Super tax rates great for some

One of the minor successes in the Abbott Government’s annus horribilis of 2014 was the tightening of something called the Large Family Supplement.

This welfare payment – worth $12 a fortnight – is paid to eligible families for their third child, and every child born thereafter.

Or it will be until July 1 when the supplement will only be paid for the fourth child and every child thereafter, as was the case before Peter Costello changed the rules in the 2006 Budget.

That it took eight years to cut back on this payment is testament to the fat that had settled over the welfare system.

It takes political fortitude in times of difficulty, to take back what is what so often easily given away in times of bounty.

The 2006 Budget is a historical standout on this front. Some economists, including Chris Richardson, reckon Costello’s 11th Budget began a phase that put the nation’s finances in structural deficit.

This phase included the 2007 Budget and the 2007 election which saw Kevin Rudd adopt – and implement – John Howard’s whopping tax cuts.

But the 2006 Budget was really something special.

Costello thought it might even be his last as Treasurer, if only Howard could be nudged off his perch. So the document had a scent of leadership expectation in its extravagant pump-priming of an electorate by an ageing Government.

Even the language of Costello’s Budget night speech had a Mission Accomplished feel about it.

Canberra’s coffers were so overflowing, the scramble was in where to spend it.

That night, Costello gave away tax cuts worth $36.7 billion over four years. Carers were given $1000 one-off payments, age pensioners received one-off doubling of the utilities allowance.

Eligibility was widened for the utilities allowance and Family Tax Benefit payments. Extending the Large Family Supplement was no mere gesture. It cost half a billion dollars in its first four years alone.

There were no losers. This was the dividend of good economic management, said Howard and Costello.

A few people worried about the hangover, warning that the party would eventually end.

But no-one likes a partypooper when the champagne’s flowing. Heavens, even the ever-sober former Treasury secretary Ken Henry said that China and India would likely support relatively high commodity prices, “for a considerable period of time, quite possibly for some decades”.

Woo-hoo! Let’s party!

But in this mind-altering environment were made some truly silly decisions, the full cost of which only emerged when the hangover was in maximum throb.

Abolition of the superannuation benefits tax for the over-60s, the reasonable benefit limits and aged-based contribution limits and the halving of the pension assets test taper rate – all decisions made in the 2006 Budget – have proven to be monumentally expensive.

Their impact on the Budget, worsened by what the coalition and Labor did before the GFC broke up the party in mid-2008, has also left the pension system under great stress and superannuation concessions with some gaping inequities.

Given they are jointly responsible for the current mess, it’s incumbent on the coalition and Labor to strike a grand bargain on superannuation that takes pressure off the pension system. Both sides have got good reasons for striking a new accord on the pension/super mix.

The coalition needs to find the money to fulfil its promise to drag the Budget back towards surplus.

Labor wants to complete Paul Keating’s decades-long project to take the superannuation guarantee to 12 per cent; a contribution rate experts believe is needed to provide a comfortable retirement.

Both sides have a shared interest in making Australians more self-reliant over the long term. We have one of the longest living populations in the world. That won’t change if it’s blue or red on the Treasury benches.

And the intergenerational report only confirmed that a greying population will see the Federal Budget heaving under burgeoning pension costs.

Unless the pension is cut, its eligibility massively squeezed or a much greater proportion of Australians pay for their own retirement, future generations will be heavily burdened with looking after the wrinklies.

As Tony Abbott has found, cutting the pension is electorally toxic. That’s because it’s unfair.

The only option is to tighten eligibility for part-pensions at the top end, while improving the adequacy and fairness of the superannuation system.

But the superannuation guarantee remains at 9.5 per cent. If the coalition gets its way, the SG will be stuck there until 2021. It will not reach 12 per cent until July 1, 2025 – six years later than Labor’s plan.

Association of Superannuation Funds of Australia research found that the coalition’s SG pause will mean workers on $100,000 salaries will be $100,000 worse off after 30 years ($50,500 for workers on $50,000).

Making the pension system sustainable necessarily has superannuation at its heart.

If the policy makers in the red and blue corners agree that the primary purpose of superannuation is to provide retirement income, they must also agree what superannuation isn’t.

It is not a tax minimisation scheme.

It should not allow post-work spending splurges before a retreat to the pension.

Nor should superannuation simply be a way of leaving your kids a taxpayer-subsidised inheritance.

Its purpose must be to provide adequate retirement income stream that supplements and, most ideally, substitutes the Age Pension, thereby alleviating pressure on the public purse.

The $30 billion in tax concessions on superannuation will have to be similarly focused – not necessarily on the way in, given there is already a concessional contribution cap of $25,000 ($35,000 for people over 59), but on the way out.

Allowing the rich and super-rich multi-million-dollar tax-free income streams not only spurns and distorts the principle purpose of superannuation – adequacy – but will put pressure on publicly-funded funded pensions.

It is now obvious to both sides that the 2006 decision to make superannuation tax-free on exit will have to be revisited, beginning with high wealth individuals.

So will rules governing eligibility to part-pensions and the ability to take lump sums as opposed to long-term annuities.

But the nation will also benefit if the SG is unfrozen and gradually increased to 12 per cent.

Most important is that the coalition and Labor agree on the purpose of superannuation and then stick with it. The pension system needs it.