by Brian Toohey 12 Sept 2016 Australian Financial Review
The worst thing about compulsory superannuation is that it’s compulsory. Sure, cuts to the super tax concessions will help cut the budget deficit. But the damage compulsion does is missing from the debate.
If the Turnbull government wants a big reform that also fits the philosophy of its conservative wing, it should junk compulsory super. Yet both the Coalition and Labor ignore how compulsion violates the 1980s reform principles widely credited as creating a economy better able to adapt to structural change.
Compulsion damages the economy by distorting the efficient allocation of resources. It artificially inflates the size of the funds management industry to the detriment of more efficient industries and stops people allocating their income in line with their preferences. It also distracts union leaders from their core job of improving their members’ take-home pay when subdued wages growth is hurting demand in some sectors.
Contrary to common assumptions, compulsory super isn’t needed to boost savings. We have a savings glut, not a shortage, as reflected by ultra-low interest rates. Moreover, the household savings ratio was higher on average before the introduction of compulsory super than afterwards.
The harmful effect of compulsory contributions is similar to that of other forms of industry protection. Most people understand it would be folly to compel people to buy an Australian-made car on a regular basis. This would not only chew up resources that could be used more efficiently elsewhere, it would stop individuals from deciding how much to spend and save from this component of their income. Individual choice is usually the most efficient way to signal where resources should go.
However the market-distorting policy underpinning compulsory contributions is the main reason Australia has the fourth biggest funds management industry in the world, but only the 12th biggest economy. Perversely, this pumps up salaries in this protected industry to much higher levels than most employees will ever receive.
Scrapping compulsion and paying existing contributions as part of normal after-tax pay would have major economic benefits. Those on $33,000 a year would have over $52-a-week extra to spend or save as they saw fit, while those of $70,000 would had an extra $85-a-week. This would have the added bonus of slashing the budget deficit by cutting $18 billion a year from the cost of the tax concessions – without reducing demand in the economy.
Original article here