Compulsory Superannuation and the Liberals – Dallas McInerney

Dallas McInerney has worked in financial service regulation at ASIC and is currently Group General Manager, Government Affairs at the National Australia Bank. In a presentation to The Sydney Institute on Wednesday 6 July 2011, on compulsory superannuation and its future benefit to Australians, Dallas McInerney joined Ross Cameron, former Liberal Party Member for Parramatta and now company director and contributor to the Sydney Morning Herald to discuss the pros and cons.

COMPULSORY SUPERANNUATION AND THE LIBERALS

DALLAS MCINERNEY

As part of its response to the Henry Review of the Australian taxation system, the Rudd Government committed to increasing the employer paid superannuation guarantee from its current level of 9 per cent of earnings to 12 per cent; the Gillard Government has retained the policy and plans to introduce legislation in the Spring sittings of Federal Parliament. The increase will be incremental, moving upwards at half a percentage point at a time between now and 2019/20.

The superannuation guarantee, or SG, is one of the so called three pillars of Australia’s retirement incomes policy, the other two being the means tested aged pension and voluntary savings. The combined results of the policy are as compelling as they are impressive. Australia has the fourth largest funds management market in the world, a spectacular achievement for a country of less than 25 million people, $1.3 trillion of the fund pool, or about 40 per cent, are held in superannuation assets.[i]

The growth and success of the financial services industry in this city is largely driven by superannuation. In fact, pretty much every financial services job in this city – including my own – can be traced back to the super system in some way, the skyline to your left is largely owned, in various structures by Australian superannuation funds, including the building we meet in this evening. Superannuation is a financial behemoth.

It is the SG, the compulsory component of the retirement incomes policy that has done the heavy lifting in this success story. Paid by employers as deferred wages, the SG was introduced by the Keating Government in 1992 and was part of a broader trend on the part of market oriented, mainly western democracies, transferring risk and liabilities off the government’s ledger, out of the public domain, and onto the individual.

The limited user pays scheme in the higher education sector, HECS, brought in by John Dawkins was guided by the same principle of self provision. It was Dawkins again, this time as Treasurer who introduced the SG legislation. Dawkins noted that Australia, at that time, was unlike most other developed countries, and met its age pension requirements from current revenues; the Treasurer said that “changes are required to the current reliance on the pay-as-you-go approach”[ii]; that change was compulsory superannuation.

Right there, we have one of the two main reasons behind the Liberal Party’s historical – and potentially re emerging – antipathy or indifference towards the SG – it is compulsory. The other and more interesting basis for the Liberals’ reluctant embrace is the SG’s antecedents in organised labour and controlled wages policy. Let me talk to that point first. Australian superannuation is largely regarded as a policy idea and achievement of the Australian Labor Party and its industrial wing. This is largely true, a view aided by repeated doses of Paul Keating’s policy triumphalism.

In February 1983, the month before Bob Hawke’s election, the ACTU and the ALP signed a Prices and Incomes Accord, the first of many that the ALP would take into government and form the basis of its industrial relations and wages policy. The first Accord (there were eight renegotiations) held that an “immediate priority will be consideration of the possible role for a national superannuation scheme”. The national scheme option was not pursued by Labor in government and it worked with the unions to encourage the spread of superannuation through occupational based agreements and the award system.

At its September 1985 Congress, the ACTU endorsed the policy favouring occupational superannuation and what followed was many years of agitation and petitioning of Australia’s various industrial tribunals to expand employer superannuation to all Australians, which at that point was largely limited to white collar professionals, the bureaucracy, military and judiciary.[iii]

In 1985, the ACTU took the question of occupational superannuation to the then Conciliation and Arbitration Commission arguing superannuation was an industrial issue and within the ambit of the Commission, that application was supported by the Hawke Government. This was quickly followed with a related national wages claim of 4 per cent; the government and unions negotiated a wages – super trade off with 3 per cent of wages to be diverted into superannuation.  The deal was thereafter referred to as a productivity agreement.

At the time, the Coalition saw it differently and its response came from its leader, John Howard. In the House of Representatives November 1985, Howard said:

The issue of superannuation is day by day, assuming more importance in the economic and political debate in Australia, and well may it, because the current campaign for superannuation benefits which flows out of (the agreement), owes more to a Chicago style extortion racquet than it does to a proper and logical extension of superannuation[iv]

For context, Howard held the view that the deal was a means of avoiding a wages break out under the much vaunted Accord by having employers pick up the extra costs. Howard was right to make those comments as that whole episode was a prime example of the excesses and shortcomings of labour relations and incomes policy that operated in Australia at that time. It was what Gerard Henderson termed in his seminal 1983 Quadrant article, “the Industrial Relations Club”, and it was in full swing!

Henderson observed an informal cabal of thought and convenience between the ACTU, the Australian Conciliation and Arbitration Commission, the Industrial Registry, peak business bodies and the Federal Department. Here a higher priority was given to consensus and industrial harmony at the expense of productivity considerations or the interests of individual workers. However, it would be regrettable if the well founded criticism made by the Coalition at that time were to endure or re-emerge on some level and possibly taint a broader appreciation of superannuation policy and its success.

Award and occupational based superannuation only took the Labor Party’s objective of universal coverage of the workforce so far and, as Prime Minister, Keating opted for the route of compulsion by legislation. Australian superannuation is a great policy achievement and here’s why: it puts Australia within striking distance of what no other democracy has achieved: to fully fund the retirement needs of its population on a sustainable basis.

The last part of the Howard quote is significant; he concedes that there is a proper and logical extension of superannuation – just not by the means he witnessed in 1985 and the record of his government reflects this appreciation for the benefits of superannuation, including the compulsory component. Howard and his government were following a tradition of strong interest in retirement incomes policy by Conservative politicians and governments in Australia.

In his first budget speech (1923), Treasurer Earl Page recognised the limits of the recently introduced aged pension system and noted that it “did not remove that sense of cruel insecurity… the fear of a destitute old age after a life of toil.”[v] In what might be considered a body blow Labor Party folklore, the idea of self provision for retirement (and sickness needs) by way of a compulsory contribution by employees to be matched by employers was not originally a stroke of Keating or Kelty genius. It was the outcome of a Royal Commission established by that most Tory of Australian Tories, Prime Minister Stanley Bruce which reported in four volumes between 1925 and 1927.

The report led to Treasurer Page introducing the National Insurance Bill in 1928, but the legislation failed to gain parliamentary approval before the defeat of the government later that year.[vi] In fact, the issue was to prove problematic for the non-Labor side of Australian politics, with Menzies citing Prime Minister Joe Lyon’s prevarication on the National Insurance Scheme as the (ostensible) reason for his resignation from the government in 1939.

Fast forward to today and the Coalition must now consider its response to the government’s proposed policy. For Labor, this is returning to unfinished business, as Keating’s original plan was for the SG to move to 15 per cent. However, Keating made the Coalition’s ongoing support for 15 per cent difficult when he withdrew the 1993 L-A-W tax cuts and put that money into superannuation. For many Liberals, the superannuation system now housed the prime minister’s broken promise. The reason for the planned increase of the SG is because most Australians are still retiring with insufficient savings when measured against living standards expectations.

The leading industry authorities on this issue, the Financial Services Council (FSC) and the Association of Superannuation Funds of Australia (ASFA) have each published data that has been accepted by government which finds a significant shortfall of retirement savings, particularly for the current working cohort – a retirement savings gap.

In the case of the most recent research by the FSC, the national shortfall in retirement savings (so measured) has blown out from $695 billion in 2008, to over $900 billion in 2009.[vii] The big policy lament is that Australia has the world’s leading financial architecture for its retirement incomes system, but we just aren’t putting enough gas in the tank. The current view of the Liberals is to oppose the measure; the issue is difficult for a political party whose key constituency is small business. The small business sector has never fully embraced employer funded compulsory superannuation and there have been examples of disingenuous comments which have cast the SG as essentially a payroll tax.

To be clear, the SG is not a tax; it is employee wages compulsorily diverted to a government regulated savings vehicle. The small business concerns, though real,  lose some of their edge given the parallel measures announced by the government aimed at assisting small businesses absorb any of the imposts, including a reduction in the company tax rate and accelerated depreciation allowances in their tax schedules.

Recent comments by Coalition spokespeople appear to signal a hardening of the opposition to the policy and perhaps the SG more broadly. The Shadow Minister for Superannuation, the very capable and impressive Liberal Senator Mathias Corman, said the increase in the SG will cut take home pay[viii]. Further, in a joint statement issued last month by Senator Corman and Shadow Treasurer Joe Hockey, the Coalition went further labelling the government’s policy as “lazy” and “unfunded”.[ix] Corman says that the ALP is all about “compulsion”.[x] If this current posture holds then it should be recognised as possible departure from the Coalition’s record on superannuation when in government. The history of superannuation policy during the Howard years was to strengthen and enhance the system, not weaken or dismantle it, much less take issue with its foundational element – compulsion.

In May 1997, Treasurer Costello said the government was committed to a retirement incomes system comprising compulsory super,[xi], a view he repeated and maintained through the life of the government and shared by a succession of Treasury Ministers including Rod Kemp, Peter Dutton and Chris Pearce. There were several major superannuation policy packages put forward by the Coalition during that time including a better Superannuation Policy in November 2001, and a more Flexible and Adaptable Retirement Incomes System in February 2004. These were aimed at improving a good arrangement.

In fact, in his best selling memoirs, John Howard said that the most innovative Treasury related policy his government ever implemented was the 2006 superannuation package announced in that year’s budget; these reforms, inter alia, removed all taxation off preserved superannuation benefits. [xii]

One point needs to be made explicit; there is no retirement incomes success story or superannuation safety net without the compulsory component. The 92 years prior to the SG’s introduction illustrates the anaemic power of voluntary measures. The evidence around contribution patterns post 1992 also confirms this. The most recent data from the superannuation industry’s regulator, APRA, shows that in the March 2011 quarter, there were $18.9 billion of contributions. Of that, 81.2 per cent ($15.3 billion) of contributions was from employers, while member contributions accounted for 18.0 per cent ($3.4 billion) of total contributions. [xiii]

Take away the SG and the top income earners making up that 18 per cent of voluntary contribution and you have a minimal amount of working Australians covered. The challenge for today’s Opposition, and my unsolicited advice, is to have regard for the demonstrable economy wide, market benefits of superannuation and its ability to deliver dignity in retirement to working Australians as well as relieve the federal budget of significant long term pressures. This is not the policy area to apply high principles of liberty and unadulterated freedom of choice, to do so would prevent the policy delivering its promise as it approaches maturity.

Any decision of government that mandates compulsion should have regard for the covenant with its citizens. The rights or freedoms traded away must be done lawfully and be accepted by the citizen, the rewards for doing so real and tangible and their broader interests protected – otherwise compulsion has no place. The higher road for the sceptics or opponents of compulsory superannuation is not to agitate against compulsion, but to strengthen the covenant.

To be clear, the Coalition is extremely well served here by Senator Corman, by far the best spokesperson the Opposition has had in that portfolio for a long time, his will be a considered judgement. There is of course a recent example of the Coalition over coming initial ideological based concerns of a major federal policy introduced by the ALP.

Medicare

As federal leaders, Andrew Peacock, John Howard and John Hewson all opposed and campaigned against Medicare. Some of the Howard comments on Medicare circa 1984-86 are quite pointed, if not provocative. In various contexts, Howard referred to Medicare as a miserable, cruel fraud, a scandal, a total and complete failure, a financial monster, a human nightmare and bulk billing as an absolute rort. I have sympathy with Howard’s public position at that time, Australia was potentially heading down the path of the worst model of European socialised medicine, which was of course the original Whitlam dream. Remember, this was 25 years ago.

However, after the 1993 election, lost by the Liberal Party’s most ridiculous of leaders, John Hewson, a major rethink of Medicare took place within the Coalition, led by the member for Mackellar, Bronwyn Bishop, who in 1994 had become health spokesperson.  Bronwyn Bishop was the first ever Liberal Health spokesperson who stated support for the continuation of universal bulk billing and the continuation of Medicare. John Howard formalised the reviewed position when he reascended the leadership in 1995. The decision the Liberals made was to acknowledge the significant social dividend of Medicare, embrace it in principle while committing to a series of sound reforms, based on market efficiencies that afforded individuals more destiny and discretion in their health affairs. The Australian health system was better for it (as were the Coalition’s electoral stocks).

By the end of the Howard years, the boast of the Howard Government that it was Medicare’s “best friend”, was also the title of a speech the Health Minister, Tony Abbott delivered to The Sydney Institute in September 2004. Tony Abbott said that while some Coalition members were “late converts” to Medicare, Coalition Ministers were now the truest of believers. [xiv] Superannuation needs a friend like the Liberals!

The current superannuation system would benefit enormously should the Coalition take a similar approach to superannuation. There are too many examples where the mechanics of the current system are shielded from competitive pressures, lack transparency and languish in the practices of last century. For example, billions of superannuation dollars are orphaned as Australians find it difficult to track their various funds as they move around different jobs. Similarly, the investment decisions of too many funds lack the oversight and review experienced by the rest of the financial sector.
The Australian worker is worse off in these circumstances and the Liberals have the track record in government of delivering this type of reform. In 1995, Tony Abbott told the Parliament that he thought “compulsory superannuation was one of the biggest con jobs ever foisted by government on the Australian people”. Like my interlocutor this evening, I have known Tony for many years and believe destiny is calling him to his greatest challenge yet. He has the best and most mature policy mind in the Liberal Party and when he turns that formidable skill to this policy area, I am hopeful we will see the Liberals arriving at a position best suited for the country and its future.

ENDNOTES

[i] Figures taken from speech of Parliamentary Secretary to the Treasurer, Hon D Bradbury MP, 7 June 2011

[ii] The Hon John Dawkins, MP, Security in Retirement, Planning for Tomorrow Today, 30 June 1992, pp1-2

[iii] THE IMPACT OF THE NEW SUPERANNUATION SCHEME ON LONG-TERM PERSONAL SAVING

Phil Gallagher, Retirement Income Modelling Taskforce (RIM, Department of Treasury). Pg 1

[iv] Howard MP, Hon. J, Matter of Public Importance, House of Representatives Hansard, 25 November 1985

[v] HoR Hansard, 26 July 1923, p. 1653

[vi] These and other details are sourced from an excellent article by Treasury official,  Mr John Hawkins of the Domestic economy division” ‘Earl Page: an active Treasurer’

[vii] FSC Media Release, Rice Warner Research, 23 November, 2010

[viii] Media release 22 June 2011

[ix] Media Release 17 June 2011

[x] Ibid

[xi] P Costello MP, Ministerial Statement, Savings: Choice & Incentive, 13 May 2011

[xii] The Howard Years, Lazarus Rising, pg 629

[xiii] Quarterly Superannuation Performance, March 2011, APRA. Issued 9 June 2011

[xiv] Hon T Abbott, Speech to the Sydney Institute, 15 September 2004