Pressure grows to cap superannuation balances

AustralianSuper, HESTA and Aware Super are among the major superannuation funds calling for a $5 million limit on account balances, a figure that has been suggested by Financial Services Minister Stephen Jones.

Jones says that it is pretty hard to argue that a balance of $100 million or even $50 million is about retirement income, which is what Jones believes is the purpose of superannuation.

Mercer senior partner David Knox says his fund is proposing a $3.4 million cap, with Knox saying the job of superannuation is not intended to support excessive lifestyles, but to help people maintain their living styles.

Cutting on back on tax concessions paid to people with large balances could raise billions a year, and could help to reduce the structural budget deficit, which is currently estimated at around $50 billion a year.

“You don’t have a consultation with a preconceived outcome, but I’ve got to say $5 million is a lot closer to the purpose of superannuation than $100 million”, Financial Services Minister Stephen Jones said.

“We’ll look at where the rate number is, but it’s definitely something that we are considering”.

“If people have got superannuation balances in excess of $100 million, or even $50 million, I think it’s pretty hard to argue that that’s about retirement income”, Jones added.

“It might be about estate management, it might be about tax management, but it’s not about retirement income, and that really is not the purpose of superannuation”.

The Australian Treasury’s Tax Benchmarks and Variations Statement 2021-22 revealed that the budgetary cost of superannuation concessions had ballooned past $40 billion, and is expected to grow over the forward estimates:

Superannuation concessions also cost the federal budget almost as much as the Aged Pension:

In fact, Treasury’s Intergenerational Report projected that the cost of superannuation concessions will overtake the cost of providing the aged pension by around 2040:

Treasury’s Retirement Income Review also found that superannuation concessions are poorly targeted to high income earners, thus increasing inequality:

To the extent that superannuation tax concessions are contributing to higher superannuation balances of lower- to middle- income earners, they help to reduce Age Pension expenditure. But the main influence behind the growth in superannuation balances is the SG. Tax concessions are largely concentrated among higher-income earners who are close to and above preservation age. Across the income distribution, the lifetime cost of superannuation tax concessions is projected to outweigh the associated Age Pension saving (Chart 13)…

Therefore, the Albanese Government is right to implement measures such as a $5 million superannuation cap to rein in costs for the federal budget.

However, rather than tinkering at the edges, it would make more sense to unwind the compulsory superannuation system altogether and direct the budget savings into providing a more generous and comprehensive Aged Pension. Doing so would improve efficiency, equity and budget sustainability.

Sadly, the superannuation industry has become so large and powerful that genuine reform is nigh impossible. And Labor is the system’s biggest supporter.

So, we are stuck with the current inefficient and inequitable budget monster where only minor tweaks are possible.

Thanks Paul Keating.