What we talk about when we talk about super

What we talk about when we talk about super in Australia is… tax. And what a bleak discussion it is, seagulls squabbling over chips at the beach.
 
We have stopped talking properly about reform of the system to fix its many failings, only the taxation of it, and that’s for the simple reason that it’s a flat tax in a regime that is otherwise progressive.
 
As a result, Treasury bureaucrats constantly explain to politicians that most of the benefits of super tax concessions go to high income earners, which is what happens with a flat tax: well-off people get to keep relatively more cash than those on lower salaries.
 
In damage control mode yesterday, Superannuation Minister Bill Shorten told a few journalists that superannuation taxation would simply be made more progressive – that is, that only rich folk on $240,000 or $300,000, depending on which report you read, would be taxed more. More, presumably, than last year’s change, which will increase the tax on super contributions by those who earn more than $300,000 from 15 to 30 per cent.
 
And who can complain about taxing the “fabulously wealthy” more than the wretchedly poor? But now we have to have a debate about where, exactly, the line is between fabulous and wretched these days, given that everyone is burdened by so much debt.
 
Perhaps the taxation of super contributions should simply be a discount on a person’s top marginal rate, so the same scales apply and we can all get on with life and stop talking about the taxation of super.
 
Maybe then we can talk about what’s really wrong with super, which is that nobody knows what they will have to live on in retirement, so they don’t know if they are saving enough – and almost nobody IS saving enough – and absolutely everybody is paying too much in fees.
 
What’s more, the means test of the age pension encourages retirees to spend their super lump sum so they qualify for more of the pension. Most other countries require at least part of the benefit to be paid as income.
 
Some wise people have written in recent days that the problem with super in Australia is the post-retirement end, not the pre-retirement saving part of it. I disagree: it’s both.
 
As the chief executive of Australian Super recently pointed, excessive fees are being skimmed from our savings and the industry is “living off the public teat”. I would add that there is not enough discussion with savers about the end, instead of the means. What do the terms “growth”, “balanced” and “conservative” mean in the context of what a person will end up living on in retirement? How does someone save for a post-retirement income of, say, 70 per cent final salary, given the age pension means test?
 
As for post-retirement, part of the savings should definitely be rolled into a lifetime annuity, preferably 75 per cent as in the UK (in Canada it’s 100 per cent).
 
The whole public policy reason for superannuation tax concessions is to take pressure off the age pension, yet there is no requirement for anybody to reduce their reliance on it: we get a tax-free lotto victory on retirement that we can either spend or give to the children, before going on the pension.
 
The problem is that most people feel like they won’t have enough in super to make much difference. Are they right?
 
Well, the average super balance on retirement is around $280,000, which would provide a lifetime annuity income of around $15,000, or $577 per fortnight. That would reduce the age pension by $212.50 for a single person, under the income test rules, and $154.50 for a couple.
 
A single retiree would thus get $1098 per fortnight instead of the pension of $733.70. A couple would get $1528.70 instead of $1106.20. Those amounts represent increases of 50 and 40 per cent on the usual pension income. Is that enough? Is it worth saving 9 per cent of your salary over your whole life?
 
And is it worthwhile for the government to forgo a large amount of current tax revenue (Treasury’s bogus numbers put it at between $32 billion and $45 billion per annum) to achieve that small reduction in pensions later?
 
I don’t know, to be honest, but there’s nothing else to be done, let’s face it. And neither side of this equation is working off good information. Savers don’t know what they are saving for, and Treasury is all over the place with its numbers.
 
The only clear winners are those in the super and investment management industry, skimming about $20 billion a year in fees and happily supplementing their maxed-out super tax breaks with a spot of negative gearing.