I spoke in parliament last week about the government’s Stronger, Fairer, Simpler superannuation reforms, and the importance of making sure our superannuation policies are equitable as well as efficient.
Abolition of Age Limit on Payment of the Superannuation Guarantee Charge Bill 2011
Second Reading (21 Mar 2011)
Thoughts of superannuation naturally lead us to thinking about the future. When I think about the superannuation system of the future I think about my one-year-old son, who will probably enter the labour market somewhere around 2030 and work until maybe 2070 or 2080, a year when most of us in this chamber will have shuffled off this mortal coil. Superannuation involves thinking about the retirement savings that my son will accumulate. It involves thinking about the retirement savings that I will accumulate and how that will impact on him and his brother.
Why do we have superannuation? We have it for two simple reasons. The first is that, as a spate of studies from behavioural economics has shown us, human beings have a tendency to undersave. We have a tendency to focus too much on the present and not enough on the future. Therefore, we can make people better off through a system of compulsory retirement savings. The other reason is to reduce the impact on the age pension. We want to encourage Australians to save for their retirement, if they can, so that the public purse does not have to pay for those who can afford to support themselves in retirement.
The history of superannuation reform, therefore, has been in two parts. There have been great reforms brought about by the Labor government, first through the introduction of the superannuation guarantee in 1992 and now through the important package of My Super and the increased compulsory contributions. Then there have been tinkerings—and I will go to some of those tinkerings in a moment. The tinkerings are the approach that those opposite take to superannuation.
But it is important also to recognise what those opposite do when big reforms are put up. Those opposite will place themselves in this debate as the friends of older Australians, as supporters of a strong retirement saving system. But that is not the history. Allow me to quote from Senator Bishop, as she then was, addressing the other place on 18 August 1992:
On this side Opposition members argued very logically and meaningfully that the imposition of this compulsory superannuation tax is a de facto federal payroll tax.
They were running their ‘great big new tax’ argument against compulsory superannuation. And then Senator Bishop, as she then was, told the Senate of a conversation with a small business person, who had said:
But now that this compulsory superannuation payment has gone through, yesterday I had to sack a part time employee and turn a full time employee into a part time employee.
The late Senator Peter Cook was moved to interject by this statement that, because the law had not yet come into effect, it was difficult to see how small business people would be affected by it. But Senator Bishop, as she then was, was unmoved. Senator Bishop finished up the 1992 debate as follows:
I heard Senator McMullan say, ‘The difference between our systems on superannuation is that ours is compulsory and theirs is voluntary’. That is very true. That is an essential difference. Our policy is designed to make it attractive for people to provide for themselves in later life whereas this Government’s is designed to penalise business, to regulate it out of existence.
Of course, if you carry on with that logic then the member for Mackellar should today be saying to this chamber that superannuation is penalising business—and, if it is penalising business, why would we want to extend it?
But of course such an argument is nonsense. As we know, superannuation does not penalise business, and that is why the government announced in May last year that we intend to raise the superannuation guarantee contribution age to 75 from 2013. We intend to do that to provide certainty for business in transition and to recognise that there are costs associated with this. An initial upper age limit of 65 was increased to 70 in 1997. There has been an argument by the member for Mackellar that the abolition of the age limit on the superannuation guarantee will encourage older workers to remain in the workforce. However, done in this manner, there is a high chance the opposite will occur. It is possible workers may be enticed to work longer but it is also possible that employers may be less willing to hire older workers. The bill provides no adjustment time for employers, resulting in a $150 million immediate cost to employers of workers over 70 years old. Secondly, the bill requires that the payments of the superannuation guarantee charge are not tax deductible for businesses. It is estimated that corporate profitability could therefore fall by up to $150 million in 2011-12 were this bill to be passed.
The abolition of this age limit may also lead to a push for other limits to be abolished. It is important that there is an age limit on superannuation contributions. This stems from the significant tax concessions from saving through superannuation compared to other forms of saving. The purpose of these concessions is to encourage savings and maximise retirement income from superannuation. Were there to be no age limit, there would be an incentive for people to maximise tax payments through making voluntary superannuation contributions.
We have to be careful of inequity in the superannuation system. The Henry review went to some of these equity issues in superannuation, pointing out that a 15 per cent flat tax on superannuation contributions is one of the few flat income taxes that exist in our system. This tax is much lower than some taxpayers’ marginal rates—for example, a person earning over $100,000 faces a marginal tax rate of 45 per cent. The consequence, according to the Henry tax review, is that in 2005-06 only five per cent of taxpayers earned over $100,000 but those taxpayers accounted for 24 per cent of concessional contributions to superannuation. On the other hand low-income earners enjoy the least tax concessions. Most face effective marginal tax rates of zero to 15 per cent. That means they receive little or not tax concessions from superannuation. In 2010 over three million low- and middle-income earners did not obtain any tax concession, so abolishing the age limit would only worsen their position.
Another source of inequity is the much lower cap on tax concessions for co-contributions than on salary sacrifice contributions. Although co-contributions provide a higher rate of concession, it only applies to the first $1,000 of voluntary contributions as compared to the $25,000 cap on salary sacrifice contributions. That means that low-income earners still receive much less in tax benefits than high-income earners.
I spoke about the reforms that we on the Labor side implement on superannuation compared to the tinkerings that those on the opposition benches tend to put in place. These tinkerings can have substantial equity implications. I will mention in the context of this debate the changes in 2007, when the Howard government allowed most workers of age 60 and above to withdraw their superannuation tax-free. Retirees who previously earned high incomes were the ones who benefited. In addition, people were allowed to transfer up to $1 million in their superannuation accounts before 30 June 2007. Wealthier people took advantage of this, topping up their accounts with large amounts of funds so they could later be claimed back tax-free. The result was $22.4 billion transferred to superannuation accounts by individuals in the June quarter of 2007—triple the amount transferred in the June quarter of 2006. Many commented at the time that that was doubtless going to lead to a substantial redistribution of income towards richer individuals. So, while the coalition place themselves in such debates as the friends of older Australians, as supporters of the superannuation system, history tells us quite the opposite.
What the government will be doing instead is implementing a package of reforms that builds on our legacy in superannuation. We will be increasing the superannuation guarantee rate from nine to 12 per cent and introducing a new contribution for low-income earners—reforms that those opposite oppose.
The government’s Stronger, Fairer, Simpler superannuation reforms and the reforms flowing out of the Cooper review into superannuation will see an increase in replacement rates for a worker on median wages, who is currently aged 30, from around 71 to 76 per cent. Put in dollar terms, that worker could expect an additional $108,000 in their retirement benefits.
These are reforms which are holistic and which take into account the entire superannuation system. These are not reforms that are opportunistic, that are tinkering or which potentially introduce inequities into the system. These are reforms that reflect Labor’s ongoing commitment to a fair superannuation system for all Australians.