Superannuation: The invisible python coiled around the economy

Robert Menzies created the Liberal party in 1944 to celebrate and promote “the individual, his rights, and his enterprise”.Compulsory superannuation offends each of those principles, which is why the Liberal Party opposed its introduction in the early 1990s, along with very reasonable doubts about its ability to boost net aggregate or individual saving.

The Gillard government’s push to increase the superannuation guarantee from 9 per cent to 12 per cent by 2019 is bad economics – expensive and inefficient – but it is not surprising.

Compulsory superannuation is totemic Labor party and trade union policy, the biggest legacy of Paul Keating, who had long envisaged a 15 per cent compulsory saving rate. The superannuation guarantee appeals naturally to a collectivist and paternalistic mindset.

That the Liberal Party now appears to endorse the shift to 12 per cent, seemingly for the sake of poll-driven expedience, is surprising and disturbing, however. Forget the mining and carbon tax: commandeering another 3 per cent of workers’ wages is the biggest policy change in the offing.

From a liberal perspective, compulsory saving is only excusable when it is designed to protect taxpayers from their own rational profligacy: it should be obvious that a universal old age pension like Australia’s massively discourages private saving, for instance.

You fix that problem with a meagre and restricted age pension, and much lower income taxes on ordinary workers, who are then forced to pre-fund their own pension. That is a liberal policy.

But Australia’s superannuation system is pure paternalism, not hard-nosed fiscal prudence. For a start, eligibility for the age pension in Australia is so generous (couples with $1 million in superannuation living in a Point Piper mansion will still get it) that increasing compulsory superannuation contributions does little to stem pension outlays.

The Henry Review clearly shows that the cost of tax concessions from increasing the superannuation guarantee vastly outweighs any fall in pension payments, even in the long-run. That logically means other welfare-sapping taxes (such as a mining tax) must rise if the budget is to balance over time.

Compulsory superannuation is predicated on pessimism: that Australians are too stupid to organise their own affairs. The clamour to lift the compulsory rate to 12 per cent is sustained by a slew of studies parading ‘inadequate replacement rates’ – spending power in retirement as a fraction of pre-retirement income.

These cookie-cutter forecasts inevitably ignore crucial individual realities: expected inheritances, spousal assets, housing equity, and likely assistance from children, to name a few. Individuals are in the best position to judge the adequacy of their savings.

In any case, Treasury modelling shows that for people on median incomes, reliant in their retirement solely on the age pension and their compulsory superannuation accumulation, the existing system will eventually provide a satisfactory replacement rate of about 75 per cent. The compulsory savings rate has only been 9 per cent since 2002.

But more to the point: they ignore the care factor. Given superannuation’s paternalistic character, why should it matter if someone hasn’t saved ‘enough’ (assuming we can even know what ‘enough’ is)? That would be his or her own fault.