Australia’s compulsory savings regime has been praised and criticised over the past three decades. With trillions of dollars in assets under management, is superannuation there to maximise workers’ retirement savings, reduce the burden on the pension system or serve another broader economic and social purpose? A recent report found one in four Australians missed out on legal super entitlements in a single financial year and research finds tax concessions disproportionately benefit men and high-income earners, which might be why surveys show many Australians find the system unfair. But should we abolish superannuation?
Arguing in the negative in today’s Friday Fight is accounting lecturer and superannuation expert Natalie Peng, and in the affirmative is writer Robert Lechte.
Superannuation is terrible for inequality — even worse than housing. But let’s put that aside for a moment.
Let’s pretend a wizard casts a magic spell that eliminates all inequality. Everybody in Australia now earns the exact same amount. Even with that perfect equality, superannuation would still be a terrible system.
Why? Because people don’t know how long they will live. How much retirement savings you need depends largely on how many years of retirement you will have. At the extremes, you might die before retirement, or your retirement might be 50 years (retiring at 60, living to 110).
During working life, this creates two contrasting worries. The first is the fear of under-saving (“I’m worried I’m not putting aside enough for retirement”) but the second is the fear of saving too much (more money saved for later means a lower standard of living and more cost of living pressures now).
Then, after retirement day, two more worries emerge — overspending (fear of running out) and underspending (“what if I die before I’ve enjoyed all those savings?”).
These are worries that a well-designed system of retirement incomes should take away — superannuation solves none of them. Fundamentally, superannuation is an individualised savings system, and there’s no way an individualised savings system can solve these problems because individual savings can run out. If we want everybody to be secure in retirement, and nobody to run out, then everybody needs to save enough to last them 50 years.
Only a fraction of people will live this long — and thus, in aggregate, most people will over-save massively. That means lower spendable incomes/standard of living during working life, and often lower standard of living again in retirement too (because, hesitant to eat into their capital, many will die with mostly unspent savings, at which point super becomes a taxpayer-funded inheritance-boosting scheme).
Suppose you went to get fire insurance on your house, and they told you that instead of pooling everybody’s insurance premiums and paying out to people who had house fires, they would set up an individual account for you. If your house burned down, all you’d get is what was in that account.
Everybody would agree that was a very stupid system. But this is exactly how superannuation works. Superannuation’s fundamental flaw is that it doesn’t pool risk.
The conceptual solution to all this already exists: pensions. You get a pension however long you live — so it never runs out.
Australians usually think of the age pension and the wider welfare state as a “safety net” (to help only the poorest), or a “Robin Hood” (to do some redistribution). But while we’re still under the wizard’s spell of perfect equality, do we still need a welfare state? Yes!
UK welfare economist Nicholas Barr calls this “the welfare state as piggy bank”. Another term is “social insurance”. It’s not about redistribution from rich to poor, but about redistribution between people at different stages of life, like having children (via child benefits) or in this case, getting old (via pensions).
Superannuation’s individualised design means it can never act as an effective shared piggy bank or social insurance. And that’s why it should be scrapped. Instead, redirect all that money into a much higher, universal pension that provides an above-poverty-line standard of living as a minimum to every retiree, however long they happen to live.
That also implies scrapping another misguided Australian policy obsession: means testing. The key to understanding the stupidity of means testing is realising that the withdrawal of a benefit is functionally identical to taxation. Not getting the pension because you got means tested is the equivalent of getting the pension, but then being taxed the amount of the pension (in both cases, you get zero dollars).
So means testing doesn’t mean less tax — it’s just tax in disguise. There’s nothing wrong with taxes per se — in fact, I happen to think they should be higher, especially for wealthy retirees. So what’s wrong with this disguised tax?
Well, a regular tax increases alongside income or wealth (progressive tax) or has a flat percentage (flat tax). But the means testing “tax” doesn’t work that way, because it’s a flat amount. Translated into percentage terms, a billionaire not getting the pension means a very small “tax” for them, but a very big “tax” on somebody only just over the means-testing threshold.
And notice something else: while regular tax is paid by everybody, the means testing “tax” is only “paid” by current retirees. So instead of being a low tax on a big group of people (all taxpayers), it’s a high, concentrated tax on only a small group of people (retirees), and as we just discussed, overwhelmingly only on the middling-asset retirees.
DING! DING! DING! CRIKEY EDITORS DECLARE LECHTE HAS OFFICIALLY PASSED HIS ALLOCATED WORD COUNT
And high indeed it is. The effective marginal tax rate on income from assets subject to means testing can be near (or even over) 100%!
So it’s a myth that Australia doesn’t have a wealth tax: it’s called the age pension asset test. It only applies to retirees, and again, the richer you are, the lower percentage you pay (once you get beyond the asset test limit).
Eliminating means testing would also eliminate its most egregious loophole — the primary place of residence exemption, which has all sorts of pernicious effects. It penalises the poorest retirees who retire without owning a home. It encourages people to over-invest in housing and minimise liquid assets to maximise the pension they get and avoid downsizing even when they would otherwise be happy to.
Australia already has a shortage of well-located family-size housing. Meanwhile, legions of empty-nesters live in big empty houses which they would happily downsize from except for the fact they would lose their pension by doing so.
DING! DING! DING! CRIKEY EDITORS REMIND LECHTE HE HAS NOW OFFICIALLY PASSED THE MAXIMUM WORD COUNT BY MORE THAN 200 WORDS
We haven’t even got to the many practical problems with super: the supercharging of inequality, the tax breaks that cost the government more than the entire pension or the NDIS, the fees that cost the country about as much as the military budget each year, the enablement of rampant wage theft via super non-payment, among many others. But these conceptual design problems alone make it not fit for purpose.
Scrap means testing, scrap super, fund pooled social insurance via progressive taxation, and pay every retiree a pension comfortably above the poverty line.
Read the opposing argument by Natalie Peng.
