FEATURE: Is an increase in the SG what we really need?

The Federal Government’s plan to lift the Superannuation Guarantee (SG) from its current 9 per cent to 12 per cent unsurprisingly has widespread industry support. But it might be a surprise for some in the industry that the plan does not have universal and unequivocal community support.

Legislation giving effect to the increase was introduced into Parliament today.

Opposition to the move predictably comes from the other side of politics. The Shadow Minister for Financial Services and Superannuation, Mathias Cormann, was involved in a Senate Estimates hearing on the day of a roundtable hosted by Professional Planner and sponsored by Challenger, but the Opposition Leader’s chief of staff issued a statement.

It said: “As you know, the Coalition’s position is clear and we do not support the super increase funded from the mining tax.”

But reservations also have been expressed by those representing low-income-earners and workers with broken employment patterns (particularly women) – and out in the electorate, raising the SG is far from the sure-fire election winner some think it should be.

Eva Cox, the well-known feminist and convenor of the Women’s Equity Think Tank (WETT), is another opponent of the plan, but purely on equity grounds.

“Why don’t I support the increase? Because, I think the system itself is unfair because it puts an enormous amount of money into the pockets of the rich, and much less into the pockets of the less well off,” Cox says.

“I can’t see any reason why public money should be forgone on that sort of basis, and I think putting it up to 12 per cent is actually not going to do anything about the equity issues; it’s just going to make them worse.

“I’m a long-term feminist, and convenor of [the] Women’s Equity Think Tank, but at the moment I’m also attached to the Aboriginal Unit at UTS [University of Technology, Sydney], and I don’t think it’s going to do a damn thing for people in that area, either.”

The general philosophy behind increasing the SG is simple, says the Minister for Financial Services and Superannuation, Bill Shorten.

“There is little benefit in working for a long time and retiring poor,” he says.

Small business might be expected to oppose the plan too, but the chief executive of the Council of Small Business of Australia (COSBOA), Peter Strong, says the council frankly does not care if the SG is 9 per cent or 12 per cent or even 15 per cent; what COSBOA objects to is the administrative burden the SG already places on small business, which will not be alleviated.

“Small business is about the real world,” Strong says. “And most small business owners, when they went into business, did not expect to become administrators for the Government and the superannuation industry. It’s difficult enough to run a small business without that burden and distraction.

“When we’re talking about superannuation we’ve got to make sure we don’t wear the cost – or if we do, it’s compensated, and that we don’t wear time-cost, and confusion,” Strong says.

“And there’s a way of doing that…as you may have heard: putting it in the tax system, rather than putting the onus upon the employers to do the collection and distribution of the money.

“The fact that small business collects money from large, multi-billion-dollar national financial institutions, and we do it for nothing, is amazing. And we’re forced to do it, by Government. It’s amazing, and we’re fined it we don’t.

“Everybody else in the system gets paid – everybody. The directors of super funds, in some cases we don’t know how much they get paid, but they get paid is my understanding. The paymasters of big companies, people in Treasury, people in finance, people in the Tax Office – they all get paid. But the [small businesswoman] on the Sunday morning, collecting the super, taking those four hours once a month, or once a quarter, doesn’t get paid, and it’s wrong.”

Strong’s proposal to remove the superannuation compliance burden from small business has the support of Nicholas Gruen, chief executive of Lateral Economics.

“Peter was making his point with regard to a sort of fairness idea: why ask employers to do this?” Gruen says.

“You could say exactly the same thing about income tax – and FBT [Fringe Benefits Tax] and all the rest of it. Those things embody certain kinds of social and political compromises, but I’m actually quite sympathetic to what you’ve said, because the criterion for me is not some kind of Olympian fairness, but economic efficiency, and I would imagine that what you’re suggesting is more economically efficient

“Now, I haven’t looked into it, but [I have] watched the nice idea of super choice be implemented with complete disregard for the way people actually function cognitively. There are lots of opportunities here, I think, for the Government, in trying to quite explicitly say: ‘We know people’s lives are too complicated. We know they resent that, it’s not all that easy to fix it up, because we live in a complicated world, but we can do some quite reasonable programmatic things to make things better’.

“And often that involves not just talking in slogans, but also thinking about systems.

“Having little businesses administering super choice doesn’t seem to me to make much sense, and simply saying to consumers, ‘You’ve got super choice’, without trying to attend to the sorts of cognitive inefficiencies that we’ve had in the system, hopefully, before the Cooper Review starts to clean some of those things up, seems to me to be pretty unwise.”

Ultimately, getting legislation through the Parliament to raise the SG will depend on the support of the Independents. Rob Oakeshott, the member for Lyne, was invited to the roundtable, but industrial action by Qantas meant he found himself stranded in Port Macquarie on the day.

An indication of how little impact this issue has actually made out in the electorate comes from the peak consumer lobby group, Choice, whose director of campaigns, Christopher Zinn, says the group hasn’t really given the issue of raising the SG, and adequacy, much thought.

“Well I hate to say that we’re sitting on the fence, because I hope it’s not completely like that, but as I said, we are great supporters of compulsory super, and have been in the past,” Zinn says.

“[But] we haven’t really done the work in terms of the adequacy, that is, what really will be enough? And, I think I probably wear two hats being here today: one is Choice, in terms of our role; but I have actually consulted more widely among that group known as the ‘consumer industry’, or whatever you want to call them, and I’d have to say that the views are surprisingly polarised on this one.

“That indicates to me that there is a great deal more information that needs to be out there, understandably, and a lot more debate. Often our role is to question, one, a suite of [issues] around adequacy; and then, two around product design.

“And certainly they’ve been some great advances in terms of product design of super. I think we’d still be keen to push some a bit further, [to] see how they bed down. As I said, we are firm supporters of compulsory super but quite what that level should be I think we’d still want some more debate around it.”

Choice has been a strong supporter of the Future of Financial Advice (FoFA) reforms, and addressing conflicts in the financial planning space. Zinn says Choice recognises that implementing FoFA is an important element – along with raising the SG – in producing better results for consumers. He says there are five issues Choice is focused on.

“Commission bans was one of them, and certainly, there are full marks for that,” he says.

“Lost super was another one of those five issues, and the tax file number, that will go a long way to clearing it up. Multiple accounts – again, we’ve got some more consolidation, so that should happen. The defaults – that’s perhaps a work in progress; but MySuper reforms will really help.

“And the fifth one is advocacy, and that’s [creating] an advocacy group, that I know the Minister’s talked about, and that’s ongoing.”

Michael Drew, Professor of Finance, Griffith Business School, and managing director, lifestyle strategies, QIC, says raising the SG is an important step towards achieving retirement income adequacy, but it’s by no means the only step, and on its own is insufficient. More attention needs to be paid to the specific requirements of super fund members as they approach retirement.

“You can throw money at this problem but it’s a coordinated set of levers that need to be managed by the fiduciaries around contribution rates, around education, around the asset allocation decision,” Drew says.

“I keep coming back to this point: what’s ‘safe’ and what’s ‘risky’ changes over your life. The sort of financial market conditions we have today, for instance, for a 25-year-old are important, but in the grand scheme of things don’t necessarily matter. If you’re 62 years old today, and you’re within three or four years of your retirement, they absolutely matter.

“So, it’s about a coordination – again, it’s the ‘outcome’ conversation, about contribution rates, about the asset allocation and the system moving, to continue its long heritage of member-centricity.

“So there are a number of challenges within the system. Moving from 9 to 12 per cent is very important – like anything, throwing money at a problem can help, [and I] certainly support that – but there are [other] things we can do. MySuper’s part of the journey, and also education, literacy, and the fiduciary responsibility around asset allocation is important as well.”

Former NSW Treasurer and Attorney General, Peter Collins, is now a director of the industry fund HOSTPLUS. Collins says he supports lifting the SG “because it’s good policy”.

“I think that it has to go to 12 per cent because, to take what Bill Shorten said, earlier, 9 per cent is simply not going to provide Australians with the kind of retirement that they need; and there are only two ways it can be achieved – that is to address the issue now, by increasing the superannuation guarantee to 12 per cent, or taxing people more to pay for the age pension later on, and then you get into all sorts of issues about inter-generational equity,” Collins says.

“And can I just make this point, just to set a context? If you asked me to nominate the top five social reforms since Federation – the best five ideas that either side have come up with since Federation – you would have to put the Superannuation Guarantee in that list of five. It is one of the top five social reforms since Federation and it provides for a form of national saving for retirement that never previously existed. It is world’s best practice and I think we’ve got to stop beating each other up about it.

“To look at the politics of it for a second – that was an initiative of [the] Keating Government and the ACTU 20 years ago. It was not only left intact by the Howard Government, but the Howard Government actually introduced a whole raft of incentives for people to put more into superannuation. So, I mean to put it in context, I think there is a degree of bipartisanship that needs to be acknowledged, and needs to be seen as an underpinning of the debate that’s going on at the moment, and the legislation that will eventually go before the Parliament.

“Let’s wait and see what the Coalition does, but…both sides need to take the long-term view.

“If you don’t increase the superannuation guarantee you will go to an increase in tax for the next generation, to pay for the age pension which people will have to fall back on.

“We have worked together, through bodies like AIST [Australian Institute of Superannuation Trustees], to look at all of the economic projections, and the indication is that 9 per cent is not enough; 12 per cent is the figure that [we should] realistically pursue and I think it is sustainable, I think it’s something that we need to do. If we don’t do it, then our young members – and…we’re coming up to the millionth member in HOSTPLUS, and it is a young demographic – then those young members are going to be paying more tax in the years ahead to cover the gap, if it’s not covered now by increasing from 9 to 12 [per cent].”

Ged Kearney, president of the ACTU, says the organisation supports the lift to 12 per cent, but is particularly concerned about how the system caters for lower-income earners, and for people, particularly women, who experience broken work patterns.

“The ACTU is very concerned about the whole equity issue and have constantly been hammering the living daylights out of poor Bill about the concessional tax system, about, you know, we do believe that it should be a progressive tax system, particularly on contributions, and that’s something that we are very, very, concerned about,” Kearney says.

She says the ACTU is sanguine about the impact on business of raising the SG.

“Is 12 per cent enough? Well, the trade union movement has always argued for 15 per cent from the very beginning – and I admit that there probably wasn’t a great deal of science around that – at the very beginning, when Keating was discussing that 15 per cent was the perfect figure,” she says.

“But, since then of course, there has been a great deal of work done. There’s been a lot of modelling and a lot of analysis and whilst we think we would like to move to 15 per cent – and I know that there’s probably some, a lot more people here who can talk to that, with a lot more clarity, than me – we do believe that 12 per cent is a good first step, and we’re very willing, to support that.

“Through the enterprise bargaining process of course, we’d have a lot of people who are already at 15 per cent – one in four businesses already pay 10 per cent. So, there are a lot of people that have already achieved that without the sky falling in for the business, and without it being an economic disaster, so, whilst I don’t think we’ll have Utopia, I think we have a pretty good sustainable system.”

Gruen says that the flat taxation of superannuation creates inequities.

“The great achievement of the previous Labor Government was to establish the system – the great flaw was the idea that it should be done under a flat tax,” he says.

“And one of the things that we’ve got ourselves into in super is a sort of trench war. And the trench war involves a bunch of people who say, adequacy is very important and therefore we should protect the tax concessions, go from 9 to 12 per cent and so on.

“The way in which we should be taking the heritage of Bill Kelty and Paul Keating is [that] equity should be addressed, but so should comprehensiveness, and I think we should grow the size of the contribution – make it more equitable, make it more comprehensive, and then you’ve got something that I think people would really react well to.”

Cox says a major issue with raising the SG is that it will force a cohort of the community to save who cannot in fact afford to save.

“You’re asking low-income people to save for their retirement,” she says. “Can we stop sort of acting as though somehow or other the rest of life is preparation for retirement? We actually live for a lot longer doing a variety of things than we do when we retire, but there’s this sort of magical fantasy that, you know, that at retirement you will have enough money to do all of those things you’ve deprived yourself of earlier in life.

“People need money for housing, and quite frankly, you know we’ve got 69 per cent home ownership or potential home ownership there. That leaves a lot of people out of it – and that will increase, because younger people are having more and more difficulty getting into highly difficult housing markets.”

Cox says the tax concessions that go to high-income earners could be productively directed elsewhere.

“The amount of money that we spend on the superannuation tax concessions is… growing to the point [that] it’s more than we actually spend on the Age Pension,” Cox says.

“You know, we’re talking about $30 billion in tax concessions and we’re talking about 34 per cent of that going into the top 5 per cent of income earners. Nick, I think if we actually knocked them out of the system, that would give us another 10 billion dollars to put into funding much better retirement things for the people at the bottom end that haven’t got it.

“This is one of the points that has bugged me from the feminist viewpoint for a very long time: there is no outcome difference between a tax expenditure and a welfare payment. The outcome is exactly the same for the Budget. Yet, I have sat around for years with men in suits at tables who’ve told me they’re entitled to tax expenditures, but nobody’s entitled to welfare.

“I would like us working together to set up a fund which has a fair tax system where everybody contributes, and gets concessions at a reasonable rate. And I would like to see it actually covering things like time out of the workforce for having kids; I’d like to see it covering housing; I’d like to see it covering various other life crises so that you actually can live your life before you get to the final stage like that. And I think we also need an acknowledgement that, even if it goes up to 12 per cent and 15 per cent – there’ll be a large proportion of the population that still will not be independent.

“This is something which people, unfortunately, don’t realise. How many members of the population will end up with $20,000, $30,000, $50,000 maybe max, in their superannuation thing, even if it goes up. It will make a small difference to their retirement. It will not save the money – save money in the pension system – because they will be getting full pensions in most of those cases? And it will actually be a grossly inequitable system, and I just think we do need to be serious and think about that.”

Jeremy Cooper, chairman, retirement incomes, at Challenger, says compulsion is a critical part of why the Australian superannuation system has succeeded to date, and why it will continue to succeed.

“We tend to put things off, we tend to delude ourselves about how expensive retirement is, and when it’s actually going to happen, it’s a great thing that we’ve got compulsion,” he says.

“There are always school shoes, and other budgetary pressures on people and, certainly at low income levels, there is a view that traditional welfare takes over from compulsory savings or private savings, as you will. But we’ve got to remember how important that compulsion is – at the moment, in the UK they’re going through all sorts of tangles to try to come up with a sort of a quasi compulsory system, a sort of so-called ‘auto-enrolment’, and soft compulsion ideas, and I think that will be a pale imitation compared to our system, because, of course, people are allowed to opt out of it, and those very day-to-day budgetary pressures are often what force people to do that.”

Cooper says it’s important to continue to seek efficiencies, so that the benefits of raising the SG are not lost to unnecessary charges and other drags.

“I mentioned in the beginning that I supported the 9 to 12 [per cent] on conditions – the conditions, fortunately, are ones that the Government is going for, and SuperStream will be one.

“It became very clear to us that the back office of super was not efficient. Many experts told us it was wasting around about a billion dollars a year in needless reprocessing and using paper and so on. And the SuperStream measures address that, and the Government has said that it will implement those.

“So, that’s a tick. The other one, I think, is improving the base model, if you like, of superannuation – that’s the MySuper idea. Again, the idea behind that was efficiency, and in a compulsory system I think the Government owes the people who are forced to contribute to the system a degree of efficiency – and again that’s being embraced.

“And I suppose the icing on the cake, you know, really achieving excellence – and perhaps, topping the charts, as it were – you’ll all be aware, recently, that the Melbourne Mercer [global] pension index came out. It’s a sort of a ranking of all the systems around the world. We came second.

“What could really make us come first would be getting into the retirement income area. Looking at how we spend down in our increased lives; how we actually spend down the money, rather than just what we currently have, where we sort of hand back to [the] worker who’s reached retirement – we hand back to the worker a lump sum and effectively say, ‘Okay you can be Warren Buffett now and take this out and see how you go’. That’s being a little bit flippant, but yeah, I think that’s the real icing on the cake.”

The role that self-managed super funds play in helping a large number of Australians achieve adequate retirement incomes cannot be overlooked, but even in this area there are things that can be done to improve efficiency, and which should be looked at as part of the adequacy debate.

Gruen says SMSFs “are important”, but they’re simply an alternative vehicle for accumulating retirement savings and should not be immune from the drive to improve efficiency.

Gruen says: “SMSFs have a requirement in them to do an audit every year. The audit is based – it’s simplified, but it’s based – on the same audit you do of trustees of billion-dollar funds, and as a consequence it costs about $2500 minimum.

“That’s completely absurd. We could do that through the tax system. There are rules about sole purpose and all that sort of stuff that should be enforced. But the idea of getting $2500 of auditing done on this fund, year after year, is absurd and the Senate Committee in 2007 had a proposal that if you had passed your audit for the previous three years, you could be forgiven it for the next two or three. This would save serious money.

“It’s a simple piece of regulatory review that the Government can do, and everyone can do, and everyone will thank them for it. Why not do it?”

Shorten says that controlling costs is an integral part of the Government’s plan to raise the SG. It is not prepared to allow the industry to get fat off people’s compulsory contributions by being inefficient, or greedy. Developments such as SuperStream and MySuper are part of the overall package.

“The idea that planners and other people managing other people’s retirement accounts are taking unnecessary fees and charges really frustrates me,” Shorten says.

“Funds can’t guarantee performance, but they can absolutely control what they charge. If we can put downward pressure on what they charge, then, all things being equal, there will be more money for people’s retirement. So, our reforms are aimed at increasing the back office, improving the efficiency of the back office of superannuation.

“Superannuation hasn’t made too many millionaires amongst the account holders, but it’s made a few millionaires amongst the advisers, and so we do need to wind back some of those unnecessary costs.

“If you imagine superannuation’s the rain in the mountains coming down through the river of financial management to the sea of people’s retirement, I just don’t want people diverting too much of it for their own use on the way from the mountain to the sea. So that’s where reforms are going.”