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Scrapping compulsory super

An interesting debate on superannuation was initiated in the AFR a few days back by Geoff Carmody. His argument was that the current system of superannuation should be scrapped and replaced by an age pension entitlement for all. He argues this would save the government money in the sense that the value of the tax concessions implied in the current superannuation arrangements would exceed the cost of simply providing a full pension entitlement for all.

Shifting to a full pension system now would raise the costs of the pension by 54% now (about 50% of eligible people now get a full pension and another 30% get a part pension) or about $24b. The cost of superannuation concessions now, however, is only around $30b. Indeed, these figures understate the net saving since wealthy individuals receiving a full pension would gain incomes that yielded some tax revenue.

The universal pension scheme is much fairer too since the current superannuation scheme benefits mainly the rich.

The net gains from switching back to a full pension for all are disputed. John Freebairn and Andrew Podger in a subsequent AFR article argued they would be smaller using arguments that were unusually opaque.

But there would be other gains from rejecting Paul Keating’s “compulsory savings” plan. First would be the savings in superannuation fees – Brian Toohey in today’s AFR estimates these as $22b annually. Watch this lobby scream like crazy if this proposal gets any air. Superannuation is not manna from heaven despite the devotion of the labour movement to it. Whether superannuation payments are made by workers or employers they are all born by workers now. A future gain is borne by lower living standards now.

Relying on a compulsion to drive savings does not make a lot of sense. Families, for example, often need the money when they are young and raising a family. Of course, the biggest gain of all is simply to allow people to decide themselves how much they want to save.

Draft subject to revision. Comments appreciated.


4 comments to Scrapping compulsory super

  • Wouldn’t a large share of superannuation fund management fees be replaced by non-superannuation investment management fees (if much of the super is held by those who will save anyway)? Also, industry super funds have relatively low fees compared to many alternatives in Australia.

  • hc

    Obviously not if people made their investments directly. I don’t think super fund fees are low – even funds like Uni Super.

  • rog

    Some jurisdictions allow people to access their super before retirement for personal housing loans. Were this to be the case in Australia more money would be made available to chase a finite resource putting even more upward pressure onto prices.

    It seems that super should be looked at as a part of the whole of govt taxation, along with welfare and tax cuts.

  • Michael

    Is there any evidence that societies that continually shift risk from the collective to the individual achieve a net benefit to the population as a whole? The hypocrisy of politicians with their state provided safety net is breathtaking. It’s time to start doing the unthinkable and start asking the tough questions instead of believing the hype.

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