Good morning, everyone.
I am delighted to be here at the Australian Financial Review’s Banking and Wealth Summit.
On any given day, when you pick up a copy of the AFR you get a sense of the mood in the business community and the issues that are at the forefront of this all-important industry of which each of you, here today, are an integral part.
For us politicians it is not always a daily pleasure to read the AFR, but it is always educative, informative and provocative.
In my time today, I want to share some of that healthy provocation on the issue of what is, for most Australians their second largest asset – superannuation – and government’s pivotal role in growing and securing this asset.
But before I knock down some shibboleths I want to emphasize that the Government’s economic policies — highlighted by the Treasurer earlier today – are critical to the wealth and prosperity of all Australians.
Our policy direction follows a strong tradition.
The Liberal Party has always stood for the great bulk of Australians who work hard at their jobs and in their businesses; who believe in their right to retain as much of their hard-earned income as they can; and who aspire to a better future for themselves and the generations that follow.
Which brings me to superannuation.
When we think forward to the next two decades or so in Australia there will be things that we haven’t even imagined that are likely to change the way we live our life and shape our world.
But there are some things that we do know today about tomorrow.
We know, for example, that in Australia our population is ageing.
We know, that for every person aged 65 and above, there will be significantly less working age people, around 2.7 to be exact.
And this compares with around 7 working age people in the 1970s.
We also know that those older Australians are living longer – and hooray for that.
And finally we know that the cost of services to support older Australians is also likely to increase – whether it is healthcare or aged care, to pick out just two.
So why is all of that significant?
It is significant because it means that if we are to relieve the tax pressures on those working age people, then more people need to be self-reliant in their later years.
And if we want people to live the lives that they aspire to in retirement, and to have choices, then they need to build savings today.
Australia’s retirement system has long been built on three pillars:
Compulsory saving within superannuation;
Voluntary saving inside and outside of superannuation;
And for those without savings or limited savings – our social safety net – the age pension.
Twenty-six years ago, superannuation went through a significant change – it became compulsory.
Under Labor Prime Minister Paul Keating, almost everyone who worked as an employee, regardless of means, was forced to sacrifice some of their wage today for their retirement. It became known as the ‘superannuation guarantee’.
Starting at 3%, the super-guarantee has risen to 9.5% today and is legislated to reach 12% by 2025.
But it would be wrong to think that the ‘super-guarantee’ is a guarantee of someone’s present lifestyle in retirement.
Nor would it be right to think that the super-guarantee particularly benefits low income earners.
Far from it.
In fact many low income earners are being forced to save for a higher standard of living in retirement than they can afford while they are working.
ASFA, the Association of Superannuation Funds of Australia, has calculated that a single person or couple will have, and I quote, “a comfortable standard in retirement” with savings of around $545,000 and $640,000 respectively.
But the Grattan Institute states ASFA’s “comfortable” benchmark would mean that a single person in retirement who has reached ASFA’s benchmark, would be better off than most singles, whether retired or working, and couples in retirement better off than 40% of working couples.
And this is before you take into account the detrimental impact that the super-guarantee has on an individual’s wage.
As noted in the Henry Tax Review:
“Although employers are required to make super guarantee contributions, employees bear the cost of these contributions through lower wage growth. This means the increase in the employee’s retirement income is achieved by reducing their standard of living before retirement.”
This is something that should be top of mind in a historically low-wage growth environment.
The superannuation industry is often very quick to point out that the only way that people can achieve higher incomes in retirement is by compelling an ever increasing amount of wages to be sacrificed into superannuation.
But they would say that wouldn’t they?
The increase of 9.5% to 12% will mean around $10 billion a year more flowing into the industry in 2025-26.
Which, of course, means a bonus of hundreds of millions of dollars in fees each year for the industry and ever increasing salaries for industry professionals.
And that is before you take into account all that additional money sloshing around for other cultural practices that have built up along the way.
For example:
Members of superannuation funds have to stand by and watch as their retirement savings are spent on straight out political advertising.
Or dubious sponsorships of union congresses.
Or on superannuation liaison officers who are in fact union officials being paid out of super funds.
Or on a lobbying outfit whose principal achievement last year was to stand in the way of the regulator, APRA, getting important new powers to protect members’ money.
The fact is, mandating what people must put into their superannuation isn’t the only way to increase retirement savings.
A far better way is to ensure that those people who want to save more than the mandated amount have sufficient flexibility within the system to do that.
So how do we achieve this?
One of the greatest criticisms of superannuation has been the constant changing of the rules.
And this is true of both sides of politics, but it is also true that some changes are based on necessity and the evolution of a system as it grows and matures, while other changes are based, as I will outline later, on opportunism and governments in search of easy cash grabs.
Today I want to outline what I believe are the five key principles that should guide superannuation policy making.
In my view these five key principles are that:
- The system be fair. It should be fair to women; fair to those people who don’t fit the employer-employee model such as small business people; and fair to each generation, so that the superannuation system can sustainably benefit those who retire today, and fair to those who will retire 50 years from today;
- The system give people the ability to make choices about their lives, both in the here and now, and into the future;
- The super system should have the highest standards of governance, after all it is a mandated system, and everyone must contribute whether they like it or not, so the system must work in favor of those people whose money it is, rather than those who are managing it;
- That members’ money must be protected. Again, it is a mandated system so the government has a responsibility to ensure that fees and charges, including premiums for insurance products, are not inappropriately eroding retirement income;
- And finally, that it delivers certainty and stability, or to put it another way, that there should be no significant new tax changes for substantial periods after a period of change.
Fairness
Taking the first and second principle first, tax changes need to ensure that the system can deliver for all Australians, not just the few.
When the Coalition Government introduced tax changes to the system in the 2016-17 Budget, it did so to make the system more sustainable, but also to ensure that all people can benefit.
Whilst it raised around $6 billion in revenue over the forward estimates period, the Government reinvested around $3 billion of this back into the system to deliver fundamental changes.
Changes that included protecting low income earners through the Low Income Super Tax Offset (LISTO) so lower income earners are not paying more in tax because of the super-guarantee, than they would otherwise pay at their marginal tax rate – helping more than 3.1 million people, including 1.9 million women.
In this respect, the Government has sought to uphold the progressive structure of our tax system.
Changes that allow everyone in the workforce, regardless of how they make their living, to make concessional contributions into their superannuation – helping around 800,000 Australians.
Changes that allow people with low balances who spend time out of the workforce, such as women and men who may have caring responsibilities for children, to ‘catch-up’ if they have the financial capacity to do so, by rolling over their concessional contributions each year for up to five years – expected to help more than 230,000 people in 2019-20.
By contrast, Labor has taken a different approach to the taxation of superannuation.
If elected they have pledged that they would make changes to pocket $20 billion of revenue and not put a cent back.
The Leader of the Opposition has promised to scrap two of the changes I just mentioned.
As Minister for Women I find it particularly concerning that Mr Shorten will repeal the ability of women to ‘catch up’ on super, or even contribute at all, by getting rid of the flexibility measures designed to give them the tools to be self-reliant in retirement.
This alone will mean that one million people will be worse off as a result.
Ominously, the Leader of the Opposition also has promised “more” superannuation tax changes on top of his recently announced plans to reintroduce double taxation for taxes paid on shares – many of which are held by superannuants and retirees.
Let me return to that a bit later.
Choice
The second principle also extends to people choosing where to put their own money.
After all, who cares more about your money than you?
Right now in 2018 there are still around one million Australians who are denied the ability to choose where their superannuation savings are placed because they are locked in an enterprise bargaining agreement or workplace determination.
Although workers can choose who they work for, they are denied the right to choose which super fund to entrust their hard-earned retirement savings.
With so many people changing jobs regularly, a growing feature of our economy, some are forced by these restrictions to create new accounts on which they are charged fees and insurance premiums even if they already have one or more accounts.
The Government has legislation before the Senate that would help fix this, but it is opposed by the Leader of the Opposition.
Choice also extends to the sort of products that are available, as well as a recognition that at different times during a person’s lifecycle, their needs will be different.
Which is why the Government is developing a framework for comprehensive income products in retirement (CIPRs).
This will allow someone to invest in a product that can deliver them a fixed income that is triggered at say 80 years of age, at a time that they may be less active in the management of their retirement income.
Such products can also provide financial security against longevity risk, that is, that you will outlive your savings.
This new choice will have the capacity to deliver both financial security and peace of mind.
One of the standout achievements of the Howard-Costello years was the expansion of the self-managed superannuation industry.
Former Treasurer Peter Costello recognised that, in a mandated system, people should be able to make their own choices about investments given that it is their money.
And its success can be seen in its growth from 100,000 small funds holding around $28.2 billion in 1996, to more than 577,000 SMSFs holding approximately $721 billion in retirement savings today.
Around a million or so people have voted with their feet.
This is because people want to take responsibility for their future, and they should be able to do so.
Over the years we have seen various attacks on individuals who choose to manage their own money.
But the biggest threat yet to SMSFs has come with Labor’s very direct attack on dividend imputation. More on that later.
Transparency, accountability and good governance
The third principle is that superannuation should have the highest standards of governance.
Sadly, not even this has bipartisan support.
Labor will block the Governments legislation in the Senate to give greater transparency and accountability to members about how their money is spent, and it will block greater powers for the regulator APRA, to police this and take action where needed.
It does seem strange that whilst the Leader of the Opposition thinks that the taxation of superannuation needs radical change, including reducing contribution caps and applying Division 293 tax at lower income levels – he thinks that not one thing should change regarding transparency, accountability or governance arrangements.
It also isn’t lost on me that many of the funds who demand transparency in the companies that they invest in, are themselves fighting to cocoon themselves in a black box remote from the needs of their members.
This is despite the fact that the industry has grown from around $140 billion when SG was introduced in 1992, to now be $2.6 trillion and forecast to rise to around $9 trillion by 2040.
The Royal Commission will be important in considering the relationship between trustees and members, and whether members have always been well served.
Eroding retirement income
The fourth principle - that retirement income should be for retirement and that it shouldn’t be unnecessarily eroded - has definitely fallen by the wayside.
Leaving aside the examples I gave before about cultural practices in the industry, there are very clearly circumstances where people never see the benefit of their retirement savings at all.
Let me explain.
As Minister I receive a lot of correspondence from people who have done part-time or casual work, only to discover that it will cost them more, or only slightly less, in fees and charges to consolidate their money or take it out, than what is sitting in the account.
So they simply leave it there and watch helplessly as it gets whittled away to zero by the ongoing fees and charges.
Either way, the superannuation industry wins, and wins big.
This was the example of many retirees who worked for the Australian Electoral Commission at the last election who found they ended up without a cent of their super.
How can this be right?
How can it be right that a young person with no dependents and no assets is forced into paying high insurance premiums as soon as they join a fund as a result changes to superannuation made by the Leader of the Opposition in 2012?
Compounding interest is critical for these young people so the more that is taken out at an earlier stage; the less they will ultimately have in their retirement.
By way of example, every $100 in fees that is taken out of someone’s account at age 25 could be an extra $540 in real terms for that person in retirement if it were left in their account.
Again, how can this be right?
Certainty and stability
The fifth principle - to have certainty and stability in relation to tax changes - is fundamental to people having ongoing confidence in superannuation system.
Whilst Labor have promised further tax changes, the Government has made it clear that our package of tax changes announced in the 2016/17 Budget and which are in the process of being implemented, are the only tax changes that we intend to make.
Dividend imputation
Not surprisingly, and finally, I want to turn to the Labor Party’s plans to rip up Australia’s dividend imputation system.
This unique system was introduced by the Hawke Government in 1987 to ensure that shareholders of public companies weren’t slugged with a double taxation on share dividends – a company tax hit followed by a personal income tax hit.
This was a great reform by a Labor Government but it still left those on lower incomes with a tax bill – still paying the company tax rate.
Then in 2000 the Howard Government made franking credits fully refundable.
This reform completed the vision of two successive Australian Governments to end the double taxation of dividends.
People receiving dividend imputation credits could now use these credits to offset other forms of income, while people on lower taxable incomes received their tax credit back in the form of a tax refund – remembering that as shareholders they already paid company tax.
When it was announced, we were told by the Leader of the Opposition that his $59 billion dollar retiree tax 1.0 was carefully crafted to hit “millionaires”.
The only problem was it affected hundreds of thousands of pensioners.
Mr Shorten’s new version, retiree tax two point zero, isn’t much better.
Perversely millionaires can still benefit, it is just those on modest taxable incomes who will be hit, around 85% of whom have a taxable income of less than $37,000.
Labors “guarantee” is nothing more than a guarantee to turn more self-funded retirees into pensioners.
And to punish those pensioners and self-funded retirees who dare to want to control their own money through a self-managed super fund, by making SMSFs, more complex and less tax effective.
Yet industry and retail funds will be largely untouched.
How is this fair?
The result will be that investing in Australian companies with shares with high-paying dividends will become less attractive.
People will invest more in property.
They will seek out investment opportunities overseas rather than invest in Australian companies.
And what happens if somebody with a self-managed super fund becomes a pensioner half-way through the year? Or ceases to be a pensioner half-way through the year?
What if somebody is just $1 outside the eligibility for the pension, is it fair that all their refundable credits are pocketed by the Labor Party?
In short, Labor’s retiree tax is unfair, full of contradictions and flaws that will require ongoing changes.
And worst of all, when we should be using retirement income policy to help more people be self-reliant, their policy will put more pressure on the old age pension.
But these are not the only tax changes on the agenda.
The Shadow Treasurer has already flagged that:
- He will cut the ability of all Australians to be able to concessionally contribute to their superannuation;
- He will cut the ‘catch up’ contribution that will help those people with low balances who are out of the workforce for a period of time with caring responsibilities to increase their retirement savings;
- He will increase the tax on higher income earners by dropping the Division 293 threshold from $250,000 to $200,000;
- He will slash the annual non-concessional contributions cap by 25% down to $75,000;
- He is open to increasing the superannuation guarantee which will lower wage growth in an already low wage growth environment which will hit low income earners hardest;
- He refuses to rule out lowering the concessional contribution threshold even further;
- And refuses to rule out lowering the transfer balance cap below $1.6 million – earnings on which he contemptibly refers to as “tax free”.
- And just on cue this very morning, the Shadow Treasurer has told the FSC there will be necessary changes to superannuation tax.
Conclusion
As I said at the outset, the Liberal Party has always stood for the great bulk of Australians who work hard at their jobs and in their businesses; who believe in their right to retain as much of their hard-earned income as they can; and who aspire to a better future for themselves and the generations that follow.
The choice couldn't be clearer.
The stakes couldn't be higher.
And the need to protect retirement savings is greater than at any time since we all bought into the superannuation vision.