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Superannuation and responsibility: a broader approach. Association of Superannuation Funds of Australia Conference, Brisbane, 23 July 1998

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Senator Meg Lees



Superannuation and Responsibility:

A Broader approach


Association of Superannuation Funds of Australia Conference

Brisbane, 23 July 1998


Thank you for the opportunity to address you this afternoon. I’m delighted to be here and I look forward to sharing some of my thoughts and ideas with you on what is a very important issue in contemporary Australian society.


Before I address specific issues regarding superannuation in Australia today — as if you won’t hear enough about superannuation while you’re here - I want to say two things. Firstly, I shall say things with which most of you will agree which, naturally, I am very happy to do. Secondly, I shall say things with which most of you will disagree. I shall say them anyway.


I have a vision for Australia - and it is in the context of this vision that I want to talk about superannuation and a sense of national responsibility.


My vision is of an Australia which is a safe and secure haven to all of us who think of this land as our home.


The Australia of my vision has a vigorous & internationally competitive economy based on social equity, in which wealth and access to work, goods and services, and social welfare are fairly distributed, and in which the inequalities which affect women, Aboriginal people, people from non-English speaking backgrounds, people on low incomes and other disadvantaged groups are actively pursued with the aim of minimising - or preferably eliminating - them.


My Australia is one where we all value and work to protect this fragile land and its many unique and beautiful places.


My Australia is a country in which high levels of creativity and effort are recognised and appropriately rewarded.


My Australia is a fair society which has achieved a better quality of life for all through the willing co-operation of its citizens, increased efficiency, innovative technology and careful use of resources.


In my Australia all people, regardless of background, education or country of origin are able to meet their material needs for shelter, food, clothing, health and transport. They are also able to satisfy non-material needs, for example, for continuing education and creative expression. In my Australia, all people are fulfilled through personal growth and collective endeavour.


My Australia is a young country in an old land — where the youthful qualities of idealism, curiosity, passion and innocence are admired; where realism, courage and loyalty to your mates are traditional virtues and where there is a deep national regard for the Australian experience. And where there is an equally deep regard for responsibility.


And it is here where superannuation becomes part of the vision because I’m sure all of you would agree that the very notion of superannuation reeks of responsibility. The very idea that you can deny yourself by not spending in the present to build up retirement savings is an idea constructed on the notion of personal - and national - responsibility.


But, in honesty, we must face the fact that the majority of Australians had to be compelled to join superannuation schemes. We must also acknowledge that large chunks of their final lump sums are used to pay the debts they have accumulated over a lifetime. These two facts, among many, do not suggest a national acceptance of responsibility for the future.


Today, I want to discuss with you some of the broader issues of responsibility in current superannuation policy in Australia.


Responsibility, for instance, is not unknown to the trustees of superannuation funds, who labour under the onerous duties and responsibilities set down by the Superannuation Industry Supervision Act.


And, on the other side of the coin, irresponsibility on the part of Governments is not unknown to you either. The Superannuation High Income Earners Tax Surcharge is a classic example of political irresponsibility on the part of a Government wanting to raise taxes without being seen to do so.


Australia’s superannuation system is charged with ensuring that the cost of maintaining a rapidly ageing population does not bankrupt the country. This is a huge responsibility.


Australia is ahead of much of the rest of the world in preparing financially for the costs of an ageing population with our compulsory superannuation system.


According to the National Commission of Audit Report in 1996, the compulsory superannuation syst em will, by 2030, reduce the extra pension cost of ageing population down to about 1 per cent of GDP. The report also noted, however, that the ageing of the population will add about 4 per cent of GDP to the national cost of health care.


Indeed, provision for aged health care remains the great unfinished business of planning ahead for an ageing population.


The Democrats have never regretted our decision in 1992 to back compulsory superannuation through the Superannuation Guarantee. Our support was a matter of responsibility.


We all know there have been teething problems with the system. But, in terms of expanding superannuation coverage and increasing national savings, the Superannuation Guarantee can only be seen as a success. It is now attracting international attention.


It is a pity that the current Government had added such a huge administrative burden to the system with its poorly designed High Income Earners Tax Surcharge.


The Democrats’ views about the unfairness of current superannuation taxing arrangements are well known.


We believe that, if the object of tax breaks for superannuation is to reduce pension outlays, then it does not make sense to offer a tax concession of 33 cents in the dollar to the superannuation savings of high income earners who will not be eligible for a pension anyway, but only 6 cents in the dollar for low income earners.


The surcharge was supposed to address this, but does it only in part. And, by making funds rather than employers collect the new tax, the surcharge has become a costly administrative nightmare.


Our view in 1997 was that the benefit of reducing the tax concessions for high income earners marginally outweighed the administrative problems of the tax. It was certainly a close call.


We would have preferred to see the tax collected by the employer rather than by superannuation funds and fixing of other inequities in super taxes.


The Democrats will continue to push for a fairer approach to the taxation of superannuation and the allocation of superannuation tax concessions. We see this as the best way of removing the need for the Superannuation High Income Earners Tax surcharge.


Too often in this country, attempts to avoid political responsibility leads to bad policy outcomes. And the surcharge was one of them.


As I said, the surcharge was a close call for the Democrats. So too was the Democrat response to the Government’s bill introducing “choice” into superannuation. Ultimately, on balance, we decided not to support the Government model. And, the Government rejected our alternative model.


Essentially, the objective of choice was to move the responsibility for maximising returns from the industry funds to the individual. However, this assumed that individual workers were best placed to assume this responsibility.


To us, it was clear from the evidence to the Senate Committee that very few workers had a full understanding of superannuation needed to make such a responsible choice.


By and large, industry funds, are delivering moderate to high returns for low costs. Indeed, a survey by a major Superannuation Industry newsletter estimated that the low cost nature of industry funds added about $100,000 to the final value of a worker’s payout compared with a master trust. In the view of the Democrats, this was an advantage worth defending.


The Democrat model was not anti-choice, but rather sought to deliver a managed version of choice within the current, largely successful award based system. We remain open to discussing the evolution of a staged choice regime with both the government and the opposition.


One Super issue that cannot be ignored relates to politicians’ superannuation and my belief that it is in need of immediate reform.


In 1995, the Democrats succeeded in setting up a Senate Inquiry into the Parliamentary Superannuation Scheme. To me, probably the most amazing revelation during that Inquiry was that the public subsidy of the politicians’ superannuation scheme was the equivalent of about 69% of salary.


That means that for every dollar a politician puts into the scheme, the Government, effectively, contributes six dollars. To look at it another way, it means that the scheme adds about $56,000 to the salary package of politicians.


But even then the subsi dy is uneven. Parliamentarians who leave with less than 8 years service receive considerably less. Losing a seat after 9 years service results in a public subsidy of about 8 times the member’s contributions. This falls again to less than 5 times contributions after 18 years of service.


In the Senate Inquiry Report, the Democrats called for the public subsidy to be slashed, for the scheme to become an accumulation scheme and for pensions not to be payable until the member turns 55 years.


To help politicians adjust to a loss of income when they lose their seat, we proposed a separate retrenchment type benefit.


The combined result would be a scheme that is much less of a drag on the public purse, and one that also treated all parliamentarians more fairly.


I t would go some way to reducing the perception in the community that politicians are only there to line their own pockets.


Unfortunately, Labor and the Coalition rejected the Democrats proposals and flick-passed the entire issue to another inquiry by the Remuneration Tribunal.


The Democrats have no intention of letting this issue lapse. We shall continue to campaign for a more responsible parliamentary superannuation scheme in the lead up to the next election.


Just as I do not believe that the current public subsidy to politicians’ superannuation is a responsible use of taxpayers’ money, I do not believe that the $7 billion of tax concessions underpinning superannuation are used in the most responsible way.


Given that the superannuation system exists largely because of that tax subsidy, I think it is reasonable that the industry accepts its has a broader responsibility to make these dollars go as far as possible in the national interest.


I certainly understand the argument from trustees that any attempt to direct or restrict their investment decisions could lead to lower returns and lower payouts and thus costing the public sector more in the longer term with higher pension outlays.


But, too often the ‘short-termism’, of chasing the largest short-term return irrespective of where that return is or what has caused it carries wider costs for the Australian community.


Take overseas investments.


Since the introduction of compulsory superannuation six year ago, the amount of superannuation monies invested overseas has more than trebled and now stands at over $37 billion. In percentage terms, the amount of funds invested offshore has risen from less than 12 per cent to 17 per cent of assets.


Let me put that into perspective. These offshore super investments are equal to the gross state product of the State of South Australia. Adding in other managed funds, the offshore investments rise to $72 billion, close to the gross state product of Queensland.


It is a fair question to ask why Australian taxpayers should be subsidising job generation in other countries when there is an unacceptable level of unemployment here.


Imagine how much growth $37 billion of investments could engender in Australia. If it was put into infrastructure, for example, the multiplier of public sector and private sector jobs suggested by the National Institute of Economic Research suggests as many as 800,000 jobs could be created. This would pretty much wipe out unemployment.


I must emphasise and stress that the Democrats are not calling for a ban on the investment of superannuation funds offshore. But I do believe that taxpayers are entitled to ask whether it is appropriate for a growing proportion of investments, subsidised by the taxpayer, to be parked offshore.


In the short term, there may be higher returns to be had offshore. But, in the long term, all Australians are better off if investment rises and employment rises in Australia.


This would also increase the value of other investments in Australia — as well as making further investment more attractive.


Another aspect of ‘short-termism’ in investment strategies which is getting increasing attention, is the role of the big pension funds in the equities markets and the foreign exchange markets.


To many institutional investors, chasing short-term returns, demand excessive cost cutting and job shedding of corporations in which they invest. The day BHP announced its was pulling out of Newcastle, at a cost of 3000 jobs, its share price soared.


The day Patricks Stevedoring sacked its entire 2000-strong workforce, its share price hit an all time high.


The more workers company directors can retrench, the more the stock market likes the companies. And, the biggest influences in the stock markets are, of course, the big management funds.


Retrenchments and cost cutting may deliver short term returns. But, as the American corporate downsizing guru Stephen Roach now concedes, in the longer run, the company itself and the economy as a whole, are losers.


These sorts of corporate practices mean higher returns on superannuation for the declining proportion of the workforce lucky enough to have permanent jobs. But the very significant downside is the rise in social costs because the growing proportion of the workforce either unemployed or underemployed.


Is the demand for higher short-term returns for workers money which is paid for by sacking other workers in the best long term interests of the workforce as a whole? Is it responsible? I am not convinced that it is.


Another aspect of investors opting for returns without r esponsibility of the consequences is the foreign exchange market.


In recent months, about $700 billion was wiped off the value of the economies of South East Asia by the markets. We can now see the result — economies in either advanced recession or depression, social unrest, widespread hunger, massive unemployment and a world-wide economic slump.


We have seen Australia’s Reserve Bank forced to spend billions of dollars to defend the Australian dollar.


Of course, we have seen all this before - the Mexican crisis in 1994, and the forced exit of Britain from the European Monetary System in 1992, with market speculation pushing whole nations into billion dollar losses.


The huge Quantum Fund, for example, founded by George Soros, made a profit of almost a billion dollars from forcing Britain out of the EMS. All of this profit was drawn, essentially, from the public purse.


After making his fortune from playing the market, George Soros is now advocating the need to reign in the international financial markets. In 1997, he wrote:


“I now fear that the untrammelled intensification of laissez-faire capitalism and the spread of market values into all areas of life is endangering our open and democratic society.”


And later, he said:


“I cannot believe that the present global boom will not be followed by a bust... The recent turmoil in Asian markets raises difficult questions about currency pegs, asset bubbles.. .inadequate banking supervision and the lack of financial co-operation...”


The money which drives the huge shifts and transfers of money on global markets is a product of the accumulated wealth of pension and investment funds throughout the world.


As prominent British financial commentator Will Hutton puts it:


“The consequences (or the growth of private pension funds) has been a flood of institutional savings, an acute demand for dividends and the foreshortening of investment time horizons.


“These savings, if the wider financial system had been reformed to accommodate their new power and demands, could have been and still could be a fruitful source of finance for investment. Instead they have become destabilising.”


Hutton calls for wide ranging reform of both corporate governance rules and the regulation of financial markets to build the attractiveness of long-term investment —“stakeholder capitalism” he calls it — and to reduce the inherent instability and high real interest rates that characterise modern financial markets.


The prevailing short-termism of investment is not sustainable. It is profit without responsibility.


Gordon Gecko’s “greed is good” motto is not sustainable in the long term.


In even raising this issue today, I hope to encourage the superannuation industry to look beyond short-term returns and start looking at the consequences for Australia of decisions it makes.


Australia, indeed, the entire world, cannot afford this dizzying dance of ‘short-termism’ in investment.


With investment must come responsibility, responsibility as a stakeholder for the performance of a company, responsibility as an investor for the stability of the financial system.


We need a debate in this country about how to start building the notion of investor responsibility. This will mean reviewing the nature of responsibility of investors to the members of their funds.


But, frankly, short-termism will ultimately prove self-defeating as it impoverishes the many to benefit the few. And, as Hans-Peter Martin in his book “The Global Trap” warns, that is the direction the global finance and equity markets are currently dragging us in.


It will take international action to re-write the rules of global finance. But, that must happen and happen soon. Australia; with one foot in Asia and another in Europe and America, is well placed to play a major role in promoting the need for a new set of rules that balance returns with responsibility.


The Democrats will continue to push for a more sustainable and responsible set of rules for global and domestic investment. I believe it is in the interests of all of us to see such an outcome sooner rather t han later.


Responsibility does not end at a computer screen. Investment managers do have a responsibility for the consequences of their decisions, not just for the financial return.


And Governments have a responsibility to ensure that superannuation policy truly delivers the best possible outcome for Australian workers now and into the future.