Senator WATSON (4:37 PM) —The Senate is debating, in amended form, two bills that were an important package of the superannuation changes that were put to the people by the Liberal coalition before the last election. The measures were popularly received and contributed to the significant election win by the Howard government. I note that the ALP supports with some degree of qualification the Superannuation (Government Co-contribution for Low Income Earners) Bill 2003 and the Superannuation (Government Co-contribution for Low Income Earners) (Consequential Amendments) Bill 2003, but it rejects the Superannuation (Surcharge Rate Reduction) Amendment Bill 2003. I remind the Senate that earlier today Senator Kemp stated that this rejection was the greatest U-turn in the history of the parliament by the ALP and, in particular, by Senator Sherry. We all recall the early days when Senator Sherry harangued the Senate about the problems and inequities of the surcharge. Yet now, at the first opportunity we have to establish a measure to reduce that surcharge in part, he rejects that measure.

The alternative suggested by the ALP of transferring the reduction from the existing 15 per cent surcharge to a 13 per cent contribution tax does not make sense. There is a huge black hole in Senator Sherry's argument, because for a person on $110,000 per year the saving is only $150. That saving, multiplied by the limited number of people—we acknowledge—who are going to benefit from this, compared with a two point per cent contribution covering a much greater number, does not make arithmetic sense. There is a big black hole created by the Labor Party in terms of the arithmetic.

I remind the Senate that an income of $110,000 per year includes termination benefits and FBT, so it is more than a salary. One of the inequities of the surcharge tax is that it does impact on some middle-income earners. A couple of days ago I indicated that I met with members of the Police Federation, who were very concerned that a number of their people who had particular illness problems because of the nature of their employment had sought early retirement only to be caught by this surcharge. They are not regarded as people on higher incomes but, because of the impact of fringe benefits and termination benefits, their income is grossed up and they suddenly become subject to the surcharge. Here we have an opportunity as a first step, albeit a small step, to make this change and it is rejected by the ALP.

I recall the time when this surcharge, or surtax, was introduced. It was introduced for a specific purpose: after the 1996 election we found a $10 billion black hole in the ALP's calculations in terms of budget deficit, and that had to be funded. Lots of people said, `This is just a short-term measure.' Unfortunately this short-term measure has gone on for a while. But, at the first opportunity that we have to reduce the surcharge, the bills are knocked back by the ALP.

You were talking about the huge benefits to high-income earners, Senator Sherry. I remind you that the saving is about $150 in the first year. It could be a lot less for a lot of other people. Senator Sherry, in rejecting this, you and all of your parliamentary colleagues, as people who are in defined benefit funds, have the advantage of the surcharge being capped at 15 per cent. But if you are outside the Commonwealth Public Service and the like, if you are in a defined benefit fund, you are not necessarily paying a surcharge of 15 per cent; you could be paying, for a successful fund, 20 per cent. Yet you are denying these very people an opportunity of some small reduction in the surcharge. I think it is time you looked at the equity of this issue. You had more commonsense five or six years ago than you are showing at the present time. We have particular problems with this surcharge and we must send a message to the electorate at large that this has got to be, over time, taken away.

I remind the Senate that it was Mr Keating, when he was Treasurer, who introduced the concept of a contribution tax. In modern-day thinking, practically all the commentators are saying, `This was wrong. We should move back to the original position of taxing the end benefits.' Therefore, it is very difficult for a government—and particularly for the Treasurer, Mr Costello—to suddenly forgo revenue of $900 million, which the surcharge raises annually, in one measure. So it was agreed in the proposition put to the Australian people that it should be progressively reduced. The first stanza was that it would be reduced progressively. As a result of the historic agreement with the Australian Democrats, that surcharge was reduced quite significantly. But there is still a message out there that we should go further, and there is a commitment to do so.

For the first year, 2003-04, the maximum rate is 14.5 per cent. Of course, that rate can be higher for people who belong to successful defined benefit funds. For the year 2005 and subsequent years, the rate becomes 12.5 per cent. We are not talking of massive tax savings to the rich. Senator Sherry, where is the inequity in these people paying tax—overall, in terms of the benefit—of between 46 and 64 per cent? That is what we are talking about. We are talking about pretty high taxes. Admittedly, they are the higher-income earners but, when the marginal tax rate for ordinary income is in the order of 48 per cent, why should superannuation be taxed much more heavily than the maximum on ordinary savings—up to 64 per cent for some people; between 48 per cent and 64 per cent. Even the tax on income from capital gains is a lot less. Where is the equity, in the Labor Party's vocabulary, of taxing people who have savings—admittedly the higher-income earners—of between 48 and 64 per cent? It is just not right.

As a result of a Senate committee inquiry, our attention has been drawn to the big savings gap between what people will have in 40 years time and their expected lifestyle. ISFA, in conjunction with Rice Walker, conducted some studies which showed that that gap was of the order of $600 billion. It is immaterial whether it is $500 billion or $700 billion. The point is that it is a very significant figure. What we have to do is move to encourage more retirement savings in Australia. We have already seen that there has been a dropping off of voluntary contributions, and the surcharge is certainly a contributing factor. Why would higher-income earners want to put money into superannuation when they are taxed at the sort of prohibitive marginal rates that are now on the books? In terms of equity, it has to be changed, and it has to be reduced.

The other very good measure is the co-contribution. I thank Senator John Cherry, who is a member of our superannuation committee, for entering meaningful discussions with the government to make this possible and allow this bill to proceed. Contributions and savings will significantly increase as a result of the incentives proposed by the co-contribution bill. It particularly targets the lower-income earners in society. If people who have incomes of up to $27,500 deposit $1,000 into a superannuation account, the government will pay a co-contribution of $1,000 into that account. If they cannot afford $1,000 but they put in $400, they will receive $400. For those who have incomes in excess of $27,500, it tapers off—to $40,000; at $40,000, there is no co-contribution.

I believe that is one of the best investments on the market. It has low risk, it has a very high return and it is not speculative in nature. Over time, I believe that there will be a very significant take-up. Initially over half a million people will be directly affected. I think that figure will grow substantially. Lower-income earners are being told, `We'll make contributions.' More and more people are seeing the need to increase their level of savings for their retirement. People recognise that, even in 40 years time, at nine per cent, without something extra they will have a shortfall in terms of their expectations and living standards.

And I put this to the Senate: how do we know that in 30 or 40 years time the Australian economy will be as robust as it is now? It is certainly going along very nicely, but if it is put in the hands of such irresponsible people as certain spokesmen of recent times we may not be in that fortunate position. I hate to suggest that, if the hands of those at the controls of government are not as responsible as they are at the present time, we may have to go down the track of a lot of countries in Europe which have to reduce retirement benefits. This is the situation where it really hurts.

There is no doubt about it. The measures this Commonwealth government has introduced will significantly improve people's retirement incomes. It is true that they might not meet people's expectations, but to meet people's expectations there also has to be some saving on their part. As a result of the age pension, the incentives that the Commonwealth government has provided and the superannuation guarantee, people are going to have a better standard of living than they would have had had these additional measures not been introduced.

It is a breath of fresh air to have such a measure. In fact, it is one of the most creative of the measures that have been suggested by the Liberal-National coalition in terms of lifting the levels of savings, particularly for lower-income earners. For example, moneys can be paid into the accounts of mothers who have had to take time out from the work force and then come back to the work force; they can get significant benefits out of this.

I commend the bills to the Senate. They will certainly increase the level of savings in this country and contribute very significantly to people's welfare when they retire. As earlier spokesmen have said, when this matter was put to a Senate committee there was overwhelming support for the concept of the co-contribution. Vince FitzGerald believed that overwhelming support would continue even if the contribution by the government was only 50 per cent of the contribution people made—50 per cent of every dollar they put in. But that is not the measure. The point is that it is a breakthrough in terms of philosophy and methodology. It is groundbreaking. It is going to be very significant in terms of the level of savings. There has always been a problem of how to creatively get those at the lower end of the spectrum of wage-earners in society to build up their superannuation accounts. Every contribution is going to be significant.

Like many other senators, I am grieved when people come to me and say, for example, that their sight is failing, they have an eye problem and it would take about $1,500 to $2,000 for an operation, they are not in Medibank and they have been told to wait 15 months to two years for an operation. Their standard of living during that period deteriorates because they cannot read or socialise and yet, if they had some money in the bank in the form of retirement savings, they could have the operation.

We are living longer, and the Senate Select Committee on Superannuation has indicated various measures which can be undertaken to make retirement savings much more attractive. We can make them much more attractive—because at the present time they are not all that attractive—by changing the format of complying pensions and annuities. At the same time, if we follow the recommendations of the Senate committee report—many of whose issues have been very much maligned in the Senate today and earlier—we will have complying annuities and pensions which are much more attractive to the providers. There will be a re-entry of the providers into the market, and they will certainly be much more attractive to the retirees themselves. This is what we must have. We must have a mix of lump sum, complying pensions, annuities, allocated pensions et cetera, as well as other investments. It is by getting the most desirable mix that people's incomes in retirement are going to be adequate to meet their important needs.

So, savings is an important issue. It must not be underestimated, and the superannuation committee have spent a lot of time on it. I notice the next contributor to this debate is going to be Senator Hogg, a very valuable contributor with experience within industry who recognises the need for savings and the need to protect those savings. I still think the challenge is out there. We have had an adverse report from APRA about the supervision that is being offered over superannuation accounts in Australia, and the challenge is now to APRA to lift their game and ensure that there is adequate, comprehensive audit and surveillance of people's superannuation savings, because we cannot afford for it to fail.

On the other hand, retirees must also plan to save more than they really think may be necessary. Why do I say that? Because there will always be occasions, over a 40-year period, when you get negative returns. A lot of superannuation funds factor these in as one in seven or one in eight years. When you retire you must also take account of a particular market slump if you are heavily into equities or, in particular, into property. That is why we have said superannuation funds themselves must provide better education to assist their members throughout the accumulation phase, but particularly before they retire because often they receive this big lump sum, they are out of the work force and they do need guidance. If we could have a move towards accumulation sums, so that some of these funds could provide income streams, I think we would have an improved superannuation system in this country.