Could Prime Minister Julia Gillard or Treasury Secretary Martin Parkinson live on $38,000 a year of superannuation income with their spouses in retirement? Of course not, and I emphasise I am not playing the weeping game to embarrass them but rather to underline that the current ‘tax the rich’ and end ‘middle class welfare’ proposals being circulated to friendly journalists by Treasury and government politicians are terribly unfair.
People on a superannuation income of $38,000 are being classed as rich and they clearly are not rich. I am afraid that neither the politicians, the Treasury officials nor the friendly journalists understand just how the superannuation system works in real life Australia.
In the case of long-serving senior ministers and public servants, they have a superannuation scheme to which they made only token contributions, which is now worth tens of millions of dollars – a lifetime indexed pension linked to high salaries. The fact that these schemes are not taxed in the proposals being canvassed to the journalists is not a question of politicians and public servants feathering their own nest at the expense of others – I have a great respect for Martin Parkinson. It’s just that the personal situation of the decision makers makes it very difficult for them to relate to what’s actually happening in the real world.
To its great credit Treasury now understands that the current government cannot raise enough taxes on the current structure to fund its big spending proposals, including the school kids bonus, Gonski reforms, disabilities support, etc.
Accordingly, Treasury believes that the government must tax savings and the leaks indicate that they (or the politicians) have chosen the superannuation system to attack.
By contrast Tony Abbott believes that he can bring his spending into line with the tax base, partly by eliminating the duplication between Commonwealth and states. That involves reducing the size of the state and federal public service. The choice between taxing savings and reducing public service duplication will be a key issue at the election.
Let me explain how savings in Australia work and how I reach the figure of $38,000 a year as the proposed trigger for a tax attack on older Australians.
There are many ways to save in Australia – through the family home, negatively geared rental homes, personal shares, the increased worth of your business, estate benefits from deceased relatives, bank deposits and superannuation. Apart from bank deposits all savings avenues are taxed at a lower rate than normal income. Because there are now limited sums that can be invested in superannuation it is hard to generate enough to retire on via superannuation.
As a result more and more people are using superannuation to support some of the other savings mechanisms. For example, when you reach 60 you withdraw your superannuation to repay mortgages, or a leveraged dwelling in your super fund is extracted. Sometimes the super fund owns the business premises etc. Very often in retirement super is run down to augment the aged pension. If you are going to tax savings then it's only fair to attack all forms of savings and not just select one.
In previous decades it was possible to put larger sums away in superannuation. If you are among the minority who socked all they could away in superannuation and reached $1 million then according to the leaks from Treasury/politicians, the absence of a tax on your superannuation pension means you are receiving ‘middle class welfare'. Let’s look at the real position. If you invest that $1 million in Commonwealth Bank two-year term deposits, with interest payable monthly, you receive $38,000 a year. But Treasury would say that if you punt it on the stock market the return will be much greater. It could also be a lot less. If you start using your capital then your income potential soon falls. Dying early helps.
If you have $2 million in superannuation the income becomes $76,000 – which is easier to live on but hardly makes you rich. And certainly you are not a recipient of middle class welfare, especially as there is no indexation. To be "rich” you will need much greater sums. If you are going to attack those with, say $2 million in superannuation, why not attack those with tax-free houses of $2 million, including rental property where there is negative gearing?
The only fair way is add up all assets and then tax. I must emphasise that I am not in any way advocating such a policy but at least it's fairer than simply attacking one savings class. And you must include the market value of the senior politicians' and public servants' indexed pensions – they will have a huge bill. Attacking one form of savings, which most journalists, senior public servants and long-serving politicians did not use, is clearly not fair. But I must confess my bias. I am one of the minority who used superannuation as legislated by governments as important savings vehicle. But at 72 I am still working.