Security In Retirement: Simplification, Safety And Choice. Labor’s Policy For Simpler Super Mark Latham - Shadow Treasurer, Manager of Opposition Business in the House of Representatives

Speech

Transcript - Association of Superannuation Funds of Australia, Brisbane - 13 November 2003

Australia needs a new culture of savings. Most of our economic problems come from the paucity of national savings and the record level of debt in this country. Our economic future has been placed on the credit card.

Last week the Reserve Bank increased interest rates because of its concern about the housing bubble and excessive household debt. Since 1996 average household debt has increased from $43,000 to more than $91,000. In the last National Accounts the household savings rate fell to an all-time low of negative 1.2.

As a nation we draw heavily on the savings of other countries. This is why the Current Account Deficit is at a record level: 6.7 per cent of GDP. This is why foreign debt has also hit a record high. In 1996 foreign debt stood at $10,500 for every man, woman and child in Australia. Today it is over $18,000.
We need to build a new savings culture to break the cycle of deficit and debt. In particular, we need to overcome the trickery of Federal Government policies on debt.

The Government has lowered public debt by selling off public assets. But it has pushed the debt onto everyone else: record household debt, record credit card debt, record foreign debt and a record Current Account Deficit.

And the problem keeps getting worse. The Government's policy for higher education? More student debt. The Government's policy for Centrelink? More family debt.

They have pushed the debt onto everyone else. That's Peter Costello for you: all smirk and mirrors. New policies are needed to break the Costello cycle of deficit and debt.

Last Sunday I released a research paper on Nest-Egg Accounts – a new way of helping families save for the future needs of their children. A new way of ensuring that, as parents and citizens, we leave something better for the next generation of young Australians.

Two months ago I released a research paper on Matched Savings Accounts – incentives and support for low income families to save and accumulate assets. A new way of breaking the poverty cycle in this country.

Last year Simon Crean announced that a Labor Government will reduce the superannuation contributions tax from 15 to 13 per cent – a tax cut for all working Australians. There are many bad taxes in Canberra and the contributions tax is among the worst.

The best taxation treatment of super is to tax at the point of withdrawal, not contribution. In government we will do everything we can to phase back the contributions tax – starting with its reduction to 13 percent. We want to build on one of the great achievements of the last Labor Government: a national program of retirement savings and investment.

This is one of the big differences in Australian economic policy. The current Government is pro-debt. Labor is pro-savings.

I believe in an economy based on incentive and reward for effort. The people who work hard and save hard in our society, the people who do the right thing, should be rewarded.

If low-income families want to dedicate themselves to savings and asset ownership and lift themselves out of poverty, they will always have my support.

If working families want to save for their children's future, to turn the love and care of parenting into financial benefits for the next generation, they will always have my support.

I am unequivocally pro-savings. I believe in the capacity of the Australian people to save, once they receive the right support and encouragement from government.

Unfortunately, not all Members of Parliament hold these views and values. John Howard has described superannuation savings as ‘theft'. His government has done everything it can to minimise the scale of super funds in this country.

It has done nothing to help families save for the future. Our national savings are in decline. We have a debt culture in Australia, not a savings culture.

We also have a bunch of highly-paid sceptics and interest groups who doubt the capacity of working people to save. Fifteen years ago, that's what they said about superannuation: it would never work. Today they are saying it about Matched Savings and Nest Egg Accounts.

They assume that they know more about low-income savings than low-income families themselves. I prefer the evidence – an evidence-based approach to public policy. Internationally the verdict is in: low-income people can save.

In Australia the ANZ Bank is piloting a Matched Savings Account (Saver Plus) at Frankston and Shepparton in Victoria and at Campbelltown in my electorate. This is a scheme for health card holders – that is, people earning less than $32,000 per annum.

The early signs are very encouraging. Of the 77 families who have attended information sessions, 75 have signed up to the program. They haven't been coming to the information sessions saying: "we can't save". The reaction has been: "this scheme is too good to be true – we save one dollar and the matched account turns it into three".

For the highly-paid experts who say that low-income families can not save, try telling that to Mary, a single mum and emergency relief teacher with two children. She is saving $15 per week to reach a $1,000 target. This will be matched into $3,000 for the education of her children: school books and a home computer.

When I visited Frankston last month, she said that she did not think that $15 per week was too much. She had made her initial deposits comfortably and has benefited from the discipline of a family budget.

Mary wants to take advantage of the generous matching and, beyond education, likes the possibility of saving for home ownership. Try telling Mary she can't save for her children's future.

Or try telling Simon from Frankston. He is 39 years of age and a casual teacher's aid on $20,000 per annum. He is a single dad with two boys at home. This is what The Age newspaper reported on 4 October:

When the local school sent home a flyer about the pilot savings program for low income earners, Simon jumped at the opportunity to start saving for his older son's final years at school.

‘He'd got to a point where he didn't want to go to school,' Simon said. 'When I mentioned I wanted to save for school uniforms, camps, maybe even a new computer, his eyes lit up.'

It is early days. Since the pilot program started three months ago, Simon has saved $28 a fortnight toward his target of $1,000, which he hopes to achieve by December next year.

The $1,000 would then be matched into $3,000 for the education of Simon's sons. The Age report continued:

But the most profound change for Simon has been the new possibilities that have opened up before him.

‘Maybe it's the big picture, improving the way I look at things,' he said. ‘Even if the program went broke, for me, I would still have saved $1,000 that I never would have, and it's changed my son's attitude to school.'

So don't tell Simon he can't save or that savings won't make a big difference to his family and his sons. I have a lot more faith in people like Mary and Simon than the clamour of conservatives who talk down the importance and possibilities of saving.

I know that you share my faith. That's why we are here today: to find new ways of lifting national savings and further improving Australia's superannuation system.

Simpler Super

Security in retirement is fundamental to the future of all Australians. It is one of the basic rights of citizenship. People are entitled to know that they can look forward to a secure life in their retirement years.

Today, on behalf of the Labor Opposition, I am releasing the first part of our retirement incomes policy: Security in Retirement – Simplification, Safety and Choice. Our Shadow Minister, Nick Sherry, has developed the policy. No parliamentarian knows more about super than Nick.

No one could have been more thorough in the policy development process, consulting with hundreds of individuals and organisations following the release of his discussion paper in August 2002. I would also like to thank ASFA – the leading voice of super – for its contribution. Your research and ideas have led the policy debate about superannuation in Australia.

Our policy aims to build national savings by rebuilding the superannuation system. The Howard Government has spent more time taxing super than building it up. Superannuation taxes have increased from $1.8 billion in 1996 to $5.3 billion today.

Just look at the Government's recent package. For every $1 the Liberals are now giving back to superannuation, they are still taking out an extra $7 in higher taxation. And the Government's current proposal - splitting super contributions – will create an administrative nightmare for funds, plus put at risk the tax integrity of the superannuation system.

Labor, by contrast, wants to ease the tax burden on super. We believe in a retirement savings policy based on the following principles:

• Higher retirement incomes, delivered over time, through a combination of the age pension and superannuation, set against a clear goal;
• Simplicity, with every fund member able to understand the general features of the system, and the specific features of their own superannuation fund;
• Safety and certainty, so that retirement incomes are not at risk and people can predict with reasonable certainty what income will be available to them on retirement;
• Safer choice, so that individuals have a say in selecting the superannuation options that best suit their retirement needs, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement;
• Affordability, a cost-effective savings vehicle within which operating costs are kept to a minimum;
• Fairer taxation, combined with other measures, to ensure that people have sufficient incentive to contribute to their superannuation; and
• Increasing savings – raising Australia's level of household saving from its current record low of negative 1.2%. Increased savings will contribute to Australia's economic growth and help create new jobs for Australians.

Labor's vision is for higher retirement incomes through a simpler and safer superannuation system. A system in which all Australians will be able to make real and informed choices, set against a clear goal. Our first step is simplification.

The current system is too complex and, for most members, difficult to understand. This makes it hard to convince Australians of the need for greater participation through increased contributions.

People are also concerned about other issues - negative returns, excessive fees and commissions, high taxes and misleading financial advice. Again, this has contributed to a lack of confidence in the system. Without full confidence it is not possible to achieve full security through higher retirement savings.

We need to renovate the super system, making it easier for Australians to operate and understand. This is the purpose of today's policy release: Simpler Super for all. Let me outline the changes we propose to make.

Labor will automatically consolidate all inactive accounts into a member's active account or, where there is no active account, into the last active account available.

Labor will put in place an automatic consolidation system that will substantially reduce the 25 million accounts currently held by nine million fund members. There are also 4.6 million lost accounts in the system, valued at $7.3 billion, with the lost money amount increasing daily. These lost accounts place a huge administrative burden on the funds.

Although consolidation is currently available to most members, the complexity of the system does not encourage action. People lose contact with their funds, find the red tape overwhelming and are put off by exit fees. This is why the consolidation rate is so low.

Labor will use the tax file number system to automatically consolidate into a member's current or most recent active account, unless the member choses to opt out of the consolidation process. Under our policy, there will be fewer accounts with higher balances. People will be paying one account fee, not two or three.

This will also reduce the administrative burden on funds caused by a high number of small and inactive accounts. Lower fees and lower costs will inevitably mean higher retirement incomes. Excessive entry and exit fees will be banned.

Labor will introduce a standard format for all funds when reporting to members.

Members need to be able to understand their superannuation if they are to successfully manage their retirement savings. With the complexity of the current system, many fund members struggle to understand the information and reporting of their fund.

Under Labor, all funds will be required to report to their members in a standard format, with a minimum requirement for key information. We see this as part of the basic service obligation for funds. They will be free, of course, to provide additional documentation if they wish, but the standard information will be compulsory.

Labor will require all superannuation funds to provide investment choice, involving at least five different investment options.

Labor will require all superannuation funds to provide at least five different investment choices. In recent times, the number of funds offering a range of investment options has expanded, especially with the growth of ethical investments. Six out of 10 funds now offer this important service.

Labor will ensure that investment choice becomes a basic service obligation. Members should be able to chose an investment that best suits their circumstances. In some cases, the definitions and parameters of a defined investment are not clear. We will require the regulator to set a common set of definitions.

Labor will introduce Safe Choice of Fund provisions.

Labor's safe choice regime will allow individual members to select the fund that they wish to join. But we will also provide safeguards against excessive costs, low returns and consumer exploitation.

Choosing membership of a fund sounds fair and simple. In practice, however, it can have many pitfalls. In the United Kingdom, for instance, when unregulated choice was introduced, it turned out to be a disaster – with millions of consumers ripped off and over 11 billion pounds paid out in compensation.

Labor will protect consumers with a firm but fair regulatory regime, including:

• Sensible documentation that verifies independent decision making in the exercise of choice;
• Strong measures to prevent employers or other parties coercing members to join certain funds;
• Clear and simple disclosure of all fees, charges and commissions, along with the appropriate regulation of some fees;
• Ensuring that choice cannot be used to override industrial agreements or AWAs – the existing award provisions will provide the default option; and
• Excluding small business from the choice regime so that it is not overloaded with red tape and the administrative burden of excessive choice. Imagine, for instance, 20 employees choosing 20 different super funds.

Labor will require superannuation funds to provide a range of pensions and annuities.

Super funds should not limit themselves to savings up to the point of retirement. They should also provide a range of annuity and pension options from which their members can choose. This provides a seamless transition from fund to retirement income in circumstances familiar to members. Labor will require all funds to offer income stream products as part of their basic service obligation.

Labor will ensure that same sex couples have the same rights as other couples in relation to superannuation.

Labor believes that this reform is long overdue. It involves not just the property rights of the individual, but also the capacity of super funds to deal with the conflicting interests and disputes that often arise in these circumstances. Removing the discrimination in the current system will not only recognise that same sex couples have the same rights as other couples, but also simplify the system for the benefit of superannuation funds.

Labor will implement a comprehensive and independent consumer education program.

Public awareness and confidence in super is vital. This is why we will run an extensive education campaign overseen by industry and consumer organisations. I look forward to working with ASFA to lift the profile and significance of superannuation issues in the community.

These are our seven commitments for Simpler Super. They are sensible and practical policies to ensure a basic level of service and to enhance retirement security in Australia. The cost of these proposals is modest, with the details to be provided when our full policy is released next year.

These reforms will reduce the administrative costs of superannuation by delivering higher account balances in fewer accounts. We estimate cost savings to the system of hundreds of millions of dollars a year.

Next week Simon Crean will outline the next stage of Labor's policy: Safer Super. This will deal with issues such as compensation for losses to superannuation accounts; fees, charges and commissions; regulation and member protection; consumer complaints and financial planning.

In early December, we will outline a new national goal for retirement incomes, a new way of working towards retirement security. The fourth and final stage of our policy will involve a new package of financial measures to restore the public's faith in superannuation and to increase the success of the system.

Conclusion

The worst form of inequality in Australia does not come from the distribution of income. It comes from the distribution of assets. The top 20 per cent of households in Australia own 65 per cent of the nation's wealth, while the bottom 20 percent own nothing at all.

Internationally, the trend towards asset inequality is severe. This is one of the downsides of globalisation. In Australia, the problem would be much worse if not for the introduction of superannuation.

NATSEM has shown that if the money from Australia's super scheme was removed from the nation's asset base, then wealth inequality would have increased sharply over the past 15 years. When the super assets are included in the calculations, however, inequality has not changed. Against all the international trends and expectations, the situation has not worsened.

This is a bell-ringer for my side of politics. Asset-based policies like superannuation are the best way of reducing the trend towards inequality in our society.

Asset inequality has a huge impact on people's life chances. The act of saving and owning assets gives people a stronger sense of self-esteem and belonging. It provides the economic security from which people can take risks and accumulate further wealth. Internationally, research studies have linked asset effects to stronger health outcomes, education levels and community participation.

While, self-evidently, asset deprivation is a cause of poverty, the problem runs far deeper. Without a sense of ownership and self-esteem, poor families lose direction and hope for the future, thereby entrenching the poverty cycle. The problems of one generation are passed onto the next.

At the other end of the scale, it's a different world. Ownership is taken for granted, as family inheritances pass on the benefits of asset accumulation and an expensive education. In a buoyant economy, these inter-generational differences are wider still. Inheriting a home in our major cities, for instance, has become the equivalent of winning Lotto. As asset prices continue to grow, people outside the ownership tent are left further behind.

Generational effects are a primary source of inequality. It is impossible to achieve social justice without first tackling this issue. Asset-based policies aim to reduce the underlying causes and extent of inequality – that is, the distribution of wealth.

If the market system produces less inequality to begin with, the task of income redistribution is not as severe. The welfare state can be more preventative, resolving social problems before they become chronic. I see asset policies as a foundation stone for the success of the welfare state.

Gough Whitlam once said that he wanted every Australian child to have a desk and a lamp. I want that too, but I also want them to have access to savings and assets throughout their lives: Nest Egg Accounts, Matched Savings Accounts and superannuation accounts.