Snouts in the superannuation trough: turbo-charging Paul Keating’s legacy

by | Aug 18, 2020 | Finance & Tax

Three million Australians have now applied to the Super Early Release Scheme, with $30 billion already paid out and more than 500,000 members emptying their accounts. Harry Chemay takes a look at the nation’s retirement system, which costs 10 times more to run than the Tax Office and has enabled the highly paid to accelerate their wealth precipitously.

If superannuation didn’t exist, and you went to the Treasurer of the day proposing a retirement system that would require 10 times the operating cost of running the Australian Taxation Office but wouldn’t deliver a net benefit to the Commonwealth budget for at least 50 years, you’d get short shrift.

If you further proposed that same retirement system primarily be a vehicle for the highly paid to supercharge their accumulation of wealth through tax concessions worth some $36 billion each year, you’d probably be expected to be shown the door.

But this is the system we have ended up with today, nearly 30 years on from Paul Keating’s defining speech outlining his vision for Australia’s retirement system.

The annual cost of administering the super system, and investing for the nation’s 16 million account holders, is in the order of $32 billion.

The ATO runs on the smell of an oily rag by comparison – with an annual budget of about $3.4 billion, a tenth of the super industry. On that budget the Tax Office oversees the tax affairs of 12 million individuals, 4.2 million small businesses, 865,000 employers, 36,000 large multinational entities, 35,000 registered tax agents, 201,000 not-for-profits and all self-managed superannuation funds (SMSFs).

Either the ATO is comically underfunded, or the super industry is obesely inefficient. Very possibly both.

Back where it all started

On a cold July day in 1991, Paul Keating strode to the front of the Australian Graduate School of Management’s lecture theatre at the University of New South Wales.

The MBA students were in for a treat. What they were about to hear would benefit them directly, career-wise and financially, although none could have known it at the time.

Keating was giving the address as a backbencher, having lost a leadership ballot to prime minister Bob Hawke a month earlier.

It was not a position the man once dubbed “The World’s Greatest Treasurer” was keen to get used to. He had a grander vision, for himself and for future retirees.

The speech was a key plank in that vision, and he aimed to make it count.

Policy shaped the nation

It did, and by December Keating was prime minister. Much of what he outlined in that speech has come to pass, shaping the Australia of today in a way few policies have done since.

While the Prices and Incomes Accords of the mid-to-late 1980s had delivered superannuation, at the rate of 3%, to 85% of awards, only 64% of workers were covered, most of whom were in the public sector.

As Keating saw it, 3% was far from sufficient. His goal was that “by the year 2000 every employee has a contribution to superannuation equal to 12% of wage and salary income paid into (their) superannuation account”.

Keating’s vision was a compulsory contributory system where a portion of nearly every working Australian’s wages would be directed into a personal superannuation account.

The Superannuation Guarantee system came into effect on July 1, 1992, but the 12% rate has been the subject of intense political debate ever since. The rate is currently legislated to rise half a per cent to 10% on July 1, 2021, before reaching Keating’s target on July 1, 2025, some 25 years overdue.

A growing chorus is now arguing for that half a per cent rise to be directed into wage rises instead, to prioritise take-home income in a Covid-19 ravished economy. The Government, meanwhile, sits on a Treasury Retirement Income Review report, widely thought to have a view on the matter.

A $3 trillion national leviathan

The wheels Keating set in motion that July day turned a then $140 billion minnow into a current $2.7 trillion financial leviathan. The nation’s retirement pool, already 140% greater than the nation’s annual GDP, is projected to rise to 190% by 2038.

The system feeds on $120 billion in annual contributions, 80% via employer payments.

Super is dominated by a handful of large funds regulated by the Australian Prudential Regulatory Authority, accounting for $1.9 trillion of assets.

Between these funds lies a philosophical chasm, with 36 profit-to-member-funds (“industry funds”) on one side, and 110 bank and institutionally owned retail funds on the other.

Some 600,000 SMSFs, collectively accounting for $670 billion in assets, together with an assortment of public, corporate and statutory funds round out the super system.

The scale of assets in superannuation is best illustrated by the fact that while the nation’s population is just 25 million people, we have the fourth largest retirement pool, behind the US, the UK and Japan.

Inordinately expensive to run

As noted earlier, super appears to be an inordinately expensive pool of assets to maintain. The direct cost to members is estimated at about $32 billion a year – 1.1% of account balances, plus annual insurance premiums of some $9 billion.

These costs appear remarkably resistant to the benefits of scale, as the chart from the 2017/18 Productivity Commission review into super indicates:

The $32 billion in charges pays for account administration, custody of assets, investment management and various governance, audit and assurance operations surrounding it.

All aboard the gravy train

Keating’s superannuation dream within a privatised system has spawned an industry now directly employing some 55,000 comparatively well-remunerated individuals.

In addition, an army of service providers exist to cater to the funds, encompassing fund administrators, asset managers, custodians, registries, data analytic companies and member engagement agencies, together with lawyers, consultants and audit/assurance professionals all engaged to keep fund trustees on the right side of a hugely complex legislative edifice. Then there are some 20,000 financial planners.

Funds are fattening up on superannuation fees

Collectively, all these roles account for a significant slice of some 450,000 finance jobs, making financial services the largest employing industry in Australia.

It has also been relatively sheltered from the Covid-19 crisis, with a Treasury review of JobKeeper recipients noting that, while the arts, recreation and related sectors were haemorrhaging jobs, financial and insurance services were among the sectors least affected.

Regressive taxation 101

Superannuation has been an absolute boon for the highly paid to turbocharge their accumulation of wealth. Those bright young MBA candidates would doubtlessly have proceeded to high-earning careers, many in financial services.

They would have had ample opportunity to take advantage of a raft of super tax concessions – the cost of which exceeds $36 billion annually. Many would also be approaching the golden age of 60, when paying tax becomes broadly optional, with the flows more commonly reversed.

As a recent study by the Tax and Transfer Policy Institute reveals, much of the tax benefit of super flows to higher income and older, wealthier Australians. In ‘The Taxation of Savings in Australia: Theory, Current Practice and Future Directions’, the TTPI analysed effective tax rates for different marginal taxpayers.

The largest tax advantage for higher income earners building wealth is achieved through concessional super contributions, as the below chart depicts.

And the huge benefit of franked dividends for wealthy over-60 retirees featured heavily in last year’s federal election campaign.

Almost 30 years on, Paul Keating’s creation has never been more significant, or more partisan. Superannuation divides people trenchantly down party political lines. Those on the left hold super sacrosanct; a legacy for the ages. Those on the right remain suspicious of super’s ‘true intent’, certain that its nefarious aim is to erode personal freedoms and facilitate the resurrection of union militantism.

Neither position stands up to detailed scrutiny, but this much is assured. It should, by now, be abundantly clear to policymakers that this current level of taxpayer largesse is simply unsustainable.

Emergency piggy-bank: superannuation’s Achilles heel exposed by virus

ABOUT THE AUTHOR

Harry Chemay

Harry Chemay

Harry Chemay is a co-founder of Clover.com.au, a “robo-advice” Automated Investment Service that aims to engage Australians with their finances earlier in life. He has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning. He has also been appointed an Australian ambassador to the Transparency Task Force, a UK-led initiative to bring greater transparency and accountability to financial services (transparencytaskforce.org/ttf_ambassadors/australia/). You can follow Harry on Twitter @HarryChemay.

13 Comments

  1. Avatar

    Most young people would never save for their retirement if they had the option. That’s why it must be compulsory, and must be 12% ASAP, and not allowed to ever be raided by a moron “old mate” Prime Minister again.

    • Avatar

      The problem I see with all of this is that the ATO is going to run compliance models against those who drew down on their superannuation early, and when it does find all those people who just saw dollar signs, I’m torn with what I think the government should do with them.

      I know, first hand, 12 people who have accessed their superannuation as a part of the coronavirus early release of super benefits stimulus. Of those 12, not a single one of them were legitimately allowed to, and literally every single one of them spent the money on a new TV, or paying off personal loans, or re-contributing the money for a nifty little tax rort, et cetera. None of them used it to pay their overdue mortgage or rent or anything that it was originally intended for.

      So now I know 12 people who flat out deserved to have the book thrown at them, but they are the ones who can least afford it. If we throw the book at them now, when they attempt to draw on their superannuation and it’s grossly insufficient to cover their expenses, the government will then be called upon to prop them up.

      And the biggest ass-chapping point of it all is that this is PRECISELY what the government wanted these idiots to do. They wanted people to pull their superannuation out and use it to prop up their absolutely god awfully knife-edged economy.

      I’m so torn over all of it. Above all else, I detest that we ever allowed a woefully under-educated populace to access such a valuable resource. Slightly under that is the fact that they were stupid enough to actually do it.

      • Avatar

        Thanks for calling me stupid. I’m unemployed (one of the qualifiers), have been for six years. Call me stupid, well I’ll assume you’re one of those pricks who won’t give me a job. I used the money to finish my mortgage and put a PV array on the house I finally own.

  2. Avatar

    To be relevant Harry has to provide us with a viable alternative. He hasn’t!!

    • Avatar

      Thanks for your feedback. The constraints of laying out the issue (super sector inefficiency) precluded me from also outlining some measures for improvement. I will be doing so in a follow up piece. Harry

    • Avatar

      Why don’t we just have a pumped-up Age Pension system, bolstered by an income-related Medicare-levy-type compulsory contribution, administered and invested centrally by an efficient ATO/Futures Fund type manager, and then we all receive a flat pension (maybe two or three times the current pension). The current super system was supposed to save the taxpayer the cost of paying the Age Pension, but my understanding is that it is already costing the taxpayer more in tax concessions (most of which go to the rich).

  3. Avatar

    Didn’t Paul Keating design this system we need to review the whole issue not a patchwork approach . I question why those who have not suffered by the coronvirus are allowed to make withdrawls especaily when the employer contiribution is upto 17% like the Univiersties , ABC. Clearly poorly designed

    • Avatar

      Thanks for your comment John.

      Paul Keating didn’t specifically invent the system. Occupational superannuation has been around in some shape or form since the mid 1800s (for employees of specific companies) and the Old Age Pension since 1908. What Keating did was formalise a modern compulsory contributory system meant to cover almost all workers. But rather than making it a nationalised system with one Fund, like say Singapore, he favoured a privatised system where many Super Funds (whether ‘Industry’ or For-Profit) could accept contributions (subject of course to awards & EBAs).

      The issue now is whether Australia’s 16 million-odd super members are getting value for money from the system, or whether it is leaking too much in fees and charges to too many entities. Evidence suggests that our fees and charges are above comparable systems globally, which basically means that we all end up with less money to retire on (all else equal).

      Harry

  4. Avatar

    The sure fire path to a financially challenged retirement is to not be a home owner. Potential first home buyers must be enabled to access their superannuation reserves to facilitate their home buying needs/ambitions.

  5. Avatar

    You are semantically correct but he did make it available for all employees . Earlier was only for the privileged public servants and employees of large companies .We do not ensure that all are equal Why do some get 17% contribution others 15% . Strangely they are people telling us that a lesser figure is appropriate . Do quarterly results prove anything except for lazy journalists . Surely the test should over 1,3 5,7 10 ,15 years at least .
    When my super started i had to place 30% into government securities and pay tax of 50% on income over 5% and I was limited to make a payment of$1200.00. I find much of these comments not well thought through and merely populist . My fund started by me in 1969 and I have suffered the disadvantage of never having had an employer contributing.

  6. Avatar

    When you consider that the taxpayer pays 15.4% toward a parliamentarian’s contribution, one has to ask why are they stopping our progress to a measly 12%. Should of been 12% in 2000, no questions asked.

  7. Avatar

    Harry, that is a most necessary excoriation of this disastrous scheme. $32 billion to run (going to well-off rentiers) and $36 billion in tax foregone (mainly going to well-off rentiers)

    But it is more fundamentally flawed than even that would indicate. The system guarantees that, in our supposedly egalitarian country, the more you earn during your working years, the more wealthy a lifestyle you will have in your old age. The less you work (for pay that is), the less super you accumulate. So PJK’s greatest legacy is to ensure that people who spend their lives as unpaid carers (mainly women), and people who are unable to work (disabled, ill, unlucky), and people who have poorly paid jobs (childcare, nursing homes, cleaners, security guards), and people whose employer goes broke without paying the SG, will be at the mercy of an inadequate old age pension in their “golden years”. And I don’t mean a part pension with all the added benefits which many of the rentiers manage to enjoy.

    Which brings us to the impact of that $3 trillion sloshing around looking for a home. How much of a distorting impact does that have on sharemarkets? What could that sort of money, held in a govt fund, achieve in the way of environmentally sound infrastructure.

    In short, this system is catastrophically bad.
    Harry, I look forward to hearing your solutions!!

    • Avatar

      Hi Richard,

      Agree with most of the issues you raise. One of the key shortcomings of a contributory system based on income is that it will, by its very nature, allow those with the longest, least interrupted, highest earning careers to gain the most out of super. That was the point I was making about those MBA students, given that the class would no doubt have been skewed to male students who probably didn’t need to have career breaks to start or raise a family.

      Will have more to say on these and other shortcomings of the super system as I systematically unpack this well-fed, portly yet slightly confused 28 year old we call ‘Superannuation’. Cheers, Harry.

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