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Former superannuation minister Nick Sherry suggests cuts to military and public sector super. Photo: Michele Mossop
Two important Labor figures in the development of the superannuation system have warned the Gillard government against increasing super taxes and suggested other changes, including cuts to generous public service super, as better ways to raise revenue.
Nick Sherry, superannuation minister from 2007 to 2009, said the existing tax arrangements, which exempt withdrawals and have attracted billions in savings, shouldn’t be changed.
“You’ve got the appropriate framework for tax treatment of super,” he said.
Labor’s finance minister from 1984 to 1990, Peter Walsh, said MPs risked a political backlash against their own super entitlements if they targeted wealthier retirees.
“They had better be careful, particularly because their own superannuation is so generous – it would be a bit rich trying to wage some sort of class warfare,” Mr Walsh said.
“When you look at trying to get the budget into a better position, there are many savings and waste Labor could target to address that problem without redesigning super taxes.”
To raise money for its stretched budget, the government plans a review of superannuation taxes paid by the wealthy. There is a growing view within the government that the cost of the concessions is too big to ignore and breaks on income from super accounts and payouts should be targeted.
The government may pare back tax concessions, and may tax withdrawals by individuals with accounts of at least $800,000 and $1 million. The concessions will cost more than spending on the age pension by 2015-16.
Former Liberal federal treasurer Peter Costello said the changes would reintroduce too much complexity into the super system, punish savers and create uncertainty.
“Let us be clear. Labor’s problem is not superannuation. It is spending,” he writes in The Australian Financial Review on Tuesday. Changes to the system by Mr Costello in 2006-07 helped middle and high-income earners.
Mr Sherry said there were areas within the super system that require attention. He cited the retirement access age for super, now 60, should be raised to the pension access age that will climb to 67 in the next decade. The so-called transition to retirement that allows people to work part-time and draw down their super at the same time should move in the same increments, he said.
“The indirect policy response of those two policy changes would be to constrain to some degree the growth of super tax expenditures, and that’s the area I think governments need to focus on,” he said.
Mr Sherry said the government’s contribution to military super should be cut from about 28 per cent and public sector super from 15.4 per cent.
“There’s no justification in this day and age for such a level of contribution above the community standards,” he said. “You just close it to new members going forward.”
Military super is a combined defined-contribution and benefits scheme.
Mr Sherry said people shouldn’t be allowed to split their super with a spouse who earned less.
“That’s inappropriate in today’s system and doesn’t exist in any other system – it’s something you can’t justify in current parameters,” he said.
“These changes would save hundreds of millions of dollars initially and those savings would grow over time.”
Superannuation will become the largest tax concession in 2014-15, totalling $40.2 billion, the latest tax statistics show.
As the government collects less tax as a proportion of the economy, the impact of super concessions increases. “The growth of expenditure in super was significant – that would be of interest and concern to any government,” Mr Sherry said.
“That growth is just for any future government difficult to sustain. It doesn’t matter whether it’s Liberal or Labor.”
Former prime minister Paul Keating, who designed the super system, said in a speech in November that the superannuation guarantee (SG) was not set up as a “welfare measure” and that it was mainly designed for “middle Australia” – or those earning one to two times the average wage.
“This is not to say that those on 50 per cent or 75 per cent of AWOTE [average weekly ordinary time earnings] should not benefit equitably from the super provisions. They should. But for middle Australia – the SG and salary sacrifice is the way forward,” he told the Association of Superannuation Funds of Australia.
“At an SG of 12 per cent and broadly tax arrangements as now, someone on one times AWOTE to two times AWOTE plus more generous salary sacrifice limits – should be able to secure a replacement rate in retirement income of around 70 per cent over a 35-year working life.”
This story first appeared on The Australian Financial Review.