Why the super tax changes mustn't be watered down

Everyone wants to know what achievements Malcolm Turnbull can point to after his first year as Prime Minister. Well, I can think of something: his reform of the tax breaks on superannuation – provided he gets it through without major watering down.

Why is it such a big deal? Because it ticks so many boxes. Because it makes the taxation of super much less unfair.

Note, I didn't say much fairer. It will still be an arrangement that gives the least incentive to save to those who find saving hardest, and the greatest to those whose income so far exceeds their immediate needs that they'd save a lot of it anyway.

A report by John Daley and others at the Grattan Institute, A Better Super System: Assessing the 2016 tax reforms, independently confirms the government's claim that the changes will adversely affect only about the top 4 per cent of people in super schemes.

That still leaves a lot of well-off people – including the top 4 per cent – doing very nicely out of super.

Remember this when Turnbull's backbenchers embarrass their leader and add to their government's signs of disarray by pressing for the changes, announced in this year's budget, to be watered down.

Whose interests did you say the Liberal Party represents? Why exactly does it claim ordinary middle-income voters can trust the party to look after their interests?

But back to the reform's many attractions. It would cut back one of the major loopholes that make tax paying optional for the well-placed but compulsory for everyone else; that allow very high income-earners to end up paying a lot less tax than they're supposed to.

A lot of the savings from reducing concessions to the high fliers (who, you should know, include me) would be used to improve the bad deal given to low income-earners and to make other changes but, even so, would produce a net saving to the budget of $770 million in 2019-20.

This saving would get a lot bigger over time.

So the super reforms would contribute significantly to reducing the government's deficits and debt, but do so in a way that spread the burden more fairly between rich and poor than the Coalition's previous emphasis on cutting welfare benefits.

A lot of well-off people have been using super tax concessions to ensure they leave as much of their wealth as possible to their children – a practice lawyers refer to euphemistically as "estate planning".

Wanting to pass your wealth on to your children is a human motivation as old as time. The question is whether it should be subsidised by other taxpayers.

If it is, rest assured it's a great way to have ever-widening disparity between rich and poor. In the meantime, it adds to (recurrent) deficits and debt.

The rationale for Turnbull's changes is the decision that superannuation's sole purpose is to provide income in retirement to substitute for, or to supplement, the age pension.

They fall well short of eliminating the use of super tax concessions to boost inheritance, but they make a good start.

This is the goal of the three main measures Turnbull wants. Reducing the cap on before-tax contributions to $25,000 a year will save almost $1 billion in 2019-20.

Capping at $1.6 million per person the amount that can be held in a retirement account paying no tax on the annual earnings. Any excess balance will have its earnings taxed at the absolutely onerous rate of 15 per cent – less dividend imputation credits. This will save $750 million a year.

Introducing a $500,000 per person lifetime cap on after-tax contributions, counting contributions since 2007, will save $250 million a year.

If those caps strike you as low, you're just showing how well-off you are. The huge majority of people will never have anything like those amounts.

They're set at levels sufficient to allow a comfortable retirement even for those anxious to maintain a high standard of living. Anything more and you're in estate planning territory – or you just want every tax break you can get because you're greedy.

The claim that starting to count contributions towards the $500,000 cap in 2007 (the time from which good records became available) makes it "retrospective" is mistaken.

The measure is prospective in that it applies to income earned after the day it was announced, not before.

Where contributions in excess of the cap have been made already, they won't be affected by the measure.

Any tax change is likely to affect the future tax consequences of actions taken in the past. That doesn't make it retrospective.

To say "I had planned to do things in the future to reduce my tax which now won't be effective" is not to say the changes are retrospective.

Sometimes politicians announce changes well before they take effect, to allow people to "get set". But it's common for them to make tax changes that take effect from the day of announcement, precisely to stop people getting set. That doesn't make the change retrospective, either.

As Daley says, "the proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties.

"If common ground can't be found in this situation, then our system of government is irredeemably flawed."

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TALK TO BSL FORUM ON YOUTH UNEMPLOYMENT

Melbourne, Monday, September 12, 2016

Last week I got an email from Peter, a 23-year-old who’s been unemployed and on the dole for the past six months. As required by Centrelink, he applied for 20 jobs a month, from which he got just three interviews and no job offers. “I’m finding it hard to get work”, he says, “because I’d like to work in a computer shop . . . but it’s either ‘you don’t have enough experience’ or ‘you don’t have the qualifications’. Really annoys me. It’s not that I want to be a bludger, I’d gladly take part-time and earn some small money . . . or full-time work if I could.”

Something funny has been going on in the labour market since the global financial crisis in 2008. Funny peculiar, I mean; it’s not exactly amusing. Until then, the overall rate of unemployment had been falling steadily since an uptick after the introduction of the GST in mid-2000. After the financial crisis, unemployment jumped, but then fell back reasonably quickly as we realised we’d escaped being caught up in the Great Recession as the other advanced economies had been - and pretty much still are.

But then our economy went for some years growing at below-trend rates and the overall unemployment rate began creeping up. Only since early last year has the economy been growing a bit faster and has overall unemployment fallen from a peak of 6.2 per cent to its present 5.7 per cent, which does seem to be a plateau.

The peculiar thing is that the youth unemployment rate - for those aged 15 to 24 - has followed roughly similar trends, but in a more exaggerated way. That’s particularly true since the GFC.  When overall unemployment jumped after the crisis, youth unemployment jumped by a lot more. It didn’t fall back as far after the crisis subsided, and it rose faster when the economy’s growth was inadequate. When growth picked up more recently, youth unemployment did fall back faster than overall unemployment, but now while the overall rate seems to have plateaued, the youth rate is actually rising.

So, while the overall rate fell to a low of 4.1 per cent before the GFC, the rate for youth’s lowest point was 8.7 per cent. And today, while the overall rate seems to have plateaued at 5.7 per cent, the youth rate is up at 13 per cent - which is a widening of the gap between the two of about 60 per cent. It’s also well over a quarter of a million young people (276k).

I want to give you my explanation for that widening gap, but first let me describe some other dimension of the youth unemployment problem. There is quite a bit of variation between regions and within states. Using the most recent figures, for January, and rounding to whole numbers, NSW’s worst regions are the Hunter Valley (22 per cent) and the Mid-North Coast (20 per cent). Victoria’s are Melbourne West and Geelong, both on 18 per cent.

Turning to long-term unemployment, nearly 17 per cent of those youths unemployed at present have been so for more than a year, meaning there are about 45,000 Australians who’ve been looking for work without success for a year or more. Here, too, the improving trend before the GFC has since reversed.

And in line with the worsening in youth unemployment has been a rise in youth under-employment - people with part-time jobs who’d prefer longer hours - including, no doubt, plenty who’d prefer a full-time job. The most recent figures, for May, show the youth under-employment rate is nearly 20 per cent. That’s more than a third of a million young people (360k).

So why is it that, even though we congratulated ourselves in 2009 for having escaped the Great Recession, we’ve seen this worsening in youth unemployment? Well, the first point I’d make is one retiring Reserve Bank governor Glenn Stevens has often made. The fact is we didn’t escape recession at that time. We did have a recession - when sensibly measured as a period of falling growth and sharply rising unemployment - but exceptionally deft economic management ensured it was a shallow and brief recession. It wasn’t anything like the severe recessions we experienced in the early 90s and, before that, the early 80s.

But one of the ways employers contributed to the shallowness of that post-GFC recession was by minimising layoffs and using other, seemingly gentler ways to reduce their payrolls. There was, for a time, a lot of resort to four-day weeks and, for much longer, what’s euphemistically known as “natural attrition” - not replacing people who leave, and skimping on, or skipping entirely, the annual entry-level intake.

In the years since then when, until recently, growth hasn’t been all that strong, particularly in the “non-mining” part of the economy, many employers have persisted with low levels of recruitment at the entry level.

The trick, of course, is that this solution suits the interests of older, established workers, but does so by shucking off most the burden of adjustment onto young people, particularly that year’s crop of education leavers. How much concern for their welfare? Not a lot.

We do hear a lot about the trouble some older people find in regaining employment should they lose their jobs. It’s a genuine problem and one we should care about.

But the unemployment problems of the old seem to attract a lot more public attention - and sympathy - than the similar problems of the young.

Research by the Brotherhood using the HILDA survey - finds those aged 55-and-over account for just 8 per cent of the unemployed, whereas those aged under 25 make up more than 40 per cent.

So unemployment is concentrated among the young. And, as Stephane and his OECD colleagues have reminded us, the sad truth is it’s concentrated among the less educated and less skilled.

In the modern technologically-driven workforce, there are many fewer jobs for people who quit school early and for those who don’t acquire post-school trade or tertiary qualifications. What unskilled jobs remain tend to be casual and occupied by uni students or young mothers.

In 2008, according to the Brotherhood’s figures, 45 per cent of the unemployed had failed to complete year 12, with another 20 per cent having gone no further than year 12. That’s almost two-thirds.

Governments can’t be blamed for the employment practices of businesses, but they can be held accountable for their punitive treatment of the young unemployed - even if they are reflecting the adult world’s lack of sympathy for youthful job seekers. Oldies seem convinced that the young’s only problem is that they don’t want to work and so need to be starved back to the grindstone.

The dole has been allowed to fall way below the age pension so that it’s now less than $280 a week for a single adult. The “youth allowance” is even lower. Now the government wants to deny the $4.40 a week “energy allowance” to new entrants, as a cost-cutting measure.

Why young voters cop this crappy deal so meekly I don’t know.

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