Last week we discussed some possible fixes for our current superannuation regime. But what if we had a blank canvas? Could we design a better system?
The possibilities are endless, so I will just focus on some of the high level points to kick-start discussion. Let’s start with the problems:
- Government. The number one problem is that our system is managed by a Government that is not committed to saving. There might be some slight differences in philosophy, but both our major parties are more interested in unemployment, CPI and GDP statistics than future proofing. This shows up in the RBA’s manipulation of interest rates to build up debt, subsidies (low cost debt, first home buyers grants, negative gearing) towards housing speculation, lack of saving across all forms of Government and the superannuation system being used as a plug for budget black holes. We aren’t going to maximize self-sufficiency while our Government works to discourage it.
- Tax system. The tax system is also a function of our spending obsessed Government. It encourages gearing and speculation at the expense of income generation and re-investment. If we are going to encourage retirement saving, our overall tax system needs to compliment it.
- Complexity. Starting with the need for superannuation funds, our retirement savings system (as well as our tax system) is far too complex. Again, the simpler the system the more chance people will be engaged with it. And the less it will cost. Part of the problem is that the system has been developed simply by adding to whatever was already there. We’ve modified what we had rather than designing it from scratch.
- Engagement. This is an issue we touched on in previous comments and is something that was never tackled when compulsory super was introduced. Most people reading this blog post are engaged but how do we extend this to the wider population?
We may have become a nation that can only absorb messages Twitter-style and Twitter-length. But that shouldn’t stop us having a go.
How do we solve these core dilemmas? On some of them I’m really not sure but I’ll have a go anyway:
- Government. This is the toughest of all. Western democracy, particularly in its modern opinion poll focused form, encourages short term gain at the expense of long term pain. I’m not sure I’ve even heard Wayne Swan talk about short term sacrifice for long term prosperity. This issue goes hand in hand with engagement. Unless the broad population recognizes the benefits of deferring present consumption (and votes accordingly) then we are doomed to, at best, mediocre effort (and a lifetime of increased super taxation). Obviously the issue of short term-ism goes well beyond retirement saving. Unfortunately, it’s not something we're likely to solve any time soon.
- Tax system. Under our current system, it’s almost as though not taxing the over 60s is considered the key to savings success. But it’s not. And the danger with our present system is that those starting out their working careers, or simply those without SMSFs, lose touch with it. Our tax system is crying out for reform and a key one is to make it consistent with an objective of building up our national savings. There are a lot of calls for an increase in GST and they’re probably right. But it needs to be done as part of an overhaul which takes the focus away from taxing income. Contrary to common arguments, an increase in GST/reduction in income tax doesn’t have to end up benefiting the wealthy. There are many wealthy people, spending beyond their means, who would end up worse off under a higher GST/lower income tax regime. And protecting low income earners is pretty simple. Practically speaking, a low income earner tends to spend and earn about the same amount. So if GST was 20%, a fixed annual rebate of GST equal to $4,000 leaves someone earning (and spending) $20,000 exactly where they are now: Zero tax. A person earning $60,000 would pay $12,000 tax - exactly what they now pay in income tax. One of the big losers of such a change would actually be the present crop of self-funded retirees. They don’t pay income tax anyway, so they’d only cop the GST hit. But if the compromise was a stop to the constant tinkering it might be worth it.
- Complexity. We don’t need superannuation funds. In fact we don’t need fund managers to be administering complicated super rules at all. The self-managed super fund is an extension of the original super fund. We don’t need it either. Individuals could simply manage ‘retirement accounts’ where they held their investments. These investments might include managed funds which targeted people at particular stages in life but without fund managers getting involved in the retirement account aspects. To get tax concessions all that is really needed is a separate Tax File Number for the ‘retirement account’. If you put money in you get tax concessions and if you take it out you pay tax (with age based concessions to encourage a long term outlook). It could be pretty simple. Superannuation funds, SIS Acts, SMSF trust deeds and investment strategy documents are what you get when you let politicians, bureaucrats and lawyers get together to design things.
- Engagement. We touched on some ideas last post. A problem at the moment is that some employees don’t see it as their money but simply something that their employer pays and which they may see again someday. Or not. I questioned whether we could deduct super contributions along with tax and have employees decide where the ATO should send the money? Whether it’s going to end up in an industry fund or retail fund, I think it would help if it was the employee who made the decision in the first place. At the moment there is a lot of inertia at play. But increasing engagement is probably going to require a whole lot more than that. And it’s certainly going to require our political leaders to end the discussion on how much the tax should be and start talking about real issues.
Again, this wasn’t meant to be an exhaustive list. It’s barely even a start. Hopefully, like last week, it will trigger a few more suggestions.
What I have found interesting so far is the willingness of people to consider changes that might improve the system, even if against their self-interest. For instance, restricting lump sum withdrawals is unlikely to benefit many individuals, but it would make the system more robust.
If only our politicians would realize that not everyone is out to talk their own book.