The ugly economics of Swan's super slug

Those with $800,000 in super savings, including the majority of women, are not rich. And Labor's proposal to punish them will backfire on Treasury.

This week I was at function where a number of senior female executives came up to me with fear in their eyes.

They had suddenly realised that they do not have enough superannuation to retire, unless they have a moneyed partner. Their plight may get worse because the politicians in Canberra (both male and female), having feathered their own nests with non-contributory schemes, are now thinking about making sure others miss out.

It's now generally accepted that single people need between $1.5 million and $2 million to retire comfortably using superannuation as their main income source. Women often go through periods of little or no income or superannuation contribution during the early years of their children. When they return to the workforce they are limited to injecting $25,000 into superannuation funds with a tax deduction. Many now realise that, if they can afford it, they are allowed to put up to $150,000 into superannuation from tax paid income – that’s a total injection of $175,000 a year.

But now Wayne Swan and Penny Wong (both of whom have been in parliament long enough to be well looked after) are looking to tax superannuation earnings at a higher rate when they reach the halfway-to-retirement figure – about $800,000. That will make it impossible for most to gain sufficient superannuation to retire on. Yet Swan and Wong are making their decision on the basis of totally incorrect figures calculated by Treasury and in the misguided belief that people with $800,000 in a superannuation fund are "rich".

Wong and Swan will argue that a lot of people who save via superannuation, including the majority of females, have far less than $800,000. And that’s true.

But the harsh reality is that most people in that situation know that they can’t use superannuation to cover their entire retirement. So what they do is go to a financial planner and work out how to maximise the government pensions. They might leave some money in superannuation but most of it is taken out as a lump sum and salted into areas that allow maximisation of government pension income. That’s why half the actual superannuation pensions are in self-managed funds. The retirement game as currently played is that you either use a self-managed fund for a self-funded retirement pension or when you retire you take out of your superannuation as much cash as makes sense in the government pension maximisation game.  

Accordingly, Wong and Swan are now looking to increase the trend towards not using superannuation for retirement by attacking, via higher tax, the superannuation funds of females and males who are getting close to being able to fund their own retirement. Swan and Wong will yield big sums in the short term but will cost the nation in the long term. (Treasury not only got their sums mathematically wrong but ignored the above effect.)

If the higher taxing trigger on superannuation was $2 million in a fund then Wong and Swan would have a legitimate argument.  

Meanwhile, the Australian superannuation industry is almost frozen with fear, as they not only await what knocks the current government will inflict but also try to work out to what extent a Coalition government will reverse any major blow inflicted by the current government.

Simon Crean and Bill Kelty are right that if Swan and Wong unfairly tax people with $800,000 in superannuation Swan and Wong will have forgotten the national interest.