The
two biggest surprises in last night’s budget were: (1) no-one suspected
there would be major changes to superannuation policy, and (2) it’s
such extraordinarily bad policy.

Every pet shop parrot knows our
super system is dogged by being taxed on the way in, when it’s in there
earning money, and when it comes out. Removing either of the first two
would be a major incentive for people to save for their retirement and
therefore not become a burden on the shrinking number of future
taxpayers as the demographics run their course.

But Peter
Costello incomprehensibly decided to remove the tax on the last phase,
when the super is paid out. His justification is that it’s supposed to
encourage the 60-plus brigade to keep working, picking up some extra
cash on the side as their super becomes tax free.

But the
downside is that it puts the lump sum back on the top of retirees’
agenda. Instead of being punitively taxed to discourage retirees taking
their lump sum and blowing it, the whole thing becomes a tax-free
bonanza.

The reality is that the 9% compulsory super is taking
a very long time to kick in with meaningful impact. The first of the
baby boomers retiring in the next couple of years haven’t really saved
much superannuation, so it won’t take much to use up the lump sum and
tip them back on the pension.

And at the same time, the pension
is becoming more easily accessible. The electoral bribe in the budget
is two-fold – families with kids and the emerging legion of retiring
baby boomers. Grey power spendthrifts win against sound policy.

If
Costello had a longer term view, he would have removed the tax on super
going in or on what it earns while it’s in there. That would have
become a big incentive to save. Instead, what he did last night becomes
a big incentive to spend.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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