(February-2002) Australia’s Super man

On superannuation today…

Super Review (SR): Do you keep a close eye on super these days?

Paul Keating (PK): I do, but it’s sort of becoming the plaything of professionals, most of whom don’t have much creativity.

SR: You mean people running the system? Fund managers, asset consultants and so forth.

PK: Yeah, most of them are pretty ordinary. That’s why I think the thing has got to be set up structurally where we increase the expectation of funds, standards, accountability, prudential management, etc.

SR: What can people in the industry do to help?

PK: I think it’s important to put pressure on the Government to do something about the 15 per cent [contribution level]. I think that’s going to be very, very important.

SR: Would you like to see the Labor Party do more in this area?

PK: I would. I urged the Beazley Opposition to take on superannuation, to say they would make a start on the next three per cent. They didn’t do it, and I would certainly urge that on the current Opposition, as I do the Government.

SR: Why do you think the Beazley Opposition didn’t adopt it?

PK: Because claims were made that they were not managing the budget, claims were made about them and their capacity to make such commitments. And in a sort of prudent kind of way, that is fair enough. But you can’t live like that politically. There is no creativity there to draw from.

Looking back…

SR: Creativity seems to have been critical in the formation of the whole industry. The use of wage trade offs, the redirection of tax cuts... How important was it?

PK: People ask me what the essence of leadership is. There are two requirements of leadership: imagination and courage. You get people who are courageous but they have got no imagination and they can’t get things done. And vice versa. You have got to have governments that can imagine something better and actually have the strength to see it into place.

SR: Did you imagine super getting to this size?

PK: Oh, absolutely. I used to talk about there being $1,000 billion in fund assets by 2010 and we are going to get there.

SR: Bill Kelty talked about your political will in this process. What drives you to put in place a policy that’s not going to see any benefits for 30 years?

PK: Well, nation building is a clever caper. And if you want to build a nation, you have got to do things like this. You have got to think outside the square, take risks and do things that would not otherwise be done.

SR: There was no political gain for you at the time?

PK: Oh well, it was worse than that. We were actually asking the political negative. We were asking working people, at a time of declining real incomes, to actually forgo more of their cash and take it as savings. Imagine Peter Reith selling that. Imagine the drones of the current Coalition proposing something like this.

On what could have been…

PK: In 1994/95, I announced we’d take the system from nine per cent to 15 per cent. And the genesis of that were the tax cuts I said I’d pay in the One Nation program, this is the name before it was purloined by Hanson. I paid the first half early and the second half I was going to pay later as savings, not as cash.

John Howard promised in 1996 to honour that tax commitment. He broke that promise. That wasn’t a ‘core promise’. Instead, they put a little ‘rinky dink’ savings scheme in place for people who had money in bank accounts, a scheme that lasted only six months. Then they said they couldn’t afford to pay it off the Budget. This, of course, was nonsense.

You have to ask yourself, where are the savings safest? Are they safest in the surplus? Or are they safest preserved in superannuation accounts for 40 years? Now, as you know, the surplus is spent. This Government spent $11 billion a year over three years to get itself re-elected. So this much talked about, much needed surplus is gone.

In fact, if John Howard had honoured the commitment he made in 1996, that money would be sitting as the assets of all those people in private savings accounts from now until eternity.

On the future of super…

SR: Can you see any way of achieving the 15 per cent, now the tax cuts have gone elsewhere?

PK: I think the tax cuts have got to come back… something similar to what I did in setting up a mandatory scheme and then funding it from the Budget, instead of trying to preserve surpluses or spending them on ministers’ whims.

SR: So someone therefore has to get in and find the money?

PK: Of course! Money can always be found. Here is the Liberal Party that has introduced a new tax base, the GST, and we have still got a 48.5 per cent marginal tax rate, and no extra super.

On reviving financial markets…

PK: I changed the tax treatment of super when we put the 15 per cent tax on fund earnings and allowed them to stream imputed credits. As a result, the average rate of tax is somewhere between three and five per cent, because of imputation credits. What this has done — and I think this is a very important point for your readers — is build into the Australian stock market a bias in savings towards equities, and it has turbocharged the financial markets.

On the dangers of changing the tax system…

PK: The other thing I should say is about people who go on about the tax treatment of super, who say it is anomalous, and say it should be taxed on the way out, and so forth.

Well, super is taxed, in principle, the way any other form of savings is taxed. If you put money into a bank account, it comes from your after tax earnings. When you leave it in the bank and you get interest, you are taxed on the interest. And when you go to the bank and take your money out, it is free. So it is taxed on the way in, taxed in, and free out. The same is true of superannuation.

I’m not suggesting this is the Holy Grail, but there is rationality to it. And some people in the industry who’ve never thought about any of these subjects say, ‘Oh well, we should take all this tax off and tax it on the way out’.

Well, let’s say we took the tax off fund earnings. Given that most private accumulations of superannuation assets are built on, in part, equities, what do we do with the imputed credits that come from superannuation funds? They can’t offset their tax because they would have no tax. So what they’d do is set up an arbitrage and sell them to someone else at a discount. Once all that started happening, the Commonwealth would come down on it.

So the current structure actually works for the kind of stock markets, and savings and investment system, we have. So when you get these slick professionals in suits, who’ve never thought about any of these issues, and think they’ve got the answer by just changing the tax treatment, they’ve got to think hard about what it means in the long run.