Treasurer Jim Chalmers’ plan to raise the tax rate on superannuation with assets above $3 million appears to have been stymied. The aim was to increase the tax from 15 per cent to 30 per cent on assets above the limit, but it has met resistance in the Senate.
Chalmers claimed 99.5 per cent of Australians with superannuation accounts would continue to receive “the same generous tax breaks”. He said the increase was “expected to apply to around 80,000 people, and they will continue to benefit from more generous tax breaks on earnings from the $3 million below the threshold.”
Although an incremental move it met resistance, perhaps because new taxes routinely start out small but progressively get more aggressive. There has long been an expectation that the Australian government would seek to get more out of the super system, which has been deliberately crafted to be independent of government. That it has been blocked is an indication of healthy suspicion.
What is different about Australia’s superannuation system is that superannuants own their own assets. They may choose to hand over the management of those assets to fund managers – some opt for self managed super funds – but the government has no role. That is very different to pension funds elsewhere. In most countries the funds are controlled by governments.
Australia is proving to be a test case of the benefits of keeping government out. In many parts of the Western world, especially the United States and Western Europe, governments have for decades not handled their finances well, and they are now facing massive unfunded pension liabilities (the US also has a large private saving system, individual retirement accounts). They have made promises to pay that they cannot realistically meet and are likely to be forced into some type of default.
In Australia, by contrast, super fund assets are, by definition, fully funded and there is no promise from the government. The aged pension operates as a backup if an individual’s super assets are insufficient; the original aim of taking pressure off the aged pension has largely been achieved.
Keeping government out has resulted in exceptional performance. The $4 trillion of assets in Australian super is the world’s fourth largest pension pool in absolute terms. It is also the world’s fastest growing when compared with the size of the economy (GDP). According to Thinking Ahead Institute Australia’s pension assets grew from 108.3 per cent of GDP in 2013 to 145 per cent in 2023, the most significant rise among the 22 countries analysed. As a consequence, Australia also has the world’s fourth biggest pension asset base relative to GDP.
'The creation of Australia’s super system was a master stroke, one that continues to be underappreciated, including by policy makers. It kept governments out of the picture, and is a rare example of what the philosopher, political thinker and author GK Chesterton called “distributism”.'
One reason for the exceptional performance is that Australian super funds have not been buying up government bonds in order to bail out public finances, as has been the case in many countries, especially the UK. This is an incestuous arrangement whereby governments use the pension money to buy their debt. It is an escape valve when they are not handling their finances well.
According to Thinking Ahead, only 14 per cent of Australian pension assets are allocated to bonds, the lowest of the seven major markets. By contrast, the UK has close to 60 per cent of its assets in bonds. Given that over time bonds tend to generate poorer returns than equities (shares) and other investment vehicles, this may further explain Australia’s high performance.
Another reason for the sturdiness of Australian super is that it is heavily skewed towards defined contribution, the Super Guarantee. Only 12 per cent of funds are defined benefit – that is, there is a promise to pay out a certain income in retirement – which is the lowest level in the major markets. When such a small proportion of funds is required to meet specific targets, the system is sure to be more robust.
There have been complaints that the system is too complex for many to navigate. This hardly seems a reason to change super radically, though. A more plausible complaint is that the fund managers and advisers who help navigate that complexity charge too much. The Productivity Commission has estimated that $30 billion annually is expended annually on commissions and fees, making it a very large industry in itself (it is about half the turnover of the nation’s manufacturing sector).
Suggestions that the system should be simplified, such as pushing Australians to guaranteed life time annuities, are questionable, although there is good reason to improve the explaining of complex options. Retirees can already purchase annuities if they want to.
The creation of Australia’s super system was a master stroke, one that continues to be underappreciated, including by policy makers. It kept governments out of the picture, and is a rare example of what the philosopher, political thinker and author GK Chesterton called “distributism”: the sharing of productive assets widely amongst the population rather than having them concentrated in the hands of the few. Some the people responsible for the creation of the system were well aware of this intellectual tradition.
Because of the large sums involved there will be many in power who want to tamper with it. They should be resisted. If it ain’t broke, don’t fix it.
David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.