From today’s Fin.
Tax cuts better off in super
As you read this, bevies of bureaucrats are busily building an inflation strategy. Virtually all the medicine theyll prescribe will have a nasty taste. We dont like spending cuts and revenue increases.
But one option could pull a billion odd out of consumption without being unpopular. Though painless it would be visionary, growing in popularity over time.
Wouldnt it be nice for the promised tax cuts to go into peoples superannuation rather than their pocket? Compelling such an outcome would hedge on a promise. Paul Keating tried that with his L.A.W. tax cuts and the electorates response means that a repeat performance is O.U.T.
But theres a middle way.
Many people who might be well disposed to increasing their super contributions never get round to doing so. So what if their employers deposited the proceeds of their tax cuts into their super, but also let them opt out, receiving the tax cut in their pockets if they chose?
Structuring the savings decision this way makes a big impact. In the US new employees participation in tax privileged 401K savings schemes can be as low as 26 percent though this rises over time. When firms enrol employees by default but let them opt out, participation jumps to over 85 percent.
The New Zealand Government is already using this insight in its innovative default savings. New employees have a hefty four percent of their salary deposited into their KiwiSaver superannuation accounts. The opt out rate is way below expectations at 32 percent.
Amongst the difficult anti-inflation decisions, thats a free hundred dollars lying on the pavement right there. Between now and tax cut day 1 July 2008 we could make the institutional arrangements necessary to encourage or require all businesses, or all businesses over a certain size to divert funds roughly equivalent to the tax cuts and/or wage increases into their employees super funds subject to employees ability to opt out. Then repeat the dose annually for all employees until their combined super contributions were something like 15% of their wages.
As a political message, Kevin Rudd would be inviting employees to join him in a fiscal conservatism that would do the country good in the short term and their families good in the long run. And those who dont like it? Well they just tick the box, opt out and thats it.
And it might signal something more that, after a long hiatus, were back in town leading the world in the game of economic reform: That, as with innovations like HECS and the Child Support Agency, and the way we crafted the worlds most targeted welfare system, Australian economic reform is not the reflex product of some ideological formula. Rather it is based on commonsensical improvements to the functioning of our collective institutions and through that to the quality of our individual lives.
I cant improve on the way Obama put it in his victory speech in North Carolina. We want a politics of commonsense, innovation, shared sacrifice and prosperity.