Other economic policy

Superannuation – a sole-purpose test for public policy

If you set up a self-managed superannuation fund it has to pass a “sole purpose” test. That sole purpose is to provide retirement benefits for fund members and their dependents.

To date, however, public policy around superannuation has not been subject to such a constraint. Our present system of superannuation was part of the bargain in the Hawke government’s Prices and Incomes Accord. To the Morrison government superannuation was a convenient source of funds to ensure that those doing it tough had the capacity to satisfy the demands of landlords and bankers.

The government intends to put some policy clarity around superannuation, and to this end it is engaged in a consultation process, announced by Treasurer Jim Chalmers on Monday. From his press release you can link to a consultation paper outlining previous proposals for such clarification, including the 2014 Financial System Inquiry and the 2020 Retirement Income Review. Drawing on these previous inquiries it proposes, as a draft, the statement:

The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.

You can also hear Chalmers explain the rationale for the government’s review in an interview on the ABC Breakfast program: How the government could change your super. (12 minutes)

It is clear from the interview that he is concerned not only by the fiscal cost of superannuation tax concessions (estimated at $48 billion this year [1]), but also by the inequity of a system that has allowed some retirees to accumulate in tax-privileged accounts far more than anyone would need to fund a very comfortable retirement.

The Grattan Institute has suggested a cap of $2.0 million for superannuation accounts permitted to enjoy earnings tax concessions. (About 80 000 Australians have balances of $2 million or more, according to press reports, and according to some other press reports 11 000 Australians have more than $5 million in their tax-privileged superannuation accounts.)

A balance of $2 million would be enough to fund a 20-year annuity of $160 000 indexed to the CPI [2], with enough left over to fund a lavish wake. That’s around 6 times the single age pension. Some of the industry superannuation funds have gone along with the idea of a cap, but the number they most often bandy about is $5 million.

The government is clearly seeking political permission to haul in superannuation tax concessions, particularly tax concessions relating to fund earnings. The government would be feeling politically constrained by Chalmers’ pre-election assurance that “Australians shouldn’t expect major changes to superannuation if the government changes hands”. But a change that affects only those with multi-million balances could hardly be called “major”. They would probably have about the same overall impact as the Turnbull government’s initiative in 2016 to limit the capital amount enjoying tax-free earnings to $1.6 million, with the earnings of any higher balance subject to a 15 percent earnings tax. Strangely that initiative hardly drew a word of criticism from the Murdoch media or from the radio shock jocks.

But even before the government has specified its intentions there are squeals of protest. Some criticism comes from those who believe that superannuation tax concessions should support the accumulation of vast family fortunes to be passed from generation to generation. Australian conservatives have always hoped to see this land develop a bunyip aristocracy – an antipodean replica of Britain’s sclerotic class system. That’s why it’s important for the government to define the purpose of superannuation in terms of providing income for a dignified retirement.

It’s also important for the government to deal firmly with family trusts which are used as a vehicle of tax minimization, and to which more people will turn if they find their opportunities for wealth accumulation through superannuation are curtailed.

Whatever means the government chooses to make superannuation and the taxation of income from wealth fairer, it should do something more intelligent than the proposal it took to the 2019 election, to disallow net imputation tax credits. That had the appearance of having been drawn up on a beer coaster at 2 am in the John Curtin Hotel. It would have diverted funds away from investment in corporations and towards housing speculation, would have been easily avoided by people with multi-million superannuation balances, would have hit moderately well-off people without superannuation while leaving the rich untouched, and would have jeopardized Australia’s corporate tax system. The government has the resources of Treasury, the Productivity Commission and others on the public payroll who can recommend tax reforms satisfying the needs or administrative efficiency, allocative efficiency, and fairness. It should use them.

Taxation isn’t the only policy issue involving superannuation. The ABC’s Massim Khadem raises many other policy issues, including the level of compulsory contribution (presently 10.5 percent), and the problem of employers who aren’t paying workers’ superannuation: Labor wants to revamp superannuation, but does it have workers' interests in mind?.

1. Earnings tax concession $26.35 billion, contributions tax concession $21.80 billion.

2. That is based on a 5 percent real return. A 4 percent real return would provide a 20-year annuity of $147 000. A 5 percent real return would provide a 30-year annuity of $138 000. Combining these two conservative scenarios, a 4 percent real return would provide a 30-year annuity of $117 000, only 4 times the pension.

How the west was won

How would you feel if your state government could have an extra $480 a year per household to spend on roads, schools, police, hospitals, parks and other public goods, without your having to pay any more state or Commonwealth tax?

That’s the deal you’re missing out on if you live anywhere in Australia other than Western Australia.

In a 2018 deal brokered by the Western Australian Liberal government and the federal Coalition, the formula used to determine the distribution of GST revenue between the states was overridden to give a larger share to Western Australia at the expense of other states and territories.

I have estimated that cost to taxpayers in other states at $480 a household, using a back-of-the-envelope calculation, drawing on figures provided by Martyn Goddard’s Policy Post article: Quietly, Chalmers moves on WA’s dodgy GST deal. Nobody is going to be happy.

When the deal expires in 2026 the distribution of GST revenue will revert to the Grants Commission formulae for distribution of untied Commonwealth funds, a system that applied from 1936 until 2018.

The deal didn’t do the Coalition any good in Western Australia: in both the 2021 state election and the 2022 federal election the Coalition was wiped out, and the bonus to Western Australia came when they least needed it, as revenue from iron ore royalties surged. No wonder five state premiers – including Dominic Perrottet who faces an election next month – two chief ministers and Goddard (a Tasmanian) are all rather annoyed.

As Goddard writes, “mucking about this is dangerous”, and it’s up to the Albanese government to fix up the mess left by the Coalition.

Goddard’s article explains not only the present politics and economics of the deal, but also a little about the history of revenue-sharing and the way the government is seeking advice – from the Grants Commission – about how GST should be divided in the future. Any government would be wise to be able to pretend that it’s all driven by formulae embodying indisputable objective criteria.

This probably explains one reason why there has been a recent swathe of federal politicians enduring the long flight to be seen in Western Australia, a state that will be crucial in the Voice referendum.