Friday, March 07, 2008

Six reasons not to pour even more money into super

Fred Argy, who I think has it right, in a letter in the AFR today:

Despite the pleas from many eminent economists to deliver the tax cuts through superannuation, I can think of six good reasons against it.

* The diversion of tax cuts to superannuation would further fatten a highly subsidised, protected and bloated tax shelter that, after the Howard government's decision to remove altogether the tax on superannuation benefits when people turn 60 (including full exemption from the Medicare levy), will cost taxpayers about 2.5 per cent of GDP in the years ahead, with the tax benefits captured disproportionately by the richer half of retirees.

* For most middle and high income earners, the present 9 per cent contributions cap will, over a full working life, leave them better off in retirement than when they were at work. Additional superannuation might therefore have perverse effects on their annual saving and encourage them to retire early, hardly what is needed. This does not apply to lower income earners but there are more cost-effective ways of assisting them to save for their retirement, including through a better targeted superannuation co-contribution scheme...

* Lower income families are doing it hard. They should not be denied the opportunity to either accelerate their house mortgage repayments (a form of saving) or to sustain their essential spending in the face of high food and petrol prices, even if this does inject some extra demand in the economy.

* In my view, by the time the tax cuts become effective, the economy will have started to slow down anyway under the weight of market and policy developments. Over the full year 2008-09, the Australian labour market might even benefit from some extra spending.

* Tax cuts at the lower end of the income spectrum would encourage greater workforce participation by fringe workers.

* Another broken promise would further damage the integrity of our political system.

The Superannuation Guarantee Levy was a great leveller and an important incentive to save when introduced in the early 1990s, but it is now becoming a source of growing wealth inequality and losing a good deal of its original economic purpose.