Overdone schemes are toasting super

It's not tax that makes super complicated, it's the entire labyrinthine system. And too many savers end up worse off than they'd be without it.

The superannuation industry complains that constantly tinkering with the tax on super kills confidence in the system, and it’s quite right.

But the main reason for the lack of confidence, in my view, is that the system is defined contribution rather than defined benefit, and that when someone retires, the real benefit (the income) is still not defined.

In other words, Australians are forced to buy a product but they don’t what the product is and they usually don’t know the price.

In fact, the only thing that’s easy to find out about super is the tax; in many ways the tax is the least complicated part of the system, despite all the tinkering.

Yes, super is a tax effective savings product, but that’s all the product description you get. You get to know what you are putting in, but not what you get at the end.

It’s like buying a toaster with a completely random outcome for the colour of the toast. It might be undercooked or burnt – that’s purely a matter of what happens to the heat market during the course of the toasting. Would anyone buy a toaster like that if they didn’t have to?

Australians are forced to save for their own retirement, but they don’t know how much they will end up with and even if they did know they wouldn’t know what sort of retirement income that would produce, and they don’t know how it would affect their entitlement to the old age pension.

It’s not tax that makes super complicated; it’s the fact that the whole thing is a complete mystery.

In order to get your head around it, you would need to be an actuary with a deep understanding of historic market returns and a crystal ball for future returns, as well as a full understanding of the taxation of super plus the old age pension means testing regime.

Most people naturally give up and forget about it. They regard the 9 per cent super deduction as a tax that they’ll never see again, and if they do it’ll just be a nice lump sum to finance some travel, before they hope the pension keeps them off cat food once they retire.

For many people a lump sum at retirement age is worse than useless: they don’t know what to with do it so they have to take it along to a financial adviser who they hope won’t lose it for them. In many cases it is then given to a charlatan who runs off with it, or is invested with respectable men in suits until it goes away.

To work properly for the customers, superannuation would turn into a known pension upon retirement. That is: if I save this much while I am working, then I will have that much per month when I retire, for life.

The industry will say, of course, that it couldn’t possibly work like that because it would require too much capital to guarantee it. Well, that’s how the system used to work, before the system switched from defined benefit to defined contribution, allowing all the capital to be withdrawn and paid to executives and shareholders, while individuals were left to the mercies of the market.

I’m just describing a system that would really be customer-focused, to use the modern terminology.

Now the system costs a fortune in tax deductions and does not properly serve customers. Who does it serve?

The industry of course. It creates a vast pool of money through a combination of compulsion and tax deduction that provides a $20 billion income stream to a rapidly growing industry with no responsibility attached to it.

That is, the army of managers, administrators and advisers get to skim the pool while taking no responsibility for their work. If they lose money, it’s the market; if they make a good return, it’s their own genius.

Meanwhile the politicians watch all this slurping from the trough, green with envy. If only they could get their hands on some of the cash, they’d be fiscal heroes – responsible economic managers.

In fact it’s the Labor government’s abject failure to design a resources tax that raises any revenue that has forced it to look at something even easier: superannuation.

The increase in government spending under Labor has to be financed. The Henry Review provided the intellectual foundation for an easy grab from the booming mining sector, but that has been entirely stuffed up, with only $126 million raised thanks to unexpectedly high depreciation based on market values of assets instead of historic cost.

Next easy grab is super because of the overlap of the compulsory and voluntary systems, and easiest of all is the self-employed, who need the tax deduction because otherwise the marginal tax rate on saving would be prohibitive.

That’s where all the tinkering has been focused up to now, by constantly lowering the cap on contributions. The effect of that is to tax the savings of the self-employed, who are the people who used the tax deductions.

Those deductions are not 'middle-class welfare' or even 'handouts' at all. They are an investment in a reduction in old age pension outgoings in future, as well as a levelling of the playing field.

Follow @AlanKohler on Twitter

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