In terms of economic reform, last week was a historic one for the Turnbull government – it managed to get a large reduction in tax concessions for the wealthy through Parliament.
On Tuesday night, legislation passed the Senate that among other things places a new cap of $1.6 million on the part of superannuation accounts that can generate tax free earnings.
Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, who had previously buckled on the issue of GST reform and who were rolled by their own cabinet on negative gearing and capital gains tax reforms, should nonetheless be applauded for this move.
It’s a genuine reform that will save the federal budget $3 billion over four years at a time when projected deficits over the same period total $84.6 billion.
The reform was originally intended to save more than $6 billion, but was substantially watered down after fierce argument in the Coalition’s joint party room over a $500,000 lifetime cap on non-concessional contributions made since 2007.
So we’ve got half the original reform, which in the current political environment is perhaps the best anyone could have expected.
Coalition of the unwilling
What’s most significant about this reform is that it was made by the same side of politics that in 2006 turned compulsory superannuation into a giant tax avoidance opportunity for higher-income earners.
A year before the end of the Howard government, Treasurer Peter Costello threw the super system wide open to contributions – a move that even back then cost the budget $7.2 billion over four years.
For nearly a decade, the super system drifted further away from being a means for Australians on modest incomes to save for retirement – something that only the wealthy had been able to do before the first iterations of compulsory super were set up in the mid-1980s.
Back in those days, only 25 per cent of women, and roughly the same proportion of blue-collar male workers, had any superannuation. The other 75 per cent expected to rely on the state pension.
Generous pensions schemes did exist, but primarily for white-collar public servants or management-level workers in private companies.
What changed all that is often assumed to be the reforming zeal of Prime Minister Bob Hawke and Treasurer Paul Keating.
While it was, indeed, Mr Keating who put the first universal ‘superannuation guarantee’ scheme in place in 1992, the real genesis of the scheme is much more intriguing.
Industry super funds luminary and chair of IFM Investors Garry Weaven recently told a Melbourne conference that the first versions of what we now call the super guarantee happened almost by accident. (Watch his speech here.)
The mid-1980s were a time of sweeping reforms by the Hawke government, but were also a time of widespread and militant industrial action.
Mr Weaven found himself mediating between a fragile union coalition speaking through ACTU boss Bill Kelty, and the government, to help sell the idea of a ‘social wage’.
Unions, who were itching to go back to their own independent strikes, were held together by a promise of family friendly policies and gains in areas such as health and education.
Failed wage claim
During that process, one pay rise was agreed – a $7 a week increase that the ACTU thought it could get past the Conciliation and Arbitration Commission.
It was, however, wrong.
The Commission knocked it back and Messrs Weaven and Kelty had the unpleasant jobs of going back to the restive unions with the news.
In a flash of genius – or perhaps self-preservation – they decided to go back and ask for a similar amount, but for it to be paid by employers into a super fund set up by the ACTU.
That would prevent yet more wage-push inflation, and still provide a real benefit to workers to keep the unions off the war path.
And so the super system grew in fits and starts until Paul Keating made it a national, compulsory scheme in 1992.
The great reform began its life almost as an afterthought, but one that led to a huge expansion of the super system.
In the early 1980s, about $40 billion of super was under management. That has now grown to around $2.1 trillion – bigger than either an entire year’s GDP or the value of all companies listed on the Australian Securities Exchange put together.
And all because the Arbitration Commission thought a $7 a week pay rise was too much.
The creation of the super system may have been due to a historical accident, but what the Turnbull government did this week was not – it was done despite substantial dissent within the party room.
It has brought the system a little closer back towards its original purpose. For that the government should be commended.
*The New Daily is owned by industry super funds.