A note on super for Crikey

Crikey asked me to comment on this article itemising some likely initiatives on superannuation by the ALP.

So I did. The result is over the fold.

Walking and chewing gum

Contrary to the opinion of his critics, John Howard has not robbed from the poor to give to the rich. Hes largely preserved the worlds best welfare system he inherited and has mostly resisted pressure (even from ALP quarters) to slash top income tax rates.

But the Governments super changes really did throw the switch to vaudeville. If youre wealthy and near retirement you can now run your own affairs mostly inside the cosy flat tax bubble of your super fund. Why pay 46.5 per cent when you can pay 15? Despite her sympathy with the woes of her Eastern Suburbs clients and their groaning wallets, even my tax advisor was taken aback at the Governments largesse.

Still, it was the ALP who set flat tax super up overwhelmingly favouring the wealthy and political considerations will constrain it from changing course any time soon. Then again if Labor wins government, rising revenue costs will eventually force change.

In the meantime, the ALP continues to buy the idea of savings incentives with the media reporting plans to lower contributions tax for lower income earners and raise the threshold of the means test for government co-contributions.

Incentives are normally preferable to compulsion. But super is different. Savings incentives work badly in low income households because they often lack financial savvy. And the top end of town will look after themselves pretty well with or without savings incentives.

The very least we could do is introduce default super as New Zealand did, according to which peoples super contributions rise through time unless they deliberately opt out. And would it be so scary to revert to the original Labor script, and gradually ratchet up compulsory super by say half a per cent a year?

Also, if its votes youre after, how about letting people use their super for a home deposit? Officials from the Government and the super industry just fell out of their chair. They dont want to deplete an already inadequate savings pool for funding retirement.

Very sensible too! So lets walk and chew gum. Lets use the ideas embodied in the HECS student loans scheme and also taken up in New Zealands opt in super scheme. Make peoples access to super for non-retirement investment conditional on their committing to increase future contributions sufficiently to repay their fund over time.

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Fred Argy
Fred Argy
14 years ago

Nicholas, saving incentives have unpredictable effects but if they are targeted at low income earners they are more likely to be effective than universal schemes – and they have a social rationale too.

That is why I like the Government’s co-contribution scheme in principle – except that it is also poorly targeted. My advice to Labor (if I am ever asked) would be to restructure that scheme and then make it more generous. I don’t think lack of financial savvy matters if the saving vehicles are simple.

Yes to allowing access to super for a home deposit but with appropriate safeguards and targeted at the less well off.

Patrick
Patrick
14 years ago

I agree with Fred’s comment entirely, and especially about expanding the co-contribution. The limits are really too low and especially so for people whose incomes are unlikely to rise very much.

That extra money put into young, modest-income earners’ super funds is about as a good a government expenditure as I can think of.

Nicholas, I don’t quite follow the connection between these two sentences:

A hell of a lot of low income people wont even know about the incentives. Others will be able to borrow to fund their participation.

If your second sentence (as grammatically I would say it does) relates to your first, then I suspect you do not know enough low- and modest- income earners! Most low- and modest-income earners I know are aware of the co-contribution, albeit not necessarily clear as to their own eligibility. There is strong reflexive belief that ‘these things’ are complicated.

But I doubt I could convince any of them to borrow to fund their contribution. At current rates it would be hard to justify, practically, to someone on a modest or low income under 40.

wilful
wilful
14 years ago

We whipped in a bit of the co-contribution this year to take advantage of my wife’s maternity leave temporary dip in earnings. Pretty cheap of us, but hey, free money!!

What else could we do, radical stuff even, to encourage saving amongst poor and middling sorts?

Patrick
Patrick
14 years ago

I agree, except that the thing is that you can’t really ‘use’ it for 20 or 30 years – hard to get a lot of modest earners to see that as a worthwhile sacrifice.

Fred Argy
Fred Argy
14 years ago

Nicholas, simply ratcheting up the compulsory super contribution would add further to the inequities of the present system. I presume you have in mind changing the present tax treatment before such an initiative is introduced?

Wilful, my very point. The present co-contribution scheme is poorly targeted. But if it could be made more poor-friendly, it could do a lot of good.

derrida derider
derrida derider
14 years ago

It’s virtually impossible for any voluntary savings scheme to be anything but regressive – only those who can spare it will take advantage of the incentives. The other problem with voluntary incentives is that they take no account of the additional dissaving (or reduced saving if you’ve still got a budget surplus) by government due to their budgetary cost. It’s quite possible to have a voluntary savings scheme that actually reduces national saving.

As I’ve argued elsewhere, it’s also virtually impossible with deregulated credit markets to make private saving compulsory – it can always be offset by loans elsewhere. The recent Reserve Bank paper found that only 38% of compulsory super represented additional private saving. But that paper did not take into account the major mechanism by which it has in fact been offset – bigger and longer mortgages (which have had the side effect of driving up the price of land).

Now what on earth would be the point of getting people to put their super into their own homes and then clawing it back with “loan repayments” into super? Ask yourself what the advantage of this is over an ordinary home loan. As far as I can see, the transaction costs (money into super, money out of super in a tax-sheltered way, recovery of an income contingent loan through the PAYE system) would be much greater. Most young people won’t have enough super to pay for their home, and the minority who can’t repay the loan on income grounds won’t have any super anyway. I’m looking for an efficiency or equity gain here, and I just can’t see it.

Sacha
14 years ago

Nicholas, I wrote to Craig Emerson some time ago suggesting that people be able to access their super to get into the property market. However, when I think about it now, even if you get people to pay more into their super to compensate for the amount they’ve taken out, won’t that just increase the total demand for housing? (mind you, it would differentially increase people’s ability to buy property which is comparatively good for first-home buyers, but still).

sdfc
sdfc
14 years ago

Ever considered that some people simply can’t afford to take advantage of the co-contributions scheme, Nick?

Jonno
Jonno
14 years ago

Has there been any data published on post codes of where the co-contribution scheme has been claimed or even better the incomes of the spouses?