THE
age of entitlement will not end if baby boomers, in or approaching retirement,
keep hijacking
public policy debate.
With
average superannuation balances at retirement scarcely more than $100,000
mainly funded by employer contributions, topping up with surplus private
savings is but a dream for most Australians.
Being
prevented from transferring more than $500,000 in surplus savings into
superannuation is of little concern. Yet it almost caused the downfall of the
Turnbull Government so we are told.
The
purpose of super is to provide funds for members’ retirement. It is not
intended to be part of an estate plan for a family dynasty.
The
tax system is biased in favour of older, wealthier people. Not only are
withdrawals from superannuation funds tax-free beyond the age of 60, earnings
on superannuation in the pension stage, which can occur even while still
working, are tax free. Once aged 65 a higher tax-free threshold applies, which
means the wealthy can receive extra unearned income on a tax-free basis in
addition to their superannuation spoils.
Meanwhile
other taxpayers paying tax on income from toiling are subsidising this rort.
Couples can earn $60,000 apart from their tax-free superannuation and still be
spared the need to contribute to tax coffers. At a rate of return of 4 per cent
per annum that’s $1.5 million. Adding this to the May budget proposal to limit
tax-free pension balances to $1.6 million or $3.2 million per couple gives a
tax sheltered nest egg per couple of $5 million.
How
much do these guys want? Obviously more than $1.5 million outside
superannuation is unacceptable. It is true that once tax starts being paid for
incomes above the seniors’ privileged threshold it is paid at a rate of over
40c in the $1, so wouldn’t it be nice to be able to transfer a bit more into a
tax-free superannuation environment.
Under
the age of 65 ordinary income thresholds apply and transferring surplus savings
into superannuation funds saves tax, especially if a pension can be triggered
and the earnings become tax-free.
High
net worth individuals run multiple pension streams, segregated from each other.
Even though pension payments are tax-free beyond 60 years of age, tax may be
payable if a stream is commuted and paid to non-dependants upon death. Each
stream is different.
In
other words the adult kids might have to pay a bit of tax, unless the pension
streams can be structured correctly. That is done by withdrawing amounts funded
by employer and other deductible contributions and replacing them with brand
spanking new non-concessional contributions which Mr Turnbull is trying to
limit. Draw out the amounts that might end up being taxable in the kids’ hands
and replace them with contributions that will solve that problem. The tried and
true withdrawal and recontribution strategy is perfectly legal, but a rort
nonetheless.
It
may be that the alleged backlash against the proposed superannuation change is
being used as a rod to beat Mr Turnbull. Assuming that it is not, there may be
an argument the changes violate the principle of retrospectivity. Usually that
means outlawing something that has already occurred, not scaling back previously
allowables on a prospective basis.
Politicians
are always lambasting opponents from their high horses while ignoring their own
inconsistencies. When Mr Shorten mounted his shetland pony to berate the
Government about proposing retrospective changes he forgot his own policy to
put a cap on the amount of tax-free earnings of pension balances also involves
changing the rules midstream. But what changes are not? Perhaps all changes
should be grandfathered so they only apply prospectively? Two sets of taxpayers
for each and every piece of legislation? That’s the retrospectivity argument in
a nutshell.
Instead
of limiting the quantum of tax-free pension earnings as suggested by the ALP,
the Liberals propose limiting the level of tax-free pension balances, administratively
a superior method to achieve a similar result.
The
ALP’s disingenuous claims of retrospectively gave oxygen to a campaign which
may thwart changes that will restore a little more equity to superannuation
policy.
For
too long the system has been skewed in favour of the wealthy. The system could
have been so much fairer and simpler if recommendations in the Henry report had
been adopted. These included a flat 7.5 per cent tax on fund earnings from
accumulation right through the pension stage and a contribution tax at the
contributor’s marginal tax rate less 15 per cent meaning low-income taxpayers
would pay nil contributions tax, more equitable than at present. Overall tax
revenue from superannuation and fund balances at retirement would be higher.
Currently, high-income earners are estimated to pay no tax on two-thirds of
lifetime fund earnings. That’s a big subsidy. A rate of 7.5 per cent is hardly
a weighty impost. Or should aged-based rorting continue to take precedence?
Superannuation
failing the fairness test is not the only problem. The system is good at
attracting funds. Compulsion helps. It is a form of national savings. While
savings is an admirable sign of prudence at the individual level, collectively
it means less is spent on current consumption. Lack of demand can restrict an
economy. The paradox of collective thrift is a well known phenomenon made even
worse by the fact in the case of superannuation, the screen jockeys responsible
for the custodianship of $2 trillion of the nation’s savings do not invest in
nation building, but instead buy and sell existing assets among themselves
hoping to make a capital gain so they can clip 1 per cent to 2 per cent from
the ticket to overindulge themselves even further.
It
was assumed the trusty old market would solve the problem of the large pool of
savings created by the superannuation. Unfortunately, it has done so by
providing sustenance to the speculative economy at the expenses of jobs growth
and the real economy.
The
whinges of the wealthy and the wannabes are a crass example of self interest at
a time when fairness, more revenue and a system that integrates with the real
economy are long overdue.
(Published in The Mercury 21st July 2016)