Address to the Super Review Conference - Labor's Vision for Superannuation

ADDRESS TO THE SUPER REVIEW CONFERENCE - LABOR’S VISION FOR SUPERANNUATION

SYDNEY THURSDAY, 26 MAY 2016

Let me begin by acknowledging the Gadigal people of the Eora Nation, their elders and traditions. And by thanking Mike Taylor and his colleagues at Super Review for the invitation to give this address today. It’s the first time I’ve spoken to this specific forum as Shadow Minister but I spot quite a few very familiar faces among you today.

I’m really pleased to see that you have lined up an all-star cast of presenters, people who have been so central to policy debates on superannuation and financial services for some time.

The program looks terrific: the digital transformation of services, the impact of policy settings on the broader economy, and women in super. These are all crucial to this portfolio, along with broader issues in financial services like life insurance, professional standards and regulation, to which we have devoted a lot of recent time and attention.

But today I’d like to take the opportunity to focus exclusively on superannuation. Let me explain why.

First, as you know, the Federal Budget contained some rather extraordinary measures, the impacts of which I know you are still working through. We’re in the same position, so I want to give you a sense of how we are going about that, in the Labor Opposition, and where we are up to. That’s the first reason to focus on super.

The second is because usually at this point in the campaign, 37 days away from the election, we’d find superannuation has given way to other issues. This time, the debate over super and retirement incomes is only gathering steam, and not in predictable ways.

In the immediate post-Budget world, you will be grappling with a set of proposed changes to superannuation which are among the most drastic since compulsory super was brought in.

I’ll give you my thoughts on these changes shortly. But first, to get a sense of their magnitude, let’s put them in context.

Our superannuation system is the envy of the world, but it has its imperfections. And in both ways – the enviable and the imperfect – public policy has played a big role.

It is a quarter century since the Labor Party introduced Australia’s compulsory private savings system. It’s incredible to think that it started out at just 3 per cent of wages, more than trebling in the years since.

We are proud to have created a system which has given ordinary workers the opportunity to lead a higher standard of living as they age.

Of course, the system is still maturing. Projections are that by the middle of the century, the systemic benefits of super will be clearly felt as retirement incomes rise and the call on the age pension declines.

While a single woman on the median wage retiring today has a balance of around $74,000, by 2055 this is projected to be $413,000. This translates to yearly income in retirement just under double the annual income of a woman in a similar situation today. Her age pension drawdown will be about $8,500 less per year.

Since its inception, super has gone through at least two, arguably three, waves of significant change.

The Howard Government introduced Simplified Super, increased the preservation age from 55 to 60, and introduced co-contribution arrangements. But most consequentially, and for the first time, super payouts including lump sums could be taken tax-free for most people over 60. Treasurer Costello described this 2006 decision as “the most significant change to Australia’s superannuation system in decades.” He may be right – we are still dealing with the consequences.

A next wave of change came from Labor ministers Bill Shorten and Chris Bowen, who restored the superannuation guarantee schedule to reach 12 percent by 2020 and introduced better transparency and choice for members through My Super and Superstream.

Next, since their election in 2013, the Abbott-Turnbull Government has pursued three policies: on the first two, they were beaten back, namely weakening compliance penalties and changing governance arrangements.

On the third, freezing the SG, they have prevailed three times. They like to portray this as a small thing, but as with everything in super, compounding can wreak damage as surely as it can build strength.

As a result of not moving to 12 per cent SG, by 2055, the funds pool would be $904 billion smaller; age pension spending $3.1 billion a year higher; tax revenue from contributions $5.5 billion a year lower and from earnings $3.75 billion a year lower.

But for all of this, it is still Peter Costello who implemented some of the most pressing current imperfections in super.

Put simply, he took a progressive, well-designed retirement income system that had become the envy of the world, and grafted an estate-planning vehicle onto the top end of it.

He also inflicted deep, structural damage on the Federal Budget.

As the Government’s own Financial System Inquiry has found, 10 per cent of Australians receive 38 per cent of the super tax concessions. That is more than the combined benefit of the bottom 70 per cent of Australians. ASFA colleagues have estimated that a small group of 24,000 retirees receive an annual payout from superannuation of more than $216,000 per year, all of it tax free.

This is a policy failure by anyone’s definition. And it’s the seed of today’s debate, a decade later.

Despite the growing and inarguable empirical evidence of the problems with these tax concessions, it still took some courage for Bill Shorten and Chris Bowen, and my predecessor in the portfolio, Bernie Ripoll, to release Labor’s positive plan for Fairer Super over one year ago, 15 months out from an election.

But we wanted to give people time to properly consider our proposals because we believe significant change needs community input.

We proposed to lower the threshold for the High Income Superannuation Contribution from $300,000 per year to $250,000. And to tax income from super in excess of $75,000 per year at the same concessional rate of 15 per cent that applies to earnings in accumulation.

Our policies were fiercely resisted at the time, including by the then Assistant Treasurer, Josh Frydenberg, who described them as a, “desperate revenue grab that will target the middle class”, and also by the current Treasurer.

I think it does show just how far that Labor has shifted the debate that we saw on Budget night a conservative Government acknowledge that the regressive tax settings were both unfair and unsustainable.

The Budget was more than a correction though – it had elements of a conversion: The Turnbull Government went from ruling out any changes whatsoever, ruling out changes to the retirement phase, ruling out retrospective changes to reneging on all of this and rushing out vast, consequential changes on the eve of an election.

Particularly given the Assistant Treasurer’s sound observation on assuming the portfolio less than a year ago, that “you have to bring people with you on the journey, and if you are going to make change to long-term policy settings, you need to be able to make that change with a period of transition, because there are people who have made decisions on the basis of long-term policy settings.”

It should go without saying that you need to think big changes through, and examine them for unintended consequences. This is precisely why we announced our plans with proper lead time before an election. It’s precisely why we are worried about the Turnbull Government’s haste and handling in this area.

The new measures will literally force people to move assets out of their retirement superannuation accounts. It will permit catch-up concessional contributions which typically benefit people on high incomes. Tax concessions supporting Transition Retirement Pensions will be abolished. The work test for people aged 65 to 74 will be gone too – a significant new spend in tight fiscal times, and one which Labor’s approach to fair budget repair means we have to scrutinise closely.

And there are other changes too.

In Labor’s response, we are taking a cautious approach. We want to fully understand the distributional impacts, as well as behavioural effects and any unintended consequences.

So we want to make sure transition to retirement changes don’t adversely impact people on lower incomes who are attempting to build up sufficient savings. Again, we are consulting with stakeholders and experts about the implications of this proposed change and whether it is implementable in its current form.

This brings me to the second reason I want to focus on super today. Because the execution of the changes has driven an unprecedented election time debate on the details.

As each day passes, more and more people are concluding that the Turnbull Government has made a mess of the changes from the beginning.

It has lurched from one extreme to the other, a year ago claiming there was no issue to be addressed, and now introducing a degustation of unexpected and drastic changes.

This unpredictability and inconsistency is why there is a line of critics stretching around the block.

They are changes which the Government and its supporters in the media are struggling to explain or agree on.

We have seen Mr Turnbull and the Foreign Minister, Julie Bishop, saying completely different things about whether there would be changes to the package post-election. We have seen the Treasurer struggle with the concept of retrospectivity and senior Liberal figures, including Former Treasurer Peter Costello, openly criticise the changes. The Chief of Staff to former Prime Minister Abbott has described the package as “devious and unprincipled.”

The Government’s preferred think tank, the Institute of Public Affairs, has launched a campaign against the changes, saying that the Liberal base is up in arms. Judith Sloan has written of the Turnbull Government’s “brain snap.”

I list these critiques not because it is good sport for me to do so, but to make the point that the Turnbull Government has forgotten the very first rule in the super policy rulebook – proceed cautiously and consistently, and bring people along with you.

Instead, we have seen confidence diminished and concern rising.

As you know, Labor has voiced grave concerns about the retrospective elements of the Government’s policy.

In saying that, I do acknowledge that some people contest this view of retrospectivity.

Some have even tried to claim that our own policy of increasing the zero rate of tax on earnings producing over $75,000 in pension income is retrospective, despite the fact that it applies to future earnings and does not force anyone to reduce their retirement balance.

Others have made the case that the Government’s transfer balance cap of $1.6 million is retrospective because it forces people to take money out of their retirement phase accounts, either transferring them into accumulation accounts or making different investments. Treasury officials also admitted in Estimates that there could be penalties applied to certain balance transfers. No doubt you will have views on these two measures, and they may not be unanimous.

What’s beyond doubt is that when people are told that their non-concessional contributions stretching as far back as 2007 are going to be caught within a new $500,000 lifetime cap, this is a retrospective change. It’s hard to argue that a policy is prospective that considers contributions made in 2007, but that hasn’t stopped the Treasurer.

Ultimately, the Australian community is the arbiter of this debate.

The scrambling of super has consequences not just for the 4 per cent of people the Liberals claim are affected by their changes, and not even for the 9 per cent that Judith Sloan has calculated.

It makes vast swathes of middle Australia wonder about the Turnbull Government’s shambolic process that got them here and what it means for their retirement.

So while political commentators have been quick to talk about the so-called Liberal base being up in arms, I see it differently. There is a revolt brewing over some of these changes which has nothing to do with their historical Party affiliation and everything to do with confidence in super and the integrity of the system.

People do understand that the tax settings on superannuation need to change. They understand that the incentives need to be better targeted, that it’s not right that people are using the system to amass large sums of wealth to pass on to their kids rather than save for retirement.

But what people find hard to swallow is the manner in which the changes were made, and the way they are going to take effect.

Our responsibility is to find where we can agree with the new measures and explain where we do not. Like the Government, our priority is to redesign the tax concessions so that they are better-targeted. The issue we take with the Budget measures is not the ends, but the means.

For some time now, Labor has been right to focus on the poorly-targeted nature of super tax concessions and we are right to keep our focus on tax concessions now. But change must be approached in the right way.

I recognise that in the time since the Budget was handed down, the tone of some of the commentary is that Labor ought to be declaring victory and moving on. There’s an understandable instinct in parts of the sector to want to settle these matters.

But this debate will not resolve itself quickly. And Labor will not be rushed into a view without understanding all the policy costs and consequences and the various points of view in the community.

Of course, we have welcomed the measures which are a carbon copy of ours: like lowering the threshold for the High Income Superannuation Contribution and reinstating the Low Income Superannuation Contribution, renamed as the Low Income Superannuation Tax Offset. As my colleague Senator Jenny McAllister has said, if we had known that the only problem the Government had was with the name, we could have sorted it out two years ago!

But we don’t regard it as responsible to say that this is the end of the matter. To do so would be to ignore a number of other spending and saving measures in the Budget package, the cumulative impact of which is really quite significant.

People understandably feel the most unsettled about chaotic changes in an area like super – where they often feel underequipped to analyse the implications themselves, but know they can be massive, not to mention detrimental. It’s why we take our responsibilities as an Opposition – to question, to scrutinise, to challenge – so seriously.

And frankly, we’re reluctant to rush to judgement when there’s a genuine risk that some of the changes could go the way of the Backpacker Tax; the 15 per cent GST; the state income tax; the capital gains changes in super – ruled out, then in, and out again in one day; the permanent freeze on the Super Guarantee; the optional opt-out of super for low income earners, which has been denied and delayed now for reasons of political expediency.

Labor’s job can’t be to try to follow the unpredictable movements in Liberal Party economic policy making.

Our job is to consult and consider, carefully work through what has been put on the table, evaluate each measure on its own and in combination, and against our policies.

As I have indicated, our priority is looking at the $500,000 lifetime limit especially, to see if there is a prospective way to implement the policy.

We will take into account feedback on the $1.6 million measure as it compares to our $75,000 earnings measure. We will look across the board at the intersections of the measures and whether they are working together or at cross purposes.

We will consider, consult and form our views as an alternative government, not as an opposition party.

We will agree where we can and disagree where we must. We want the best policy outcome; the politics will take care of themselves.

Our position has been the consistent and predictable one. Labor is united behind its proposals.

We want today what we wanted for much of this parliamentary term:

• Better targeted tax concessions;

• More adequate retirement balances for low income earners and through the middle, which have been hurt by SG freezes;

• Narrowing of the gender gap;

• Super paid to those who have earned it, not the watered-down penalties for non-compliance which failed in the Senate;

• A more rigorous way of making and evaluating and advocating policy via the Council of Superannuation Custodians; and

• Predictable changes flagged well in advance, not 60 days out from an election.

Put simply, we are staying the course.

We want what we have always wanted – and what the Labor architects of our system wanted – adherence to an objective of superannuation which goes beyond a slogan or a Budget night press release or an election-eve fix, and actually means something. Not just to the voters who will get their little pencils out in 37 days, but to the people who will have retired and will retire in the decades to come.

#speech #superannnuation