(March-2004) Time to build a new super highway

Right now, Prime Minister John Howard has the best chance politically to effect a lasting change for the better to superannuation, or wait for Mark Latham to announce it.

With mounting pressure from the Opposition to bring politicians’ super arrangements into line with community expectations, the Government should seize the day and introduce a new system designed to meet the needs of all the stakeholders.

The existing system is too complex, unwieldy, incomplete and expensive. No one fully understands its intricacies and everyone is disheartened by its multiple layers of taxation and limitations, so it’s not surprising many Australians are disgruntled with superannuation and look for other, more comprehensible, ways to fund their financial futures.

It’s time to accept that the existing system is like the old Pacific Highway — narrow and winding, full of potholes and pitfalls, which the Government tries to patch up as each new problem causes someone to run off the road. No amount of tinkering will create a brand new, modern road from an outdated and tortuous route.

It’s time to build a brand new Superannuation Highway, setting aside legacy problems, taking advantage of new technology and construction efficiencies and integrating it from the word go with other major funding transport arteries, such as social security.

Treasurer Peter Costello’s new retirement income initiatives, no matter how well intentioned, no matter how desirable in themselves, will simply not do the job. It’s time to file the existing 10,000 plus pages of superannuation legislation and start with a fresh piece of paper.

And before the critics start moaning about the cost and practicalities of changing the present system, let’s look at the real barriers that have prevented meaningful and successful superannuation reform to date.

First of all we have a political problem. The first lesson a novice politician receives is ‘lay off super - it’s too hard to fix and will only cost you votes.’ But here’s a classic reason to fix it! If the politicians, who have access to all the advice in the world, can’t interest the voting public in their own wealth creation, then it’s obviously not right.

Why has super become a political nightmare? Because historically it has been changed by governments of both political persuasions to meet a changing set of goals. It was never designed to meet the retirement needs of all Australians in a simple and cost effective manner.

Superannuation has traditionally been pitched as a tax advantaged investment vehicle. And as such, has always attracted the attention of enterprising people working the system to beat the system. Over the years, this has led to a wide variety of speed bumps, go slow zones, red lights and give way signs to try to eliminate tax rorts, including limitations on benefits and contributions.

Let’s accept the reality and work with it. Superannuation is not well understood, it is restrictive and subject to constant change.

We should compare super with another form of tax-encouraged investment vehicle — negatively geared property investment, traditionally one of the most popular forms of savings with Australians. Here is a concept that is fairly complex, but most people have a pretty good idea of how it works and are favourably disposed to get involved in it.

So the challenge for any new super initiative is how to make super as well-accepted and widely-embraced.

Now for the argument that any major change to superannuation will create winners and losers. And no astute politician wants to go near the latter, perceived as a political nightmare. The reality is no Government could afford to promise blanket compensation to those who would be disadvantaged so there are no losers.

But the solution is simple. Do as we at Towers Perrin do when transitioning a large corporate superannuation fund into a more modern, easy to manage and cost effective structure.

Give them a choice. If they want their retirement funding assets to head north, they get to choose the ways and means. They can stick with the old Pacific Highway if that makes them more comfortable. Or they can choose to head up the F3 freeway, a more direct and faster route.

There will be taxation consequences for those switching to the new system. Again using the road analogy, there may have to be a tollgate to assess the taxation position on transition to enter the freeway. But again, it’s up to the individual to make the choice of whether paying the toll to access a more convenient route is worthwhile to them.

Let’s also remember that transition arrangements are, in the scheme of things, short term. All new entrants into the work force would automatically be enrolled into the new system and many younger workers would readily switch to a more attractive system.

Now for the design of the new system. Our ‘greenfields’ approach has served corporate clients well over the years. Start with a vision of what system you would like to have, not what you can do with the existing arrangements. What should be the objectives of such a system?

For example, it should be simple to understand. Flexible, to meet the changing needs of individuals. Tax encouraged, (rather than massively tax generous), to provide a reasonable alternative to negatively geared residential property and to provide a better balance of investments. And integrated with the social security system to encourage self-reliance.

How will we know when we have a superannuation system that works? The simple backyard barbecue test is as good a benchmark as any. Superannuation will be on track when we get to the point where people discuss their super arrangements with as much relish and knowledge as they currently do when talking about their negatively geared property.

It really is time the Government seized the opportunity to make it so.

— David Solomon is the managing director of Towers Perrin.