Features Australia

Elementary, my dear Henry

21 May 2016

9:00 AM

21 May 2016

9:00 AM

One of the main reasons to buy the Australian these days is to read Judith Sloan and Henry Ergas.   Both are clear-thinking with powerful insights into our economic state of affairs. Recently, however, the two have disagreed over the Turnbull government’s proposed changes to superannuation. Sloan said some of these changes are retrospective or retroactive (for our purposes those two are the same thing). Ergas responded in a column on 16 May saying ‘the government’s changes to superannuation … are not retroactive’.

So who’s right?

Well, in my view there is no doubt that Judith Sloan is correct and Ergas is wrong. Some of these changes are retrospective. And notice that the issue of whether a legal change is retrospective is not one where economists have special expertise. It is either a question of law and legal expertise, or it is one of general clarity of thought and the standard meaning of words.

Before I explain why Ergas is wrong, recall his argument. He says the Turnbull changes ‘are not retroactive’ though later concedes that they ‘have an element of retrospectivity’. He then says that much of tax law has elements of retrospectivity. Oh, and Labor is worse. (He says that a lot.) But the core of Ergas’s argument is that you supposedly test for retrospectivity by asking whether a proposed law ‘seeks to alter the state of the law at a time prior to their announcement’. And you do that by focusing NOT on ‘what a statute says, but on what it does’.

Got all that? Okay, now before running through my reply let me set up a little hypothetical to test this Ergas defence of the Turnbull team’s changes. Let us imagine that back in 2008 Henry Ergas signed a 15 year contract with the Australian to deliver one column every fortnight for $1,000 a pop (I make up that dollar amount for illustrative purposes, and to humour all the metric system afficianados). At the time of signing (this is fanciful, I know) there is a statute that lays down that all newspaper columns must be (to continue with the metric system suppositions) 1,000 words. Now I wonder what Ergas would say about a law enacted in 2016 that said newspaper columns must now be 2,000 words. Is that a retrospective change to the law? Or does it only have ‘elements of retrospectivity’ (whatever that means, because it is far from clear).

You see Ergas will be locked in to providing his columns for another 7 years even though he will now have to double the work he does to get the same amount of pay. When he signed back in 2008 he did so on the assumption he would have to do 1,000 words of effort for $1,000 but now a statute is halving that deal. Maybe it’s no longer worth it to him? But he cannot pull out. His situation has been retroactively changed.

Notice how that is analogous to what the Turnbull superannuation changes do. You opt to put in a big chunk of after-tax monies into your super account back in 2008 thinking that once in they are tax free. Turnbull now says, starting today some of them are no longer tax free. But here’s the thing. You can’t get them out. They are locked in just as Ergas would be locked in to writing columns till 2023. And you are locked in even though many of you would never, ever have put those funds in if you had known these new rules. (Assume that Ergas would not have signed with the paper if it had meant 2,000 word pieces for that particular sum.) And notice that any attempt to defend the Turnbull changes by comparing the super changes to a changed income tax rate fails, because after any new income tax rate comes in you can decide that henceforth I’m not working so hard. Or I’m not going to earn at all. Yet with the super changes you cannot get those monies out. They are locked in, just as Ergas would be locked in.

That looks like a retrospective change to me. Blacks’ Law Dictionary, the standard north American reference book, says this: Retroactive laws ‘are generally defined from a legal viewpoint as those which take away or impair vested rights acquired under existing laws… or attach a new disability in respect to the transactions already past’. I had a vested right to this lump of after tax monies I stuck in my super not being taxed at all, and now I don’t. That’s a new disability on me. It’s retrospective. And the fact these monies might still get a pretty good tax rate compared to other investments is neither here nor there. I might prefer to use the money to consume now. Burn through it, baby, and get on the Age Pension – because that is the big message from these Turnbull super changes. But I can’t do that. I’ve locked in based on what were, in retrospect, false claims.

For Ergas it apparently only amounts to ‘an element of retrospectivity’. Okay, that sounds like saying this plutonium has an element of radioactivity; it’s not in fact radioactive. But let that pass. And let pass, too, claims that it’s ‘fair’ to hit a big roller columnist because that also is irrelevant to whether a law is retrospective.

I cannot see how Ergas can characterise those who disagree with him as ‘ill-informed’, ‘unjustified’ and ‘drowning in polemics’ (which better describes his last sentence, I suspect).

Nor does it help Ergas to note that other laws are sometimes retrospective. That’s true. Indeed the whole of the common law, or judge-made law, is intrinsically retrospective as Jeremy Bentham pointed out two centuries ago.

Nor does it help Ergas to point out that some retrospective laws are justified. They are, though not often. And more to the point not here, as retrospectivity’s almost never okay when it comes to superannuation where you are both forcing people to forego spending money they might have good grounds at their particular stages in life to prefer spending now, as well as inducing or bribing them to do so based on a promise of a future state of affairs you now are changing. Undermining trust like that, and indicating to all and sundry that no government – because let us be clear this is a supposedly Liberal one doing this – can be trusted with vast lakes of super money this big, is pension system poison. As is, by the way, the fact this Turnbull team is treating defined benefit schemes massively more favourably than defined contribution ones, and then lying about it.

I agree that some retrospective laws are justified. These ones, however, are most definitely not. But one thing we can undoubtedly say is that these Turnbull super changes are retrospective. Indulging in distinctions without a difference, and other Jesuitical sophistries, does not change that.

Over to you Henry. You’ve got 2,000 words.

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