RIR and Why Oz needs a Heath System Tax (HST)
Whilst media commentary is mainly looking at the Retirement Income Review (RIR) through the Superannuation Guarantee (SG) rate-rise prism, there are some strategic observations in the report which suggest some other more courageous alternative changes could be looked at by government.
The report suggests reduced complexity and increased efficiency could improve retirement income outcomes without increasing the SG. Two suggestions I have in this area relate to Death and Disability Insurance and Contributions Tax.
My first suggestion is to not allow SG contributions to fund death and disability benefits. I estimate this would allow on average an additional 0.5% of pay to accumulate towards retirement from the SG Contribution.
The original policy development of Super Guarantee was focused on retirement income supplementing age pension as well as allowing portability of super as people changed jobs (not death and disability benefits). Whilst existing company employee benefit schemes had death and disability benefits (sometimes outside super as well as inside) the administration of SG contributions has morphed into it also funding death and disability benefits.
This evolution was partly due to competing industry funds promoting additional bells and whistles from SG and partly from insurance companies pushing (unsustainably “cheap”) group insured products to fund trustees. There remain adequate and flexible voluntary contribution options in funds for employees (and employers) to voluntarily fund death and disability benefits and for members to match them better to their family circumstances, without using SG contributions for this.
My second suggestion is to eliminate the 15% Contributions Tax on SG contributions. This would allow a further 1.4% of pay out of SG Contribution to be accumulated towards retirement. This change and the elimination of insurance from SG deductions, would add about 2% of pay in total accumulating towards retirement without changing the current 9.5% SG rate.
There would need to be a discussions about consequential changes to how future SG funded retirement benefits are to be taxed as a consequence of the removal of Contributions Tax. I do not propose to examine this further except to say that a fresh approach to taxing retirement payouts, without the implication of Contributions Tax, would produce a more equitable and efficient taxing regime and a better retirement policy outcome.
I have addressed the Contributions Tax revenue loss aspect below together with existing proposals I have for using indirect tax to fully funding NDIS and bolster state and federal funding for post-Covid health system costs.
Firstly, a bit of background on the 15% Contributions Tax. This is a legacy from the Hawke government’s introduction of imputation of company tax (actually unrelated to superannuation). This was a policy which curried favour with the business community in the 1980s and was very costly to revenue. The compensation to revenue for revenue loss from introducing imputation, came from the so-called “bring forward” of superannuation benefit tax in the form of the 15% Contributions Tax.
This 35 year old "Contributions Tax" gimmick has been the main cause of the complexity in people’s attempt to reconcile 9.5% pay with how their SG related retirement savings accumulate. It is a historical anomaly just waiting for a good opportunity to get rid of it – now is as good a time as any.
The 15% Contribution Tax (just from SG contributions) currently provides about $10 billion to federal budget. This could be made up from an indirect consumption tax. The current GST rate is 10%. It is well behind New Zealand at 15% and below rates of consumption tax in many comparable countries.
I have previously mentioned my view that some additional indirect tax should also be raised in future to cover the unfunded portion of the NDIS and also to provide extra funding for post-Covid future health system needs.
The recently increased Medicare levy increase to cover NDIS still leaves about $5 billion pa of future fully implemented NDIS cost unfunded. I have not attempted to estimate the extra post-Covid health system funding required. I expect this will be substantial if we are to have our state health systems funding quarantine, vaccination, stockpiles of PPE, hospital reserve capacity, traveller processing etc. Federal government will also have increased funding required – if only to reduce extra debt servicing caused by Covid Job Keeper and Job Seeker.
The Howard government's legislative handcuffing of any change to the GST is a practical road block to just trying to increasing the existing GST rate. The GST legislation was written to require all States to agree to any change in the GST rate as well as pass it through both federal houses.
I suggests a courageous government could now define a new additional consumption tax to be collected alongside the existing mechanism of the GST (without all the states having to agree) and for this to conveniently make up for revenue loss from cancelling 15% Contributions tax on SG and to fund future health deficits referred to above.
I would suggest that this new consumption tax – say HST (Health System Tax) - could be set at 5% with half to be distributed to States on pure per capita ratio (without the much maligned Horizontal Fiscal Equalisation adjustment). Latest annual GST collections were $65 billion. Based on this figure, a HST of 5% would raise about $17 billion for the States and $17 billion for Federal revenue. Thus the federal revenue share would balance the $10 billion loss of Contributions Tax on SG, the as yet unfunded $5 billion for NDIS plus $2 billion to stabilise ongoing 2020 Covid debt cost.
An imperative for this level of courage by a government now is that we have to learn to live in an economy which covers the cost of future local security and health from our own resources without relying on the magic pudding of high immigration and digging things out of the ground for China.
Bruce Gregor FIAA AIA
27 November 2011
Posted Friday, 27 November 2020
- Saturday, 11 Apr 2020 - Back to Work with Covid-19? - Not so Fast!
- Tuesday, 7 Apr 2020 - Key people charting the Australian Recovery
- Wednesday, 1 Apr 2020 - Population Mortality effects of CoVid19
- Sunday, 22 Mar 2020 - CoVid19 Data Sourses - and a Poem
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