Attention Dr. Ken Henry: Government Could Make Employee Voluntary Contributions Compulsory

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Yesterday we spent more time than is healthy re-reading the submission to Emperor Henry by tertiary student Michelle But.

Maybe we’d interpreted her submission incorrectly. Comments left on the Money Morning and Daily Reckoning website suggested we had.

That’s the thing with publishing a daily newsletter. We’ve got a quick turnaround time on researching, writing and then sending it out.

We arrive at our building on Fitzroy Street by around 8am each morning.

We then quickly head for the Editorial Office – avoiding the ’roundhouse’ and ‘spinning crescent’ kicks from our black belt Taekwondo kicking assistant publisher Joanne Ha.

Once planted at our desk looking out onto the neighbours’ balcony we settle in to two full hours of reading, typing and editing. Needless to say, we’re not immune from making the odd mistake.

Of course I use my best efforts to make sure we publish error-free.

But, if an error does slip through, that’s the beauty of the comments section on the Money Morning website. If you think I’ve got it wrong, the best way to highlight it is to post a comment. As you’ll notice, there’s no censorship.

Providing you keep the wordage clean I won’t edit your comments. The only other thing we ask is to try and keep your comments relevant to the subject, but that’s all.

Anyway, back to Michelle But’s submission to Lord Emperor Henry of Canberra. If you click here you can read it for yourself.

We read it countless times yesterday evening. Maybe she didn’t support an effective 30% compulsory super contribution after all. Time for some humble pie we thought.

And then we ‘un-thought’ the idea of eating some humble pie.

It seems that rather than coming to the wrong conclusion, instead we made a schoolboy error by quoting the wrong part of the submission.

We should have referred to the summary on page one which makes it clear:

“(5) increasing compulsory employer SG contribution from 9% to 15% by 2012;

(7) establishing gradual and compulsory 15% personal superannuation salary sacrifice contributions (from gross pay taxed at 15%) by 2014.”

You can’t get much clearer than that. There’s no ambiguity there. “Employer” contributions to be increased to 15% by 2012, and “Employee” voluntary contributions to be made “compulsory” and also at 15% by 2014.

That in our books, makes a proposal for 30% of your salary to be expropriated by the government by 2014.

The idea about “voluntary” contributions being made “compulsory” is enough to make any defender of freedom and liberty cry!

Look, we’re not really interested in singling out one person here based on their submission to the enquiry. There are plenty of other hare-brained and mad-cap ideas from others too.

But frankly, if someone is lobbying the government to take 30% of your salary by force then you should probably know about it.

So in that respect we make no apology for highlighting this one submission in particular.

The fact is, almost every submission to Emperor Henry is advocating ways to slice, dice and mince your money.

But while we appear to have made a schoolboy error in quoting the wrong paragraph, it seems Ms. But – like many others – has made a schoolgirl error of assuming “employer” and “employee” contributions are unconnected.

We received this email from a Money Morning reader yesterday:

“The wage earner doesn’t care how much super goes up because it’s the employer who HAS to provide that amount. It could be argued that it comes from their wage… but it doesn’t technically. If the super amount was increased to 12%, the boss wouldn’t cut their take home pay, he would have to find the difference as it is added on after the wage is paid.”

It’s a common mistake made by many people. The government propaganda with superannuation has been mind-blowingly effective.

It seems very few employees consider superannuation as a tax on their income. A tax which reduces your take home pay by 9%. A tax which reduces the average worker’s pay packet by $465 per month.

If the super guarantee is lifted to 15% then that’s $9,300 per year or $775 per month you’re missing out on. And if compulsory super is lifted to 30% then the average worker will be out of pocket by $18,600 per year or $1,550 per month.

All because there’s a chance you could “squander” some of it.

Superannuation is treated as a mystical and magical entity. “It’s the boss that pays for it, not me.”

Wrong. Someone does pay for it, but it’s generally not the boss.

Where does it come from then?

Well, that’s where you have to take one step back and look at what isn’t seen. Everyone can “see” the super contribution on their payslip, but few equate it as a tax, or a pay cut.

You see, superannuation is paid for from one of three places:

  • A cut in your wages
  • An increase in unemployment, or
  • Increased prices

There is a fourth option, and that is for the business owner to reduce his/her profit. Although possible, this is less likely. Besides, why should a business owner who has put his/her own capital at risk take a cut in profit just to subsidize the government?

Make no mistake about it, in most cases, an increase in superannuation contributions will result in a decrease in your take home pay over time. When the employer employs you, he/she will naturally try and pay you as low a salary as possible in return for you providing as much productivity as possible.

That’s just how it works. And that’s how it has to work. If the employer tries to pay too low a salary of course, then he/she will not attract the appropriate staff and will therefore lose out.

If he/she pays too much then they will not get as good a return on the investment, especially if the worker’s productivity does not justify the higher salary.

The market therefore, helps to determine the ‘price’ (salary) at which an employee is to be paid.

But what happens if suddenly the government decides to impose an arbitrary 6% increase in costs per employee? Will the business owner take that from his profit?

Not a chance. And neither should he/she be required to just because a government is implementing an arbitrary redistributive incomes policy.

So, the employer will look to take the money from the employee. Doubtless it would be made illegal for an employer to cut wages to an employee directly, so they would have to find another way of doing it.

Such as a freeze in pay increases. Inflation will have taken care of the 6% impost after just two years anyway. If an employee doesn’t like the sound of that they can look for another job, but chances are the pay being offered will be lower to take into account the increased superannuation expense.

And when the employer advertises a replacement he/she can factor in the lower pay.

Another unseen option for the employer is to cut the workforce. If they have 20 staff on similar pay scales doing a similar job then it’s fairly easy to get rid of one, or let attrition take its course and then not rehire – one less person on the payroll, but same cost to the employer.

That’s a simple example of how government contributes to increased unemployment.

The other option is for the business owner to increase prices. We’re not talking rocket science here. Trade unions would have you believe there’s no connection between pay (especially when they talk about the minimum wage) and prices to the consumer.

That’s twaddle. It does have an impact.

Again, it’s the individual that loses out at the expense of incompetent government policy.

As I’ve quickly shown above, the business owner will want to rightly preserve their profit margins, and therefore will try to achieve this in one of three ways.

So when these submissions are made to Emperor Henry’s enquiry using throw away numbers such as 12% or 15% or even 30% for compulsory superannuation contributions, just remember that the money to pay for it has to come from somewhere.

That somewhere my friend is from your pocket.

You shouldn’t forget that.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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24 Comments on "Attention Dr. Ken Henry: Government Could Make Employee Voluntary Contributions Compulsory"

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Rob
Guest

Well, you know you guys could easily write a few submissions and post them on your site rather than slaying others. A submission + editorial content kills two birds with one stone, 100% productivity increase and in the pub by 3!

Dan
Guest

Hats off to you Kris, for your opening comments. Also points well made re: superannuation as a tax. That’s what it is, and just like all the other taxes, you may never get to benefit from it.

IMBMB
Guest

You are right Kris, it started with Federal Govt Departments raising their super contributions to 15% they just get it from the tax payer, nothing like compulsion is there! Give it a couple of years and it becomes the norm. It’s the unions salami tactics,one slice at a time.

Coffee Addict
Guest
The Government WILL make “voluntary” contributions compulsory. There is NO other way to fund the retirements of the baby boomers, flower children (a better term for the younger BBs) and Gen Xers. The philosopy of seriously encouraging people to save is terrific. With the current life table and low savings rates looking at us in the face compulsory employee contributions are indeed necessary – whether you or I like the idea (in principle) or not. It will, however, all come unstuck because Governments (or whatever flavour) will be unable to keep their mits off it (to pay for things like… Read more »
CJC
Guest
There’s a lot of great things about super. Not only is it money being sucked out of your pocket in the short term, its money that then goes out into the stock market to do things like, for example, feed oil speculation and thus force up petrol prices. And ultimately in the long run, an ageing population means less labour and manufacturing that can be potentially done and thus lower real income for all, regardless of how its being funded. If they wanted retirees to have an income, perhaps they should have abolished negative gearing so that housing was affordable… Read more »
Biker Pete, Montreal, Que., Canada
Guest
Biker Pete, Montreal, Que., Canada

Kris, your response reconfirms the opening statement I made in addressing your article on super, yesterday. There must be a good reason DRA publishes your material. We’d really enjoy reading your views on financial matters in which you have some expertise… .

Greg Atkinson
Guest
Funny how few people were complaining about super when the market was up. In any case it is not a tax and if you want you can move your super funds into something very conservative if you want. I am not a huge fan of super but how else are we going to try and make sure people save for their old age? Or does everyone expect the Government will come in and save them in their old age? Before you start knocking super try looking around your house at all the worthless consumer goods you have purchased and think… Read more »
brc
Guest
It’s not entirely true that everyone thinks the super comes from their employer. Back when I last had a permanent salaried position (thankfully a decade ago now) my salary was given to me as a ‘TEC’ – or Total Employee Contribution or some such doublespeak. Your package was ‘$x’ and that ‘$x’ included your base salary, monetary value of any benefits and the employer contribution. Granted unionised hourly labour probably don’t get it like this, but there’s no doubt salaried employees are shown the total package. You could reasonably expect that if the super contributions were increased, those ‘TEC’ packages… Read more »
Ned S
Guest

Yep, societal change is happening alright:

“Please note: As of July 1 2009, changes to the definition of income mean that your assessable income for Centrelink and the Family Assistance Office will also include:

* reportable superannuation contributions, and
* total net losses from rental property or investment income.”

http://www.centrelink.gov.au/internet/internet.nsf/payments/ftb_a_iat.htm

Dan
Guest
Greg, I’d be much happier if income sacrificed to more quickly pay off a mortgage was taxed at 15% instead – instead of this negative gearing system. In other words, I can think of better places for my money than a super fund ;) But you’re right, people generally have atrocious saving habits. Perhaps this is because they have no real choice. Mandating superannuation, however, is making it into a tax, because the vast majority of people have no idea how to manage super themselves, so it all defaults to whatever the industry fund might be. Superannuation was not meant… Read more »
Greg Atkinson
Guest

Dan I think the chances of any government using our taxes wisely is next to zero. I see our federal politicians have agreed to give themselves a pay rise just as debt is soaring, so that shows what we can expect from them. Like I said I am no big fan of super but is there any other way to try ensure people have some funds after they retire?

Gerry
Guest
Is that really the best you can do Kris? Hammering the ideas of a young person making constructive suggestions. Yeah a little extreme with the additional 15%…and difficult to do.. but there needs to be additional saving and personal responsibility taken or the “socialists” really will have a revolution when pensions are unaffordable with high aged demographics. The governments will have to increase taxes on everyone (even you Kris) by at least 15% of your income to pay for it…then you will really squeal chris if you are still around. It will be better with gradual inducements as time progresses… Read more »
Dan
Guest

I think we’re missing something here. If all there is left is a bunch of old people, and no one to help them, then no amount of money is going to fix it – the rich will take the pickings regardless. Superannuation is not children, or nurses, or doctors, or meals on wheels, or ramps at tram stops for tramps which reach the outer reaches of suburbia.

Ned S
Guest

Dan is correct – Super was never meant to be a replacement for the pension – Just a top up to make the pension comfortable. Or better than comfortable. As to family, it seems to me that the fact we don’t have strong multi-generational families is a part of the reason we’ll have to settle for whatever flavour of socialism Australians collectively vote for.
Thanks for the link to distributionism Dan.

Charles  Norville
Guest
Dan maybe the Commonwealth is softening us up to take over all Public Superannuation. I agree, all Public Super should be paid at a max of say $80K/ann ie all judges, politicians, PS etc. The base pension will have to remain for those who couldn’t/wouldn’t/shouldn’t have worked (that probably puts some of our P Service of all categories in the same league as old age pensioners). Although I think there would be a case for retrospective payment of increased pensions to those workers who have not been part of the compulsory Public Super. Public Super was simply another spivs delight,… Read more »
Biker Pete, Montreal, Que., Canada
Guest
Biker Pete, Montreal, Que., Canada

Gerry, apparently that IS the best Kris can do. Scaremongering must certainly be s-c-r-raping the bottom of the barrel, when a _tertiary student’s_ views are over-analysed to this degree… . Now c’mon Kris, your CV lists a lot of niche areas in which you’re apparently an expert. While these don’t appear to include either super or property, these seem to be the niche areas you persist with… not very convincingly… . How about giving us something within your experience… and grasp?

Pete
Guest
Biker, you are right in to scare-mongering, why the sudden turn-about? And you list all kinds of niche areas that you pertain to be an expert on. Such as world travel. Superannuation. Speculating on property. Emotional attacks against logical arguments. Etc. If Kris is what you claim him to be, then surely you are kindred spirits. But I think it is still besides the point. Why not use this example to write an article about? It’s his site to do it, we’re just visitors. For a free service I certainly don’t expect him to trawl through every single submission and… Read more »
Greg Atkinson
Guest

Biker Pete & Pete. I think you guys need to spend some time together, drink some moonshine and howl at the full moon. Both of you make some very good points but for some reason I sense a lot of tension between you. Breathe deeply and focus on the energy of the crystal. Now sing along with me “Michael rowed a boat ashore….” :)

Biker Pete, Montreal, Que., Canada
Guest
Biker Pete, Montreal, Que., Canada

Ha, ha… . Love ya stuff, Greg. (Pete, life could never go on without you, son… . ;) )

bargeass
Guest

Does Kenny have an impeccable record for enterprenuership and wealth creation or his his greatest skill out sucking up his fellow public servants to rise through the public service?
No wonder 90% of Aussies collect some form of welfare.

Joe
Guest
Krys, It is not just governments that you should be wary of. My UK pension (private with profits ‘ah ha!!!’) was started in 1995. I stopped making contributions to it in 2005 when (November) I migrated to OZ. During that time over 25K (GBP) was contributed. It is yet to show a profit on those contributions at annual statement time. As of 2008 it was worth over a grand less than 10 years of solid contributions, and 14 years of capital gains. And I was supposed to be saving for my retirement, oh fool me. What is really scary is… Read more »
Ned S
Guest

And those were the boom years Joe – Doesn’t bode too well for the deleveraging period perhaps? I can’t see Michelle But’s idea flying under this government – Much to the disappointment of all the Superannuation salesmen out there. Kev wants more tax, not less. One idea that just might be sensible would be to do away with negative gearing on future purchases of existing dwellings. But allow it for newly constructed stuff – If policy makers really reckon we have a housing shortage.

bargeass
Guest

Government is the sand in the cogs of inductry

Hapless Bureaucrat
Guest
This is not the quality of jouranlism I have grown to expect to expect from DR. Clearly none of you read between the lines where the author of the submission also intended to advocate cutting income tax and government spending by an offsetting amount so that there is no net impact on labour costs or the net budget position. They submission’s author also intended government make it easier for individuals to use their superannuation as collateral for a loan so that we can still go out and spend the money now, while the government can claim to have lifted gross… Read more »
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