Thursday, 21 July 2016

Superannuation fairness

THE age of entitlement will not end if baby boomers, in or approaching retirement, keep hijacking public policy debate.

With average superannuation balances at retirement scarcely more than $100,000 mainly funded by employer contributions, topping up with surplus private savings is but a dream for most Australians.

Being prevented from transferring more than $500,000 in surplus savings into superannuation is of little concern. Yet it almost caused the downfall of the Turnbull Government so we are told.

The purpose of super is to provide funds for members’ retirement. It is not intended to be part of an estate plan for a family dynasty.

The tax system is biased in favour of older, wealthier people. Not only are withdrawals from superannuation funds tax-free beyond the age of 60, earnings on superannuation in the pension stage, which can occur even while still working, are tax free. Once aged 65 a higher tax-free threshold applies, which means the wealthy can receive extra unearned income on a tax-free basis in addition to their superannuation spoils.

Meanwhile other taxpayers paying tax on income from toiling are subsidising this rort. Couples can earn $60,000 apart from their tax-free superannuation and still be spared the need to contribute to tax coffers. At a rate of return of 4 per cent per annum that’s $1.5 million. Adding this to the May budget proposal to limit tax-free pension balances to $1.6 million or $3.2 million per couple gives a tax sheltered nest egg per couple of $5 million.

How much do these guys want? Obviously more than $1.5 million outside superannuation is unacceptable. It is true that once tax starts being paid for incomes above the seniors’ privileged threshold it is paid at a rate of over 40c in the $1, so wouldn’t it be nice to be able to transfer a bit more into a tax-free superannuation environment.

Under the age of 65 ordinary income thresholds apply and transferring surplus savings into superannuation funds saves tax, especially if a pension can be triggered and the earnings become tax-free.

High net worth individuals run multiple pension streams, segregated from each other. Even though pension payments are tax-free beyond 60 years of age, tax may be payable if a stream is commuted and paid to non-dependants upon death. Each stream is different.

In other words the adult kids might have to pay a bit of tax, unless the pension streams can be structured correctly. That is done by withdrawing amounts funded by employer and other deductible contributions and replacing them with brand spanking new non-concessional contributions which Mr Turnbull is trying to limit. Draw out the amounts that might end up being taxable in the kids’ hands and replace them with contributions that will solve that problem. The tried and true withdrawal and recontribution strategy is perfectly legal, but a rort nonetheless.

It may be that the alleged backlash against the proposed superannuation change is being used as a rod to beat Mr Turnbull. Assuming that it is not, there may be an argument the changes violate the principle of retrospectivity. Usually that means outlawing something that has already occurred, not scaling back previously allowables on a prospective basis.

Politicians are always lambasting opponents from their high horses while ignoring their own inconsistencies. When Mr Shorten mounted his shetland pony to berate the Government about proposing retrospective changes he forgot his own policy to put a cap on the amount of tax-free earnings of pension balances also involves changing the rules midstream. But what changes are not? Perhaps all changes should be grandfathered so they only apply prospectively? Two sets of taxpayers for each and every piece of legislation? That’s the retrospectivity argument in a nutshell.

Instead of limiting the quantum of tax-free pension earnings as suggested by the ALP, the Liberals propose limiting the level of tax-free pension balances, administratively a superior method to achieve a similar result.

The ALP’s disingenuous claims of retrospectively gave oxygen to a campaign which may thwart changes that will restore a little more equity to superannuation policy.

For too long the system has been skewed in favour of the wealthy. The system could have been so much fairer and simpler if recommendations in the Henry report had been adopted. These included a flat 7.5 per cent tax on fund earnings from accumulation right through the pension stage and a contribution tax at the contributor’s marginal tax rate less 15 per cent meaning low-income taxpayers would pay nil contributions tax, more equitable than at present. Overall tax revenue from superannuation and fund balances at retirement would be higher. Currently, high-income earners are estimated to pay no tax on two-thirds of lifetime fund earnings. That’s a big subsidy. A rate of 7.5 per cent is hardly a weighty impost. Or should aged-based rorting continue to take precedence?

Superannuation failing the fairness test is not the only problem. The system is good at attracting funds. Compulsion helps. It is a form of national savings. While savings is an admirable sign of prudence at the individual level, collectively it means less is spent on current consumption. Lack of demand can restrict an economy. The paradox of collective thrift is a well known phenomenon made even worse by the fact in the case of superannuation, the screen jockeys responsible for the custodianship of $2 trillion of the nation’s savings do not invest in nation building, but instead buy and sell existing assets among themselves hoping to make a capital gain so they can clip 1 per cent to 2 per cent from the ticket to overindulge themselves even further.

It was assumed the trusty old market would solve the problem of the large pool of savings created by the superannuation. Unfortunately, it has done so by providing sustenance to the speculative economy at the expenses of jobs growth and the real economy.

The whinges of the wealthy and the wannabes are a crass example of self interest at a time when fairness, more revenue and a system that integrates with the real economy are long overdue.
(Published in The Mercury 21st July 2016)