Has Treasury mucked up its super sums, again?

Once again truth is stranger than fiction. Treasury, having misled former Treasurer Wayne Swan over the cost of superannuation concessions are trying a different version of the same game on Messrs Joe Hockey, Arthur Sinodinos and Bruce Billson.

Unless the above ministers, particularly Arthur Sinodinos who is responsible for superannuation, wake up to the Treasury game long-term Australian superannuation benefits are vulnerable.

The thrust of the Treasury 2014 game is to use misleading figures (unlike 2013 the latest sums are not mathematically wrong) to make the new ministers believe that the cost of the superannuation concessions are $32 billion when the real cost is nothing like that.

Already the Australian Financial Review has fallen for the Treasury trap and claimed the cost of superannuation concessions is $32 billion and in the budget lead-up scores of other media outlets will also be tricked.

Hopefully Messrs Hockey, Sinodinos and Billson are too smart to be fooled.

What I find hard to fathom is that the Treasury sums are so obviously misleading that any minister or media outlet that uses them should know immediately that they will be shot down.

Of course, Wayne Swan did not pick the 2013 errors and the Labor cabinet, having shot last year’s Treasury superannuation sums down was forced to grab other figures to make a decision (the figures they used happened to be mine).

In my view when it comes to superannuation Arthur Sinodinos should completely ignore Treasury and seek other advice.

In the latest analysis Duncan Fairweather and Malcolm Clyde of the SMSF Owners’ Alliance have guided me and they may be able to help Sinodinos.

Tony Abbott and Arthur Sinodinos have promised no fundamental change to superannuation in Abbott’s first term of office. Indeed Sinodinos dropped the ALP tax on superannuation funds paying pensions of more than $200,000 that was devised last year when they discovered Treasury sums were wrong.

To understand how Treasury’s superannuation cost trap works you must go back and see how poor old Wayne Swan got tricked and then you can see that the trap set for the current government is, in some ways, even more devious.

With the SMSF Owners' Alliance last year I exposed how Swan was being misled (How Treasury mucked up its super sums, February 8 2013). To understand Treasury’s 2014 game you need to go back to last year.

For Wayne Swan, Treasury made two base calculations. The person who made the calculations warned that under no circumstances should the two sums be added. But Treasury incorrectly did add them and therefore reached the wrong total cost of superannuation benefits. Here are the two “Swan” sums.

SUM ONE: A person putting, say, $100 into superannuation is taxed at 15 per cent so has $85 to invest. If all the superannuation contribution is taxed at the higher marginal income tax rate then clearly the difference between the two tax rates is a theoretical cost of superannuation contributions. Given that we are adding income, the income tax rate will be at a person’s top marginal rate. Treasury made a calculation, which was no doubt mathematically correct, but just imagine the furore if all superannuation income deductions were abolished, superannuation subsides and the government effectively decides that it would fund the vast bulk of retirement via the aged pension.

SUM TWO: Treasury looked at the tax levied on superannuation income and increased the tax on that that income to the marginal rate to get another cost. They “forgot” the superannuation income was reduced significantly by the extra tax on the contributions. In fairness anyone reading the two calculations in February 2013 was warned NOT to add the sums but course that’s what Treasury did for poor old Wayne. 

Not only was Treasury mathematically wrong in adding the sums but they used a highly optimistic earning rate of 7 per cent over 35 years to artificially boost the income lost in the concession and “forgot” to deduct the reduction in the pension bill that superannuation delivers.

So now, a year later, we all hoped for proper all-embracing sums that would be of real assistance in calculating the cost of superannuation concessions. But no. The latest Treasury superannuation document calculating the cost of the superannuation concessions once again produces the same two basic “Swan” sums – one is the straight cost of superannuation contribution tax deductions, which in February 2014 Treasury costs at $16 billion. Then, as happened last year it does a sum, which calculates the cost of the lower tax on superannuation earnings at $16 billion.

Treasury this time does not add the two sums but, on the other hand, unlike last year, it does not warn ministers and media reporters not to add them. And given they were added last time The Australian Financial Review last week happily added them and it would be natural for any unsuspecting minister to do the same thing.

To start a long-term conversation about superannuation is sensible even though current benefits are locked in. But it needs to be based in realism.

Abolishing all superannuation tax concessions is not a realistic objective; using inflated long-term earnings estimates is just as silly; and ‘forgetting’ about the benefits to the pension bill is mischievous.

If Treasury wanted to be part of a constructive debate, what about a calculation of the effect of actually lifting the cap on superannuation contributions but, perhaps, curbing lump sums.

The SMSF Owners' Alliance says on their sums this would save the government a large amount. Once you get proper sums then an informed discussion can take place.

SMSFOA point out that in an appendix some boffin in Treasury takes an ‘experimental’ look at the cost of superannuation concessions using a different benchmark. This analysis suggests that if contributions are taxed at the marginal rate while fund earnings and benefits paid are exempt, then the cost of superannuation to the budget would be more like $12 billion.

We are now starting to get closer to believable figures and had Treasury used this figure as a starting point we could have deducted the pension savings and got somewhere near the cost.

I hope I am wrong but this looks like an illustration of public servants playing ”Yes Minister” politics.