Dr. Evil: "Here's the plan. We get the warhead, and we hold the world ransomed for... One MILLION DOLLARS!!"
No.2: "Ahem... Well, don't you think we should maybe ask for more than a million dollars? A million dollars isn't exactly a lot of money these days. Virtucon alone makes over nine billion dollars a year!"
Dr. Evil: "Really?"
Dr. Evil: "Okay then. We hold the world ransom for.....One hundred...BILLION DOLLARS!!"
– Austin Powers: International Man Of Mystery.
The Labor government appears to have floated the idea of reducing the tax concessions on superannuation savers who have more than… One MILLION DOLLARS! (Wayne Swan puts pinky in corner of mouth).
As my colleague Robert Gottliebsen pointed out, that retirement account balance would produce income of $38,000 a year from a term deposit (Gillard's super plan is far too rich, February 4). Also, I tried a couple of annuity calculators – $1 million would buy my wife and me an annuity of about $40,000 a year.
That was the average wage about 20 years ago. Now it’s a bit more than half.
With superannuation the account balance is irrelevant; the point of it is retirement income, and with life expectancy rising rapidly, the value of a dollar at retirement is falling fast. The value of retirement savings reduces more rapidly than any other form of money, because of the combined effect of inflation and rising life expectancy.
What’s more, the power of compounding means that it’s not hard at all for a person on average wages to save $1 million dollars, especially using the 12 per cent rate to which contributions will soon rise. According to ASIC’s basic calculator, a couple on $40,000 and $50,000 will easily get to a million dollar balance well before they turn 60, and by the way – that probably won’t be enough.
OK, so perhaps the ALP’s political brains trust reckons voters at the 2013 election won’t work all this out and that ONE MILLION DOLLARS sounds like a nice big round number. If so, they’re in for a shock. If they thought the mining companies’ campaign against the original RSPT was a big deal, wait 'til they see what the superannuation industry will hit them with if they propose an increase in super taxes.
The desperate superannuation kite-flying is a pointer to a more fundamental problem for the government and also to a uniquely excellent aspect of the 2013 election: promises will all have to be financed. Both sides are committed to returning the budget to surplus, although the timing is now more rubbery than it was, and therefore every promise will have to be matched dollar for dollar with savings or taxes.
The difference is that Labor has already started promising; specifically the National Disability Insurance Scheme and the Gonski school reforms are big ticket unfunded promises.
As Paul Kelly writes in this morning’s Australian: "Labor's dilemma is acute: if Gillard retreats from tough "structural saves", her disability insurance scheme proper and Gonski school agenda, now completely unfunded, will look untenable, yet if she cuts deep Labor risks the real and symbolic impression of attacking aspirational values, thereby confirming Abbott's campaign theme.”
The government has manoeuvred itself into a trap, where the Labor values of fairness and equity appear to conflict with good economic management. It can’t deliver one, without abandoning the other.
The Coalition still has plenty of work to do between now and September 14 to avoid a similar dilemma but it has not got itself into that trap, and is unlikely to.
Superannuation is a very large cost to the budget, it’s true, but part of the reason the tax concessions for super need to be so large is to counter the fear and confusion about it.
Most people are rightly frightened they won’t have enough, and they don’t understand how it works. They don’t know what they are buying, either while they are saving or when they retire, and they don’t know what they are paying for it. Naturally they are very anxious about that. Changes to the system simply increase that anxiety.
Peter Costello’s reforms in 2007 that abolished RBLs, replacing them with standard contribution limits that were not age related, and removed tax on end benefits for those over 60 had the enormous benefit of simplifying the system, as well as increasing the tax concession.
Labor’s fiddling with the contributions cap has added further uncertainty and confusion and flying a kite about reducing the tax concession will add to it.
What the politicians and Treasury should do make the system simpler and more transparent. Then, perhaps, it could be taxed more.
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