Superannuation – For Whose Benefit ????

One of the main roles of Government is to provide a robust social and economic framework within which the Capitalist Market Economy (i.e. private enterprise) can work to provide an efficient use of the limited resources available to it to maximise the wants and needs of its community.

As the economic systems became more sophisticated over time so to the social systems needed to become more sophisticated to enable these new economic systems to operate efficiently. This has led to the systems we have in place today where governments try to balance the many different and sometimes conflicting requirements of the different economic and social elements involved in a successful outcome.

Superannuation first rose as an issue some 150 years ago as life expectancy started to rise and more and more people were living past their useful working life. The question then arose as to how these people were to survive retirement without a source of income. Most wage earners at the time were paid little more than subsistence wages so were unable to set aside extra for their old age.

As a consequence, governments started to embrace the concept of paying an Old Age pension to these retired people. This was a recognition of the fact that looking after the elderly was seen as an important part of creating a strong social fabric framework of the community.

Australia first started paying an old age pension in 1908. At this time only 4% of the population were over 65. Life expectancy was only 55 for men and 59 for women. Australia today in contrast has 14% of the population over 65 and life expectancy for both men and women is in the eighties. Approximately 1.5 million Australians now rely solely on the old age pension for their source of income.

Superannuation schemes had existed on a small scale in Australia since Federation in 1901. They were mostly run by governments and large businesses for their employees and were seen and promoted as a perk of employment.

Post 1945 saw dramatic rises in life expectancy and significant increases in Australia’s population this created fiscal pressure on the Federal government for funding the age pension. This led to the exploration of ways to remove this funding from government responsibility.

During the 1980’s and early 1990’s the current compulsory superannuation schemes evolved, where all employers were compelled to contribute to the superannuation of their employees.

At around the same time, generous provisions were also made to encourage people to make their own contributions towards their retirement. Many of these provisions such as 15% income tax, franking credits, tax free income streams have had the practical effect of disproportionately helping the wealthier sections of the community.

60% of these superannuation benefits flow to the wealthiest 20% of households with just 11% going to half of all Australian households. In dollar terms, some $40 billion is given up by the government in superannuation tax breaks. What was originally designed to take pressure of the government’s budget has in fact created another heavier burden on it.

The compulsory superannuation guarantee scheme has spawned an industry that requires $30 billion in fees per year to run.

The concept of a retirement income has turned into a wealth creation and employment creating industry. The question to ask is whether this is an efficient use of economic resources to promote overall wealth creation?

This question raises a number of interesting albeit politically sensitive solutions

• To ensure citizens do not live in poverty in their old age could simply be addressed by ensuring the pension is paid at an appropriate level. There are a number of ways to fund this which do not require $30 billion of fees or the imposition of further costs to business

 Abolish the super guarantee scheme and incorporate that money as a direct tax to be used to fund                 infrastructure projects that add to our productive activity and wealth. This is nothing new as the Australian government has in the past split income tax into 2 streams – one for general expenditure and one for social security payments to ensure transparency.

It is generally recognised by most economists that the best way for a government to pay its debts is to promote economic prosperity with the subsequent increase in tax take up.

• Should we as a society be subsidising the wealthy retirees to a level where they cannot possibly spend the money they have? Accumulating an inheritance to leave to one’s children though understandable does not make economic sense for an economy. Asking the general population to subsidise that accumulation simply makes no sense whatsoever. All tax concessions on super should be abolished as they only achieve a transfer of wealth from the poorer sectors of society to the richer without addressing the problem of old age poverty.

These two measures would save some $80 billion in wasted money that could be used to pay those retirees who need it a livable pension and fund the economic prosperity needed to pay for it. This is a classic case of how the market economy is distorted to produce an inefficient outcome in the creation of community wealth and well being

The debate in Australia today about superannuation and pensions seems to be less about the plight of older Australians living in poverty. More about asking for handouts to increase an already wealthy sector of society and a superannuation industry trying to maintain a façade of relevance but in reality is taking an ever increasing level of management fees to do what the government could do at a fraction of the cost .