Amidst all the talk of a budget crisis and the need to raise the pension age and cut welfare costs, it seems an utterly outrageous suggestion that we should instead give the pension to everyone and substantially increase it as well.
It sounds like the raving of some loony socialist determined to bankrupt the nation, but it actually makes hard, conservative economic sense and would save the budget billions. It’s just too bad that the federal government won’t have a bar of it – because the federal government is not the stuff of hard, conservative economics whatever their PR spinners might have you think.
The sting in the tail of the suggestion is that increasing the pension and removing any means test from it would come at the cost of scrapping the many tax breaks given to our superannuation system. It’s a brave, brave soul who would be game to take on the vested interests of a $1.5 trillion industry merely in the name of equity and protecting our longer-term budget outlook. And there really aren’t brave, brave souls in either side of parliament.
But even though a government of either colour won’t have the brains or the gonads to adopt this outrageous suggestion, it’s still worth studying as it shows just how perverted our superannuation system has become, how a good idea for saving for retirement has been twisted into a looming monster.
The suggestion has come from a left-of-centre think tank, the Australia Institute, but if you consider yourself right-wing, don’t let that description stop you from reading on. The institute’s Dr Richard Denniss uses Treasury numbers to show that it’s the superannuation tax expenditures rather than the aged pension costs that are the bigger problem. Writes Denniss:
“If the cost of the age pension really is ballooning, then the enormous and rapidly growing cost of tax concessions granted to superannuation contributions and earnings must surely be the Hindenburg.
“According to Treasury, the annual cost to taxpayers of so-called “self-funded retirement” is $35 billion. Treasury also estimates that about 30 per cent of the benefit of those tax concessions goes to the top 5 per cent of income earners.
“Indeed, the top 1 per cent of income earners gets three times as much benefit in the form of their superannuation tax concessions than they would have ever received from the age pension.
“It gets worse. Low-income earners who are forced to put 9 per cent of their meagre incomes into superannuation will, under legislation introduced by the Abbott government, pay 15 per cent tax on their compulsory superannuation contributions despite the fact that ordinary incomes of up to $18,000 per year are tax free. Although the phrase is overused, the Abbott government’s retirement income policy really will tax the poor to subsidise the wealthy.
“Tax concessions for superannuation are not just the most inequitable form of entitlement, they are the fastest-growing source of pressure on the budget bottom line. While in the last few weeks we have heard about the unsustainability of the age pension, its rate of growth is 10 per cent, compared to growth in the cost of tax concessions of about 12 per cent per year.
“The mantra of governments past and present is that the more we spend on tax concessions for super, the less we have to spend on the age pension. But the mathematics reveal what the mantra conceals. Every $1 billion extra we spend on tax concessions for super saves less than $200 million off the age pension budget. It’s a massive net loss and the combined cost of the age pension and tax concessions for super is forecast to rise rapidly. If tax concessions really took pressure off the age pension then the combined cost should be flatlining.
“The superannuation industry clips about $20 billion per year in fees from Australian workers and retirees, much of which funds the trailing commissions that the banks feel entitled to or is wasted on advertisements that drive up the cost of financial products while claiming to offer low fees.”
No, the system is not right, but the power of that $1.5 trillion industry means no major political party would be game to undertake serious change. They’re barely capable of even fiddling with it at the margin, as we’ve seen with the Abbott government moving to scrap the worthwhile, mild and reasonable superannuation changes proposed in the last Labor budget.
In an interview with ABC radio, Denniss says the combined costs of superannuation concessions and the aged pension are running at about $70 billion a year now and will reach $100 billion by 2020 with superannuation concessions becoming greater than pension payments. He suggests it would be cheaper to increase the current pension by 7.5 per cent to nearly $40,000 for couples and $26,000 for singles and paying it to everybody – leaving individuals to act for themselves without tax incentives to make whatever further savings and investments they can or want for extra money in retirement.
It is one of the realities of our world that while the well-off get the most out of our superannuation system, they have the least need for extra incentives to look after themselves: they already have.
Follow Michael Pascoe on Twitter @michaelpascoe01