The super debate we never had

Labor has effectively locked in tax inequalities, the Coalition is crying foul on a raid that really wasn't and fund managers will be laughing.

Friday's momentous superannuation announcement by Treasurer Swan and Financial Services and Superannuation Minister Bill Shorten was a clever media stunt. Nothing changed, but Labor got to take some credit for protecting the interests of nearly all super savers.

To achieve this, Labor spent three weeks rattling the cage of media commentators and the Coalition, and surely enjoyed the squawking that ensued.

Headlines proclaimed Labor was divided on the issue, that there was a 'raid' on hardworking Australians and that self managed super funds were under attack.

One headline in The Australian even asked, on behalf of semi-retired financial planner John Crouch and his wife, "Question to Wayne Swan: Exactly what have you got against us?"

The answer, when it came, was a resounding "Nothing, mate".

In fact, the changes confirm that if caucus was divided on whether or not to 'raid' super tax concessions, the dissenters had been silenced. Cabinet approved a 'reform' that not only has nothing against the SMSFs that Crouch and his wife are relying on, but also has nothing against 99.6 per cent of retirement savers.

One point seems to have been missed by many commentators. For the remaining 0.4 per cent of savers affected by the new rules (around 16,000 to 20,000 people), voluntary contributions to super are still the best tax efficiency measure they have available.

It has been suggested that if that wealthy 0.4 per cent of savers will be taxed at 15 per cent for earnings above $100,000 (keeping in mind that's on earnings within their fund, not on withdrawals) that they will not want to put so much money into super.

Not true. It would have to be a pretty extraordinary investment during the accumulation phase of a super fund that would make it better to pay the top marginal tax rate on a dollar earned (45 cents) and then invest it in, say, a negatively geared investment property. You'd be investing 55 cents (having paid the taxman 45 cents) and would have to lose a hell of a lot on your investment property to recoup enough of your normal income tax bill to make it worth your while.

Even if property market capital gains were what they used to be – 12 to 15 per cent, say – it's hard to see how an investor could come out ahead, when the other option is to pay 15 per cent tax on that same dollar (30 per cent if you earn over $300,000), invest it within a super fund, and pay only 15 per cent on earnings before making a tax-free withdrawal.

That is, Labor's 'reform' changes nothing and will ensure the amount of money flowing into super accounts in future is virtually identical to the amount that would have flowed there without the reforms. Music to the ears of fund managers.

Should Labor have 'raided' more? That's a big question, and it relates to the 'accounting error' Treasury made when it estimated the cost of super tax concessions to the Commonwealth each year.

Some, such as my colleague Robert Gottliebsen, have argued that it contains double-counting (see his argument here), and that the investment returns used in Treasury's model (7 per cent) were too high.

That critique is largely correct. Concessions of $30 billion today, rising to $45 billion in 2016, are over-inflated figures – but not a complete fiction. As a rough calculation, it's instructive to see what happens to $85 invested at 7 per cent, compounded, as opposed to the new figure being used by the government, 5 per cent. The first would produce a return of $947 compared with $468 for the latter.

Without access to Treasury's full modelling and assumptions, which should have included the number of people pushed back onto a part/full government pension, it's hard to say what the numbers should have been – probably something like half the 'problem' that this week's reforms were supposed to solve. That would be $15 billion in concessions today, rising to around $22.5 billion by 2016.

For those who, like the Australian Institute, thought these concessions were too high, the argument was that 5 per cent of working Australians received a third of the concessions. The working poor, who make absolutely no voluntary contributions to their super receive none of the (let's say) $15 billion in current concessions. And the top 5 per cent of wage earners split $5 billion between them.

Under the new reform, that picture is almost entirely unchanged. Super accounts, from lowest earners to the highest, will see the same amount of money flowing into them as before. And on top of that, the Shorten reforms largely lock in the current distribution of super tax concessions by creating a Council of Super Custodians who will report to parliament any time a future government wants to tweak the system, to see if it accords with a Charter of Superannuation Adequacy and Sustainability.

That gives the Left much to dislike in this week's announcement. Workers on the minimum wage of $37,000 will still – because they have no dollars spare to tip into their super – will get none of the super concessions. 

Virtually everyone else who got a piece of the pie, will get the same piece. The only people who lose a dime are that 0.4 per cent of savers who will pay 15 per cent on earnings above $100,000. If social equity is your main driver (Kim Carr and Doug Cameron et al) you will hate, hate, hate these changes.

But the other people who should be complaining, are Tony Abbott's core constituents – the forgotten people of middle Australia, particularly the small business owners who have their super in modest retail funds, or SMSFs. Why should 5 per cent of workers get a third of concessions, when many embattled small business owners get next to nothing?

Many of them are being squeezed immensely by current business conditions, and have precious little to top up their mandated super contributions (9 per cent at present, rising to 12 per cent over the next few years – something an Abbott government has vowed to continue with).

Curiously enough, as Labor 'raids' the accounts of 0.4 per cent of savers, Abbott's response was to say the reforms were a "raid on people" and that "every time a government raids people's funds, there are shades of Cyprus about it".

What strange positioning for the man wishing to reward the hardworking forgotten people who generate so much of this nation's wealth. Five per cent of savers will still get a third of the tax breaks. All the money will still flow in the usual directions, and the lack of concessions flowing to the forgotten people will be locked in by the Council of Super Custodians.

Labor knows it has dodged the issue. Abbott knows this too. Labor wanted to lock in the status quo, and through cage-rattling and media-manipulation has achieved just that – and Abbott seriously thinks they should not have even made the tiny tweaks they have.

What an extraordinary policy process – the debate that never was.