The War Against Thrift

It is hard to think of a politician who heaped more scorn on Sir Robert Menzies than Paul Keating, yet when it comes to retirement savings they were on a unity ticket. Menzies once asked: “Is most of our policy designed to discourage or penalise thrift, to encourage dependence on the state?”

No question could be more pertinent today, as an illiberal consensus emerges between government and opposition that the way to pay for the myriad welfare entitlements including pensions, to reduce the deficit and to pay down debt, is to tax the savings of those who already pay more income tax than anyone else in the country and who fund their own retirement to boot.

That Labor might punish savers is lamentable but not surprising. The party of the workers has morphed into the party of public servants and welfare beneficiaries and it considers its first duty is to raise revenue to pay for the ever-burgeoning government sector and to redistribute revenue to those who vote for it.

But for the Liberal Party, savers are foremost among the Forgotten People. As Keating put it: “You do not expect much from conservative governments, but you do expect them to believe in thrift.”

So the news from the bunker that the Turnbull government is toying with doubling taxes on concessional superannuation contributions, raising them from 15 to 30 per cent for those earning more than $200,000 a year, is troubling indeed. Such a tax grab, on top of existing taxes, would effectively mean that for every dollar savers put aside to support themselves in retirement in forty years time, they could pay around $2 in taxes, adding together the impost on contributions and in particular the impost on the earnings of their deposits over that lengthy period.

Raiding the savings of the thrifty and rewarding those who do not provision for themselves is anathema to Menzian philosophy. Yet that is what this policy would do. With that sort of punitive tax rate, the only money that people earning $200,000 or more would put into superannuation would be what they were forced to contribute.

Such a policy, even if advocated by Liberals, is driven by the insidious leitmotif of the Left that tax concessions on superannuation savings are “unfair” because “the rich” benefit most. Yet as Ken Henry, Kevin Rudd’s root-and-branch tax reviewer of choice, concluded in March 2015:

It was always understood that those who have the capacity to save, because they have higher incomes during their working lives, would benefit most from the tax concessions, with lower-income employees benefiting most from the pension.

This is crucial. The pension is generous in Australia and the income tax system is already one of the most progressive in the world. The top 10 per cent of taxpayers pay around 50 per cent of all income tax. What is fair about heaping even more taxes on these people—especially when it is apparent that governments could deliver better services at lower cost if they were as innovative and agile as they expect the private sector to be?

Henry also warned that governments that tinker with the superannuation system simply to raise revenue risk undermining it. This admonition, like much of the rest of his thinking on tax, has gone unheeded by both sides of politics. The Henry Tax Review clearly called for a net reduction in taxes on superannuation. Yet who is heeding that recommendation? At the moment, almost no one.

The system already punishes savers. Take a couple who turn sixty-five this year and are entitled to take a full pension. On average, a sixty-five-year-old man will live to 83.7 years and a sixty-five-year-old woman will live to 86.8 years, meaning they will require support for 972 weeks at the couple’s rate of $1307 per fortnight and the single person’s rate of $867 for a further 161 weeks, a grand total of $657,559 even without allowing for future pension rises. And this does not take into account the cost of the Commonwealth Seniors Health Card, which is often even more valuable to pensioners and therefore even more costly to taxpayers, giving pensioners access to cheaper prescription medicines, government-funded medical services and other government concessions.

For a couple to get just the same income as the pension through their own savings they would need to have jointly saved at least $1,000,000 in superannuation. What sort of incentive is that to save? If a couple who work, pay taxes and save end up with exactly the same income as a couple who have never worked or paid taxes or saved, one has to wonder for how much longer people will bother to save for their retirement. Yet not only would they end up with the same income as their feckless friends, they are also currently required to pay taxes on the savings which merely replace the pension.

A system designed to encourage people to provide for their own retirement would refrain from taxing retirement savings while people are working. Then, when they draw down on this hitherto untaxed nest egg, they would pay normal income tax on it.

Such an approach grants dignity and independence to retirees, allowing them to save enough money for a comfortable retirement, usually estimated at about 80 per cent of a person’s working income, and above the level that the aged pension, as a safety net, would provide. It would make it easier for individuals to smooth out their income over their lives. It would reduce the burden on government by reducing the demand for the aged pension. It would increase revenue for the government as the population aged by giving people a taxable income stream in retirement. Lastly, it would create greater parity of treatment on income from different sources of savings in retirement, rather than privileging one form of saving over another.

Treasury originally intended this taxation regime to apply to compulsory superannuation. But the Keating government couldn’t bring itself to forgo the revenue and decided to tax both contributions and earnings at a concessional rate, with earnings and the income stream in retirement tax-free. Theoretically, this was meant to result in the same amount of tax being paid as in Treasury’s preferred regime, with the tax simply paid earlier. In practice, estimates show it appears to tax savings more heavily.

Now Labor wants to axe even this pillar of Keating’s compulsory super scheme, with Bill Shorten proposing that those earning more than $75,000 in the retirement phase would be taxed at 15 per cent. Bear in mind that when you live on the returns from your investment, the bumper harvest is meant to compensate for the losses in lean years. By taxing those returns, a government would not only break a solemn promise to savers and engage in retrospective taxation, it would slash average returns to savers.

All this when the effective tax rates under the present scheme are already at or beyond the top income tax rate when you factor in the impact of volatility on returns and the fact that super reduces the saver’s entitlement to the aged pension. To add a 15 per cent tax on top of the existing regime would take the effective tax rate to around 60 per cent.

A study by Mercer in February 2013 which benchmarked Australia against eight of the world’s best retirement savings systems —Canada, Chile, Denmark, Netherlands, Sweden, Switzerland, the UK and the USA—found that six had tax regimes that were more generous towards retirement savings than Australia. In particular, the Mercer study found that Australian contribution caps were lower than all the other countries surveyed.

The striving of ordinary people to better themselves and to provide for their families, not just today but into their old age and beyond, leads to a better society for all and is the fundamental moral difference between Menzies’s Liberalism and the collectivism of parties of the Left. If you penalise the thrifty and reward the feckless “the whole business of life would become foundationless”, as Menzies put it.

Yet the current political discussion about superannuation seldom touches on morality or philosophy. Instead, the parties of the Left have set the agenda constructed on the notion of a benevolent, paternalistic state that knows better than individuals what they need. The Left sees the very existence of haves and have-nots as an affront to the principle of fairness, fuelling an insatiable desire for revenue to be collected and redistributed. Moreover, so the leftist thinking goes, no matter how much you take from a have to give to a have-not, it will not dampen the incentive to work of the haves any more than it will sap the desire of the have-nots to try to provide for themselves.

Such a worldview is contradicted by everyday experience, nowhere more so than in remote indigenous communities, where the road to the hell has been paved with the benevolent intentions of the paternalistic state. In this extreme example, welfare dependency corrodes not just the will to work but the will to live.

The resultant degradation and despair have nothing to do with race and everything to do with depriving people of a purpose. These conditions are replicated on the fringes of our cities where welfare dependency and the social ills that accompany it can cripple several generations in a family.

Some see this whole debate as an economic argument about the elasticity of taxable income or savings with respect to marginal tax rates, but there is something much more important at stake. Society should reward, not penalise, people for thinking about their future and taking care of themselves. A safety net for those who, through brute bad luck, are unable to care for themselves should not be so broad that it ensnares those who are capable of looking after themselves, nor should it be so generous that it acts as a lure to the feckless.

A society that encourages and rewards individual effort and responsibility secures not just a better standard of living in retirement for the vast majority who provide for themselves, but will also have the resources to provide for the genuinely needy who are forced to rely on the social safety net.

The promise of compulsory superannuation was that most Australians would be able to save enough to retire on with an income of at least 70 per cent of their pre-retirement earnings. Not only are we nowhere near that goal—the 2013-14 Commission of Audit concluded that if nothing were changed, there would be no increase in the number of people who could fully fund their retirement, even forty years into the future. If reform to the retirement incomes system is simply motivated by a desire to increase government revenue and impose notional equity, it will only make a bad situation worse.

The reform that is desperately needed is not a significant increase in taxes on superannuation to pay down the deficit but a significant reduction in taxes on superannuation so that the vast majority of Australians, the 60 per cent who are neither rich nor poor, can save for their own retirement without the government constantly raiding their savings.