The Greens (WA) believe that there are a number of problems with the federal government's compulsory employee contribution superannuation scheme, announced in the latest budget, to be implemented from 1998-99. The following is an abridged version of their background briefing paper on superannuation.
The new scheme's impact on pre-retirement income is a concern. The flat contribution means that there is no differentiation between the impact of the loss of $6 per week on someone with a weekly wage of $200, compared to the impact of the loss of $60 per week for someone on a weekly wage of $2000.
It is questionable whether superannuation is the investment of greatest return. For many, housing is a far better investment as it provides continual use-value while the asset is being purchased. In terms of retirement, full or substantial house ownership provides a good option for reducing costs substantially.
Fixed-term bank accounts often provide far better returns without making capital inaccessible.
As a form of retirement income, the scheme exacerbates existing inequalities; it gives the greatest benefits to the top 30% of taxpayers. Over 30 years, on a superannuation interest rate of 5% compounded annually, this amounts to a taxpayer funded difference of over $33,000 between the bottom 30% of pre-
retirement income and those in the top 30%. (The Public Service superannuation exit rate is currently 4.3%.)
The impact of the government's superannuation promises in this year's budget are hardly visible. The second tranche of tax cuts which they are designed to "replace" were deferred to "some time in the future" when they are brought in by regulation, not legislation.
The superannuation scheme outlined in the 1995 budget is to be introduced in 1998-99; this is when the $1 billion dollar tip of the super iceberg will become visible.
The notion of giving tax cuts instead of super payments is problematic. A tax cut increases disposable income; it allows taxpayers to decide how they wish to invest, or spend, their money. Super contributions, especially those tied to compulsory employee contributions, will decrease disposable income. It will put investment decisions into the hands of super fund managers whose judgment may be questionable given recent super funds' performance. Fund members may get a return, but only at some distant future date.
The new scheme will create an alternative, private sector pension system — a "Medicare Private model of the aged pension". This will be created through taxes paid to the private sector by employees and employers, and through taxes paid to that sector by government. This will create a system of taxpayer-funded inequality, with the biggest contribution from government going to the top 30% of taxpayers.
The impact of the change to people's pre-retirement income has not been estimated. No assessment has been made of whether super funds, which will see huge and rapid taxpayer-funded growth, will cope with the increased administrative burden, improve fund performance and address the important prudential problems.
Super funds are unlikely to address these problems since they are not competing with other investments, but are being given huge windfalls through compulsory payments. There has been no assessment of the impact of creating such huge institutional investment. There are already industry concerns about the impact of so much investment in blue-chip industrials and about the power of super funds to affect their stock. Yet the treasurer boasts that he will increase superannuation investment tenfold.
There are suggestions that the government may try to direct investment to make up for the tendency for super funds to favour secure investments with high dividends.
This approach may lead to investment being funnelled away from infrastructure needed for rural and regional development into commercial building ventures in CBDs. The fact that many workers will be forced into specific superannuation schemes while others opt for schemes where they have some investment choice introduces another level of inequity.
What is this super policy about, aside from giving superannuation companies a huge taxpayer funded boost?
It is a move to a system more like the US social security system, where government ensures that your retirement income is a reflection of your income while working. It is a system which, in the US, has resulted in many older people living on cat food and dying of pneumonia and other diseases because of a lack of heating.
While there is still a budgeted safety net in Australia, it is a clear move in the user pays direction — the agenda of both major parties.
What else is this scheme? Along with the "baby bonus", which in no way substitutes for parenting leave, it is part of the next version of the Accord, which, like its predecessors, will hold wages down. We can expect the superannuation contribution to be traded off in the same way as the tax cuts have been with promised wage rises.
Another likely trade-off is the elimination, or weakening, of award-based employer-paid super arrangements that allow contributions to be set to a median wage, allowing those on low incomes to get a bigger employer contribution and those on high incomes less, in proportion to their income.
There are also problems with the way this scheme will be implemented. There will be little or no parliamentary scrutiny, as it will be implemented largely through awards. This ruse may not work. First, there will be the need for the government to legislate to allow it to make payments into superannuation funds for non-employees.
There is also the problem of coverage. If the measures are to be followed through the award system, what happens to the people who are not in it? What about people who work intermittently or part time and all those who are being moved into fixed-term, insecure jobs?
ACOSS estimates that up to 25% of workers may not be covered, which would be a financial windfall for government. The government may pursue this by imposing punitive taxes on those who fail to contribute by a certain date in the same way as they currently do for employers.
Super funds also have huge prudential problems. Super schemes often operate on a wholly involuntary basis, with compulsory membership and no choice in what scheme an employee is in, eliminating any effective consumer choice and thus any notional competitive advantage from being "private sector".
It is clear that the government would like its scheme to replace the aged pension as standard retirement income. Once that occurs, those on a pension will be stigmatised because they are "living on a government handout", while good citizens will live off their super.
Low and middle income workers will be forced to make an additional contribution, little different to a tax, except that it goes to the private sector. Upper income earners are unaffected, since they already make voluntary contributions that will now be recognised.
To make matters worse, the inequities that exist will be doubled. The government will match a person's payment dollar per dollar, from a few cents to about $1000. This will allow the top one third of taxpayers a much better retirement income — at the taxpayer's expense. It is taxpayer-funded inequity: the higher your tax, the higher your retirement package.
The government says that caps and cut-offs ensure equity, but the way the scheme is proposed, only those in the top 7% of incomes will be affected by a cut-off. With this exception, the top 30% of salary earners will receive a fund payment of about $1000 per year.
The Greens are concerned that 70% of taxpayers will have money taken out of their disposable income, while those for whom such deductions mean less take the lion's share of the benefit.
For someone of 35, this means that if your average wage for the 30 years is just within the top 30% of taxpayers (currently about $620 per week) you will receive about $30,000 by retirement. This is $15,000 more than someone at the high end of the bottom 30% of taxpayers (currently making an average of $310 per week).
The difference in employee and government contributions will add up to $30,000 over 30 years, half funded by tax dollars, and will lead to a difference in retirement income. Three quarters of those on $620 per week or above will get the full payment while for those on less than $310, the payment will decline.
For women the situation is worse. The maximum contribution will be paid to women in the top 15% of female taxpayers, while those in the bottom 40% will be much worse off.
The super scheme is will not appear for several years, making it far too late to make changes. We are laying the foundations for a world of increasing inequity. We are ensuring that in the future, Australia will become two nations within one border.