Wednesday, May 11, 2016
John Howard and Peter Costello were competing with each other to shovel money back out the door. Howard liked spending it on middle-class welfare, whereas Costello wanted to use it to cut taxes.
He was more than halfway through his eight tax cuts in a row, but in the 2006 budget he found a way to go one better. He had to fix some problems with the superannuation system, and he hit on the idea of making sweeping changes to the various super tax concessions that made them far more generous.
The changes would be pretty expensive, likely to grow rapidly every year. But that didn't matter because the budget was overflowing and mineral export prices would stay high forever. An election was coming in 2007 – when the changes would start – and voters would love 'em.
I remember business people saying privately the largesse was too good to last. Big-name economists were saying publicly the new concessions were unsustainable.
That was 10 years ago. Turned out the doubters were right, and last week it fell to the next Coalition government to correct Costello's monumental miscalculation.
People say the politicians are always tinkering with super. It's true. That's partly because, in the intervening Labor years, Wayne Swan chipped away at Costello's excesses in almost every budget.
But the measures announced last week were much more comprehensive, and braver, than anything Labor did – or has promised to do if it wins this election. This is the Libs cleaning up their own fiscal mess, and doing it at the expense of their own supporters.
You've seen all the articles by personal finance journos explaining how the changes will work and heard all the complaints from the well-lined.
So let's focus on the changes from the perspective of public policy, not your pocket. You start to understand their rationale when you realise that, until now, all the tax concessions for super have never had a formally stated objective.
The new objective is "to provide income in retirement to substitute or supplement the age pension". Which is a nice way of saying we're no longer going to let you use super to amass far more than you're ever likely to need to live on – that is, to get a tax break on savings you're intending to leave to your kids.
In principle, there are three points at which the government could tax money being saved for retirement: when you make contributions to your fund from your annual income, when the money in the fund earns interest and dividends, and when, in retirement, you withdraw money from the fund.
Under the rules Costello established, contributions are taxed at a flat 15 per cent (rather than at your "marginal" rate of income tax which, depending on the size of your income, can vary from 21c in the dollar to 47c).
Earnings in the fund are taxed at a flat 15 per cent and withdrawals are tax free.
Malcolm Turnbull's new rules would lower the annual cap on concessionally taxed contributions and lower the threshold at which concessional contributions are taxed at 30 per cent rather than 15 per cent.
They would limit to $1.6 million the amount you could have in the pension part of your fund, where no tax is charged on annual earnings. Anything in excess of that would have to stay in, or return to, the pre-retirement "accumulation" part or your fund, where earnings are taxed at 15 per cent (less tax credits from dividends).
The new rules would also impose a $500,000 lifetime cap on non-concessional (after-tax) contributions. This affects people who want to transfer other savings or inheritances or the proceeds from selling investment properties into low-taxed super.
Treasury calculates that only the top 3 or 4 per cent of fund members will be affected by these measures. So the plan is to chop back the tall poppies. Even so, because they (including yours truly) have been getting the lion's share of the concessions, by their third year these measures would be saving the budget $2.1 billion a year – and rising.
Some of this saving would be used to pay for changes that made it easier for women to build up bigger super balances despite their years of broken and part-time service.
The changes would make it much harder to use "salary sacrifice" to boost super balances (at one stage Costello was letting people like me sacrifice up to $100,000 a year – a stretch, even for me) but would encourage more savings-splitting as husbands helped wives to get higher balances.
Rather than making super concessions fairer, I'd prefer to say Turnbull's plans would make them less unfair. It would still be true that people on less than $37,000 a year got no concession on their contributions, whereas people on $180,000 to $230,000 got a saving of 32c in the dollar.
The biggest "incentives" – which apply to contributions that are compulsory anyway – go to well-off people who could, and would, save a lot of their income even without any concessions.