Michael Pascoe took a big swing at Peter Costello’s superannuation
reforms this morning but, with the greatest of respect, he couldn’t
have been more wrong.

Australia has long had a problem with excessive debt-funded consumption
and low savings and Paul Keating’s compulsory superannuation savings
system was the first serious policy move to turn this around.

However, Keating almost killed the goose that was laying the golden egg
because he over-taxed super, making saving through the family home and
negative gearing a more tax-effective alternative. And there was
something quite offensive about compelling citizens to put their money
aside and then milking it for extra tax revenue.

The Howard Government made things even worse with the superannuation
surcharge on income above $75,000 earnings, but that was abolished a
couple of years back. Super needs to be assessed in the context of
income tax rates, and the overall changes to the income tax scales from
the Keating
Government to the Howard Government will be as follows from 1 July this
year:

Government tax rate threshold
Keating zero $5400
Howard zero $6000
Keating 20% $20,700
Howard 15% $25,000
Keating 34% $38,000
Howard 30% $75,000
Keating 43% $50,000
Howard 40% $150,000
Keating 47% $50,000 +
Howard 45% $150,000 +

By any measure these are quite substantial tax cuts, even after
allowing for inflation and bracket creep, and they have served to make
superannuation relatively less attractive.

Therefore, some catch-up cuts in super taxes were absolutely necessary,
it was just a question of whether you provide relief on contributions,
earnings or exit – all of which are slugged 15% at the moment. The
government has chosen an option that costs $2 billion a year and
dramatically simplifies a ridiculously complex system whilst not overly
stimulating the economy.

There are marginal concerns about exacerbating the weight of capital in
superannuation causing asset price inflation, but even that is
preferable to excessive consumption which continues to suck in imports
and blow out our current account deficit.

Super is now a better savings vehicle, although retirees are still best
placed maximising the value of their tax free residence and the
well-off still have a large incentive to take income as capital because
the 50% discount on capital gains for assets held for more than a year
has also become relatively more attractive thanks to the cuts in the
two top tax rates.

Another good thing about super is that funds can’t borrow to supplement
investments. Concern that retirees will blow their lump sums and go
back on the pension are marginal because both lump sums and pensions
are benefiting from the abolition of the exit tax and Cossie is right
to say that at $12,000 a year, getting the age pension is hardly a huge
incentive to blow your lump sum.

Peter Fray

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