Superannuation Must Not Leave Taxpayers to Foot the Bill

Superannuation Must Not Leave Taxpayers to Foot the Bill

Editor’s Note: Before we get stuck into today’s Daily Reckoning Australia, we wanted to draw your attention to an urgent story that’s receiving ZERO press coverage at the moment.

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It would be remiss to talk about the week gone by without mentioning disgraced Australian cricket captain Steve Smith.

Guilty of conspiring to cheat, Mr Smith was relieved of his duties as captain this week. He, along with chief ball-tamperer Cameron Bancroft and co-captain David Warner, faces the prospect of a long stint on the sidelines.

Though not exactly on the unemployment line, his future as a Test cricketer hangs in the balance.

Mr Smith’s one road to redemption, at least for the time being, may be in the shorter form of the game, where contract work is aplenty.

Fitting then that, amid the cricketing fiasco, a wider debate is emerging in the media regarding the plight of Australians working in the ‘gig economy’, led by a lobby group working on behalf of superannuation funds…

Super problematic

Contract work has more than its fair share of devotees. And for good reason.

From working at home to being your own boss, the list of perks runs deep.

Yet amid the benefits lies an uncomfortable truth…

Independent work increasingly means forgoing security in retirement.

Today there is a growing cohort of Australians not classed as ‘employees’. Numbering a million strong, contract workers aren’t eligible for the same benefits as full- and part-time workers. That’s because employers aren’t obliged to pay them compulsory super.

Unless they have their own savings plan accruing, it leaves them without much of a retirement nest egg to look forward to.

Little surprise then that there’s a groundswell of support to overhaul superannuation.

But are these concerns valid? And does the system need an overhaul?

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Freelancers make the bed they lie in

First, don’t forget that freelancers work independently by choice.

This is important to note because it sets the stage for their relationship with clients, who we’ll refer to as employers from hereon.

Unlike freelancers, every full- and part-time employee has an unspoken agreement with their employer. Informally, it is the understanding that their success is bound to that of their employer, and vice versa.

This gives an employer a degree of insurance. They can invest in the future of workers and expect a return on that investment. Such an investment isn’t limited to salary or superannuation either. It extends to an employee’s professional development as well.

Yet this connection doesn’t exist with contract workers. To employers, freelancers may as well be hired mercenaries. They’ll do the work, maybe even very well, but there is no bond to nurture. They can be replaced as quickly as they were found.

Not surprisingly, this arrangement works favourably for employers. They can charge rates according to hours worked. And they have no need to invest in freelancers for the long term.

What’s more, there’s little to no risk for their business. They can contract out as much or as little work as they like.

What upside then, if any, is there for freelancers?

Well, the independence factor plays a significant role for one.

But it’s not the only factor.

Freelancers and employers clearly have an unwritten understanding.

The freelancer understands that an employer must pay them for the work they produce. But they do so knowing they’ll receive no super contributions for their efforts.

That ever more people are opting to freelance suggests they find this trade-off acceptable. Otherwise, you assume, people wouldn’t freelance in the first place. They’d just go back to full- or part-time work.

All of which is to say that there doesn’t appear to be any need to reform super. If this was in fact an urgent problem, we’d see a reversal in the number of people opting for contract work. And yet we’re seeing the exact opposite.

Taxpayers: The biggest losers

Regardless, those advocating changes to super do make one salient point.

Any reform that guarantees payouts to freelancers would likely leave taxpayers as the biggest losers.

More contract workers means fewer people with adequate retirement savings. That would place extra strain on the aged pension system. A stress made worse as ever more contract workers join the retirement queue.

That wouldn’t help anyone.

Superannuation was designed to ease the burden on taxpayers. Having to contribute more in taxes to offset the funding gap for the aged pension would defeat that.

In a country that’s ageing rapidly, that’s made all the more important. It leaves an ever smaller taxpayer base to support a growing, and increasingly poorer, pensioner base.

It’s a scary proposition. And it’s the most convincing argument for reforming super to cover the gig economy as well.

And yet there are many variables to consider. Factors which make this anything but an open-and-shut case.

Compulsory super contributions for contract workers would have repercussions elsewhere.

Employers may be less keen to take on their services. Or they may lower the hourly rates they charge.

More to the point, money doesn’t grow on trees. Any redistribution of company resources will affect some other part of the business.

Is that reason enough to keep the status quo intact?

Despite the libertarian in us screaming that we’d be better off abolishing superannuation altogether, we can’t help but side with the advocates for change on this issue.

At the best of times, man doesn’t know what’s good for him.

He makes a meal of projecting his lot into the future. The unshakeable 25-year-old of today may take on a distinctly different outlook on his life at 75.

What seems workable now — living off personal savings and a pension in retirement — may not be so when that day arrives.

Like policymakers, people have a habit of kicking things down the road.

Freelancers may have little grasp of how their actions today may be setting them up for hardship tomorrow. Like a child that doesn’t know too much candy is harmful, too much independence today is a recipe for dependency tomorrow.

The state, as meddlesome as it can be, has a duty to protect them. More than that, it has a duty to protect the taxpayers that do receive super contributions.

As it happens, the solution for both groups might be one and the same: a comprehensive superannuation system for all.

Until next week.


Jim Rickards Signature

Mat Spasic,
For The Daily Reckoning Australia