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Monday, 18 November 2002
Page: 6565


Senator CHERRY (12:51 PM) —The Senate is debating the Superannuation (Government Co-contribution for Low Income Earners) Bill 2002 and the Superannuation Legislation Amendment Bill 2002 as a package. It is a pity, in the Democrats' view, that the Senate is debating these two bills as a package. One measure, which increases superannuation assistance to low-income earners, has widespread support. The other measure has widespread opposition because it reduces the taxes paid by high-income earners.

The government has made it clear that these two propositions must proceed as a package and that, for the government to agree to give $95 million a year to low-income earners, the Senate must also tick off $200 million a year for high-income earners. One, we are told, is contingent on the other. The Democrats reject this political blackmail attempt by the government. The government's proposed tax cut for high-income earners on super surcharge is simply too big and too unfair, and as such we cannot support it.

The government's proposed contribution for low-income earners is a fairly modest affair: a $1,000 dollar for dollar rebate on voluntary savings for very low-income earners, replacing some existing rebates. Treasury estimates that only 10 per cent of eligible low-income earners will make voluntary contributions to super. Many of these are already making contributions through defined benefit funds such as the public service funds. Many others are likely to be low-income spouses of high-income earners. The extent to which the measure will actually help genuine low-income earners is, frankly, uncertain.

Indeed, in its submissions to the Senate superannuation committee, the Association of Superannuation Funds of Australia and the Australian Council of Social Service both suggested that the measure should be targeted more effectively, by introducing a cap on family income as well as individual income. This would eliminate low-income spouses of high-income couples from receiving the benefit. The Democrats suggested in correspondence that the government consider this idea, but our proposal was rejected.

The co-contribution replaces a little-used superannuation tax rebate for low-income earners. The new co-contribution provides dollar for dollar payments for people on incomes up to $20,000, phasing out at 8c per $1 up to $32,500. The maximum rebate will be $1,000, phasing out to zero by $32,500. Most superannuation groups have been supportive of the co-contribution, but they question whether it will do much good because it cuts out at an income level that is too low.

The Investment and Financial Services Association presented to the Senate committee modelling by savings expert Dr Vince FitzGerald that found that the government had probably understated the response rate; the measure is likely to cost somewhat more—probably half as much more than the government estimated, at around $134 million a year. It found that a 50 per cent rebate, rather than a 100 per cent dollar for dollar rebate, would produce a similar savings response for around half the cost. It also found that extending the scheme to higher incomes would produce a strong savings response from middle- to low-income earners.

Based on FitzGerald's modelling, this would increase the cost of the contribution by about $98 million, but still generate about $134 million in extra contributions if we extend the co-contribution up to $40,000 as an income cut-off. FitzGerald estimates that for the cost of the government's scheme, it produces an 82 per cent increase in savings— that is, a $100 million government contribution produces an equivalent $82 million in additional savings. Such a significant increase in personal savings will reduce reliance on the age pension and hence the likelihood of superannuants slipping into poverty in retirement.

The savings incentive would be even higher if the rebate were extended up the salary scale to average incomes of around $40,000. Indeed, FitzGerald's research found that, even as a 50c to the dollar rebate, the savings incentive was strong and raised as much again in additional savings as it cost the government in rebates. Most witnesses who gave evidence to the superannuation committee agreed with this analysis and suggested that the rebate should be moved up the income scale and made more broadly available. This of course costs money. Based on FitzGerald's work, the Democrats estimate that building a 50c to the dollar rebate for incomes between $20,000 and $40,000, while leaving the dollar for dollar rebate below $20,000, would cost Treasury around $100 million extra a year. It would increase the number of people eligible for the $1,000 maximum co-contribution, from 200,000 to one million, at double the cost of the co-contribution based on FitzGerald's figures. And, for a total cost of around $200 million to government, it would increase national savings by a total of $480 million, with more than half of that coming from new individual contributions encouraged by the co-contribution.

In a tight budget, one would need to ask where that $100 million would come from to fund such a worthwhile extension because it clearly has a positive national savings effect. The answer is obvious: reducing, or even not proceeding with, the cut in the surcharge the government plans for high-income earners. In fact, halving the government's proposed cut would have paid for it. In that way, two-thirds of the new concessions, which we were told were in the package, would have gone to low-income earners and just one-third to high-income earners. Indeed, I put that very proposition to government a month or so ago, but the government rejected the proposition. The Assistant Treasurer's response left no room for compromise, as she wrote to me:

I wish to restate that the Government sees these election commitments as a balanced package and will not accept the passage of one measure in isolation of the other.

This response I found very disappointing, for it is not a balanced package when two-thirds of the benefits go to high-income earners in an already regressive taxation concession system. It said to me that the government were never particularly serious about the low-income earners co-contribution other than as a political cover for their real agenda, which was delivering a cut in the high-income earners surcharge for their Liberal accountant friends.

I was reminded of Liberal President Shane Stone's famously leaked memo of early last year when he described this government as `mean, tricky and out of touch', and cited three key tax measures—BAS, petrol excise and the super surcharge—as being very unpopular in the Liberal heartland. Two of those have since been fixed, at enormous cost to the budget, and this was obviously the pay-off for the third. As an election cover, a few crumbs were to be thrown at low-income earners who would get around half the benefits which would flow to a very small number of high-income earners.

Then came the Senate superannuation committee investigation, which found that the co-contribution actually had some real potential to do some good, particularly if it were extended into low- and middle-income ranges. There are some targeting issues, which Senator Sherry referred to, but they could be fixed. I will move a second reading amendment drawing the government's attention to the real potential that the co-contribution could make to savings policy and the need to look at those targeting issues. The Democrats are ready to back the co-contribution right through this debate and certainly encourage the government to go further. I move:

At the end of the motion, add “but the Senate notes that analysis provided to the Select Committee on Superannuation shows that extending the co-contribution to workers on average earnings would have a significant positive effect on national savings, and that this could be funded by better targeting of the Government's superannuation measures”.

If need be, we are even prepared to cop a small reduction in the surcharge as the political price for getting the rest of this package up and running, but not the 4.5 per cent tax cut that the government wants to deliver. This package is too slanted towards the interests of high-income earners and as such cannot be supported as it stands.

The Democrats will be supporting the amendments to be moved by the opposition excising the surcharge cut from the legislation. We backed the introduction of the high-income earners surcharge, over, I might add, Labor opposition in 1996. We did not think that it was a particularly well-designed tax— as any tax superannuation fund administrator will tell you—and certainly the Senate super committee has pointed this out on many an occasion.

As a tax equity measure, the surcharge was sound policy. The flat tax on superannuation contributions creates a whole range of tax anomalies. For a low-income earner, the concession on superannuation contributions is just 3c, which is the 18c marginal rate, less the 15c contributions tax, plus the relevant rebates. For a middle-income earner, the concession on superannuation contributions is 16.5c, which is the 31.5 per cent marginal rate, less 15c. For high-income earners, the concession rises to 33.5c, which is the 48.5c marginal rate, less the 15c contributions tax. So for every dollar that a high-income earner puts into super, their tax benefit is 10 times that of a low-income earner. That is why the Democrats support making the superannuation contributions tax much more progressive. We were a little disappointed when we saw the Labor Party's policy, which Senator Sherry spoke about, which is a cut to contributions tax across the board. We do not believe this particularly adds to the progressivity of the superannuation taxation system, although we do acknowledge that it is an improvement on providing a cut solely to high-income earners.

Superannuation tax concessions are highly regressive, which is why we supported the introduction of the surcharge and, I might add, why we support the low-income earners co-contribution, which seeks to rebalance that in a fairly aggressive form. But to give two-thirds of the funding for this package to high-income earners and only one-third to low-income earners is to add to the regressive nature of the superannuation tax system. That is why the Democrats would be prepared to back a package which reduced the regressiveness of superannuation tax concessions where the benefits to low-income earners exceeded, and preferably substantially exceeded, those offered to high-income earners. That is something the Democrats have offered the government in negotiations, but it has been rebuffed.

I hope that the government will be prepared to carefully consider the Democrats' second reading amendment and will carefully consider the comments which we are putting on the record today. When this bill is reconsidered by the House of Representatives, we hope that the government will see fit to allow the co-contribution to sail through so that we can start the process of reducing the regressiveness of superannuation taxation. If the government wishes to come and talk to the Democrats about a more balanced package, we will certainly be ready to listen.

With those short comments, I make it clear that the Democrats will be supporting the co-contribution through the Senate and we will be supporting the Labor Party's proposal for quarterly payments reporting. We will also be supporting the Labor Party's amendments to delete the surcharge from the second bill, as that is a measure which we cannot support on the basis of this package. We will not be supporting Senator Sherry's second reading amendment on the basis that his proposal for a cut to the contributions tax across the board is something that the Democrats do not support as the best way of dealing with the $200 million saving.