyboard. It’s now more than a week since the Treasurer Josh Frydenberg released the long-awaited review of retirement income by former Treasury heavy Mike Callaghan. But not to worry. I suspect we’ll still be furiously debating the report’s findings come the next election.
For most people, superannuation is an incomprehensible subject they prefer not to think about – just as they’ve never really understood the “dividend franking credits” that figured so prominently in last year’s election.
As a former accountant, however, I’ve always been fascinated by the ins and outs of super. And being a boring accountant has an odd benefit: paying attention to super all these years has left me with hugely more than I'm likely to need for a comfortable retirement.
Scott Morrison has been dreading the release of this report because he knew it would incite his hard-line backbenchers to demand that he cancel the long-legislated increase in employers’ compulsory contributions to their workers’ super from 9.5 per cent of wages to 12 per cent by 2025.
He knew Labor would oppose this every step of the way, there’d be a huge fight to get it through the Senate and, even if he succeeded, his opponents would take the issue to the election as proof he was so down on workers’ wages he was willing to destroy their chances of a decent retirement.
Truth is, super has been an unending source of conflict between Labor and the Liberals since the present compulsory-contribution scheme was implemented by Paul Keating and the unions’ Bill Kelty in the early 1990s.
Labor sees it as one of the great social reforms of the Hawke-Keating government. But the Libs opposed it from the beginning. They claimed this was because of their philosophical objection to compulsory saving, but it’s easy to see their real objection was partisan.
Compulsory super was introduced in a way that ensured some of the super contributions were managed by non-profit “industry” super funds, rather than the usual for-profit funds set up by banks and insurance companies.
In principle, these new industry funds would be run by equal numbers of trustees from the unions and the employer groups. In practice, the unions have dominated. The ACTU will tell you union officials are required to pay their directors’ fees into union coffers. Some doubt that always happens.
The Libs always saw the industry funds – which have consistently outperformed the for-profit “retail” super funds – as an incursion into Liberal-owned territory. The nation’s share capital should be controlled by Liberal supporters, not unionists. And what’s to stop a little of the billions going into industry funds from trickling down into Labor campaign funding?
Throughout his time in office, John Howard was always coming up with ways to clip the wings of the hated industry funds – with little success.
So there’s nothing any Liberal government can do on super that doesn’t cause the unions and Labor to smell a conspiracy. If the Libs want to cancel any further increase in the rate of employers’ compulsory contributions, their only conceivable motive must be to cripple the industry funds.
Just one problem with this theory. A survey in August of 44 leading economists by the Economic Society found that two-thirds of them wanted the increases deferred or abandoned. This isn’t surprising. As far back as 2010, the Henry tax review found that a higher contribution rate wasn’t needed to ensure people retired with adequate incomes, when there was so much fat in the fees the fund managers were charging.
The findings of the Callaghan review also cast doubt on the need for an increased rate of contributions. So why do the experts disagree with the supposed champions of the workers?
Two main reasons. First, because of convincing empirical evidence that, over time, about 80 per cent of the cost of increased rates of contribution by employers is passed on to their workers in the form of pay rises that are lower than otherwise.
So employer contributions are no free gift. They involve forcing workers to spend less and save more today, so they can have more to spend in retirement. But for many middle-income workers, the more super savings they amass, the more their entitlement to a full age pension is reduced.
Second, in its long-running campaign to persuade governments to force workers to hand over more of their wages to super funds, the fee-hungry superannuation industry has played on people’s instinctive fears they aren’t saving enough.
But careful calculations by the Callaghan review – coming on top of those by the independent Grattan Institute – have found that, on the present contribution rate, most workers will retire with disposable incomes at least equal to the widely accepted benchmark of 65 to 75 per cent of their pre-retirement disposable income.
If so, why deny yourself more than you need to in your working years, so you can have more than you need in retirement?
