A savings device that provides enough for all? What a super idea!

ON LINE opinion – Australia’s e-journal of social and political debate

Posted Thursday, 3 June 2004

In the early 1990s Paul Keating fell for the three-card trick of the private insurance mafia and moved Australia towards privatised superannuation rather than a social insurance system, as is the practice in much of Europe. The Labor government passed legislation compelling the majority of employers and workers to pay into private superannuation funds. Keating spoke, at the time, of the need to embrace superannuation in order to safeguard Australian’s retirement income. Mark Latham’s latest superannuation plan is a return to the Keating blueprint.

When the current treasurer, Peter Costello, announced his major revamp of superannuation he declared, “You can retire and work”. Costello warned that because the average age of death in Australia was increasing there would be too few workers supporting too many retirees if something was not done to keep workers’ noses to the grindstone for longer. There are many more innovative ways to approach the issue of encouraging sufficient workers to stay in the labour market and to provide decent income support programs. Before looking at them, it is worth briefly considering where the private superannuation industry is leading us.

In the past three years, HIH has gone broke, AMP has made significant losses (in 2004 it wrote down its assets by an amount in excess of $8 billion) and the majority of superannuation funds have not increased the savings of those paying into them. In 2002, the government watchdog charged with the surveillance of superannuation warned that 10 per cent of superannuation funds “fell into the ‘high or extreme risk’ category”. Many workers, especially those with more than one job, are paying inordinately high fees to several superannuation companies. In 1986 only 22 per cent of female employees had any superannuation cover but Keating’s changes increased women’s access to superannuation. Currently there is in excess of $300 billion tied up in Australian superannuation funds, with most workers having some superannuation cover.

Women generally, and the overwhelming number of male workers who are likely to retire or be retrenched in the next decade or two, will leave the workforce with inadequate superannuation to provide for their retirement. Costello’s changes to superannuation will make it more difficult for many to access partial age pension payments to supplement their private retirement income. Other older workers will increasingly find they are forced to dig into their superannuation savings in periods where they are temporarily incapacitated for work or unemployed. This will reduce their chances of living comfortably, on their superannuation, when they finally exit the workforce.

Currently 5.9 per cent of the workforce is officially recognised as unemployed and another 6 to 12 per cent are disguised/discouraged unemployed or underemployed. The reality is that Australia has, since 1975, failed to create sufficient jobs for all available workers; since that time, there have been about 11 workers available for each job vacancy. Yet some politicians would have us believe that there is a “crisis of an Aging Australia”. They suggest that very soon there will be too few workers to support those leaving the workforce on account of age. Australia is not now, nor is it likely in the future, to be facing a shortage of potential employees. On the contrary, the problem is to create sufficient paid work for all unemployed and underemployed people.

Senior journalist Kenneth Davidson in an article in The Age aptly titled “Don’t be misled: the aging population is a good thing” demolishes the myth that the increasing age of the population necessarily increases the number of citizens dependent on an ever-decreasing workforce. Davidson notes that children in their first few years and the elderly in their very last years of life place the greatest demand on others for support. He notes that there will be fewer young and that although the population is living longer, on average, many older people are remaining healthy well into old age.

Economist Ross Gittins concurs with Davidson’s assessment in The Sydney Morning Herald but noted that the public believes the age pension will, in the not too distant future, be unaffordable. He points out that Treasurer Costello’s comments have added to such inaccurate perceptions. Gittins notes that Costello has “built his career as Treasurer on exploiting the public’s misconceptions, not correcting them”. Gittins suggests that the reason Costello wishes to keep large numbers of older workers in the workforce is to maintain downward pressure on wages.

Davidson writes: “Compulsory superannuation is, in effect, an income tax in all respects except that the funds are not socially accountable for their investment portfolios.” He suggests that there are far superior alternatives than continuing to force the majority of those enmeshed in private superannuation to keep contributing to such private funds. Many, who currently pay into superannuation funds, will find that their superannuation payment significantly erodes their access to social security in retirement. In 1991, the ACT Council of Social Services in a monograph entitled The Super Tax Rort raised similar concerns.

The alternatives

Social insurance (as is available in Europe) could provide a government guaranteed income in times of unemployment, sickness, disablement or retirement. The current compulsory superannuation contributions, converted into an increased tax rate and combined with existing social security budget allocations, would be sufficient to finance social insurance. Similar proposals were put forward in Australia in the 1930s and 1940s by the conservative side of the Federal Parliament but opposed by Labor.

Social insurance would ensure income support (for many who now find their retirement savings have evaporated when they try to access their superannuation funds). No form of income support is absolutely secure but because the entire country is guaranteeing social insurance it is far more secure than any private fund can be.

Social insurance is far superior to existing Australian targeted social security programs. It is more reliable and has clearer eligibility conditions. It avoids stigma, is efficient, alleviates poverty and doesn’t create poverty traps. However, social insurance systems are proving difficult to fund in many parts of Europe. Several countries have restricted the coverage and generosity of social insurance payments. Unemployed workers under 25 years old have been excluded. Limitations have been placed upon the length of time social insurance is paid, while the number of years it is necessary to have worked to get full retirement pensions has been increased.

Private superannuation is designed to provide income support upon retirement, but there are other reasons people may not be able to work well before retirement age such as: caring for children, studying to upgrade skills, illness, retrenchment and so forth. In such circumstances, superannuation is not now accessible. Social insurance or social security could provide income support in some of these circumstances.

Private superannuation can never accommodate all the potential needs of people as they go through life. Older migrants and refugees coming from countries without portable income support systems will not have adequate retirement income coverage. Many Indigenous Australians with private superannuation cover may not live long enough to access their superannuation. The average age of death for Indigenous males is 56 as compared with 77 for non-Indigenous male Australians and Indigenous women die on average at 63 and non-Indigenous women at 82 years: “approximately three-quarters (74.5 per cent) of Indigenous males and two-thirds (64.6 per cent) of Indigenous females deaths were before the age of 65 years”.

There is an income-support system that could provide for every permanent resident’s essential income support needs and that is a universal Basic Income. It would be paid to individuals irrespective of their income, assets or social relationships. Many social security applicants are refused assistance because the government assumes that family members are automatically dependent upon other, better-off, family members. A Basic Income makes no such presumption about dependency. It would be an equal payment to all over the age of 16 years; a proportion of the adult rate would be paid to those under 16 years who are living with their family.

Why don’t we do it?

Firstly, it would require a major policy change; secondly, many argue that we can’t afford it; thirdly, they and others argue that (if such a scheme existed) workers would leave work in droves and fourthly, were Australia to move in such a direction the Howard government would not be able to enforce its “mutual obligation” policies.

It is true that if a Basic Income were introduced no-one could be forced, by a lack of income, to engage in compulsory activities. There needs to be a major debate in Australia before citizens will want the government to provide for everyone not just the “worthy” who receive social security.

The economics involved to pay for a universal Basic Income would necessitate a substantial shift of income from the affluent to less well off but such changes do not constitute an insurmountable obstacle. There are sufficient funds; they just need to be distributed in a more egalitarian manner.

The Henderson Poverty Inquiry suggested a similar program for Australia in 1975; the Irish Government considers that Basic Income is economically feasible for that country (Healy and Reynolds 2002). Economic historian, Keith Rankin, has shown how such schemes could be afforded in New Zealand. Alaska has had a partial Basic Income for 20 years (Goldsmith 2002). None of the research done in Australia or elsewhere supports the view that there would be a large-scale exodus from the workforce. Indeed, some research suggests the exact opposite.