A Tiddle of Change

The “Butterfly Effect” is a phrase that suggests small changes in a system can produce a much greater long-term variance. Metaphorically speaking, it suggests that the flapping of a butterfly’s wings can have an impact on other aspects of life.

A great example is in the area of saving. Putting a little aside regularly and investing for the very long-term can change one’s financial future for the better. This is the principle behind our compulsory superannuation system.

As super money is invested, in a tax-advantaged environment, it grows with the aim of supporting the retirement of the individual. This ultimately reduces the need for the state to provide retirement incomes, thus saving a further burden on taxpayers. Simple, effective and good policy.

However, small changes can destroy the confidence in the process. Paul Keating was master of the super shuffle, making hundreds of changes to the rules, resulting in a complex and cumbersome system.

As Treasurer, Peter Costello simplified the rules, increasing contribution limits and providing a tax-free exit strategy. Both of these changes were welcomed by those saving for their future.

Now, despite Kevin Rudd saying pre-election that ‘there will be no changes to the superannuation laws, one jot, one tiddle’, there are going to be changes.

According to my dictionary, ‘tiddle’ means ‘to use with tenderness, to fondle’; but I make the bold assumption Mr Rudd didn’t mean quite that. Perhaps he was simply looking to combine a noun (tad) and an adjective (little) in an attempt to create his very own hybrid vocabulary.

Whilst we will most likely never know the truth of the tiddle, as the Rudd Government has started to make changes to the system in an attempt to gain additional tax revenue, I am chalking this up as another broken promise.

Unfortunately, this breach of trust has a number of real and potential consequences.

Firstly, it reduces the amount of money people can actually sacrifice into superannuation and still be eligible for concessional tax rates. Penalising people for investing in their future, in an attempt to grab more tax dollars today, strikes me as dumb policy.

One could describe it as the ‘robbing Peter to pay Paul’ principle.

A second consequence of this policy is that it has undermined confidence in the wisdom of actually using super as a savings vehicle. If the Government is prepared to make such changes now, and given their penchant for social engineering policies, we are right to ask “What’s next?”

Will the exit rules change? What about the taxation rates? These (and many others) are sensible questions because superannuation is typically a long-term commitment. There is little (if any) option to get out when the rules are changed halfway through the game.

While such changes are often not retrospective, an increasingly complicated superannuation policy is a turn-off for many, and this is where the butterfly effect might come into play.

I suspect that the changes the Rudd Government is seeking to introduce will ultimately have much larger long-term consequences. These could include a reduced contribution to superannuation savings and a renewed focus on direct personal investment using borrowed money. At least that way, when the rules change, the individual has some control over the response and they still get tax breaks along the way.

At a time when there are budget deficits as far as the economic eye can see, with an ageing population and rising unemployment, discouraging self-reliance and long-term savings for the future is inane. Yet that is exactly what this Government is doing.

Whatever their justification for winding back the clock on superannuation, it sends the wrong message about what is in Australia’s long-term best interest.

Perhaps this is what Kevin Rudd meant by “a tiddle.” I must let the dictionary people know.