Fairfax’s Michael West has published a ripper article questioning the merits of Australia’s superannuation system, which he argues is overly generous to higher income earners. From The Age:
Super tax concessions cost the taxpayer about $32 billion a year, according to Treasury. The bulk of this, says [actuary Geoff] Dunsford, goes to middle- and upper-income earners…
Dunsford illustrates four ways in which middle-class retirees gain taxpayer benefits that are relatively more generous than those for average workers.
He uses the examples of a clerk and an executive in the final year of their employment and the first year of their retirement, assuming an age of 65.
Via concessional super contributions, concessions on super fund fixed interest earnings, pension credits on investment earnings and the income tax scale on pension earnings, the executive does proportionately better than the clerk.
Fifty years ago, says Dunsford, normal income tax was paid on super fund pension payments…
Since then, the rules have been changed many times ”enabling the tax on fund withdrawals to be reduced in ever more complex ways”, he says.
The piece de resistance was Peter Costello’s move in 2007 to scrap the tax on super withdrawals taken after the age of 60.
It all makes for a super generous system, so generous though that Dunsford, and those few with the principle to speak against the compelling interest of their own hip pockets, reckon it won’t last for too long.
As illustrated in the above table, there are many flaws in Australia’s superannuation system that make it both highly inequitable and unsustainable as Australia’s population ages. Central among these concerns is that it allows an individual to retire at 60, withdraw their super tax free as a lump sum, blow the money on consumption, and then go on the aged pension from 65 years of age. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension. It is a loop hole that must be closed, and taxing superannuation lump sums, whilst at the same time encouraging retirees to withdraw their savings as a annuity (instead of the pension), is essential to ensure the system’s longevity.
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More broadly, the flat 15% tax on superannuation contributions should also be axed in favour of a flat 15% concession. As illustrated above, under the current 15% flat tax arrangement, the amount of super concessions rises as one moves up the income tax scale, resulting in a system whereby higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement. A flat 15% concession, by comparison, would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
A major impediment to reform is the superannuation industry itself. As noted by West elsewhere in his article, the industry has grown so big and powerful following the introduction of compulsory superannuation, that like “Frankenstein’s monster… [it] is now pulling its master’s strings”.
Ultimately, however, with Australia’s population ageing as the large Baby Boomer cohort shifts into retirement, and Australia facing a falling proportion of workers supporting retirees (see next chart), root-and-branch superannuation reform will have to be pursued. Just don’t expect anything to happen until there’s a fiscal emergency.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
