Serious budget repair requires hard superannuation reform

Apr 28, 2023
SUPER hand written in white chalk next to the money.

The Financial Review’s political editor, Phillip Coorey, wrote last week that when it comes to superannuation policy, the Grattan Institute “increasingly resembles the financial policy arm of the Greens”. I am not exactly sure what that means – and I am Grattan’s lead on super policy – but I’m pretty sure he didn’t mean it as a compliment.

I’m more concerned that Mr Coorey may have left people with the wrong idea about Grattan’s proposals for superannuation tax policy reforms, which we argue would make the super system fairer and the federal budget stronger.

Mr Coorey wrote that we are “urging a scorched-earth approach to super tax concessions”, and that our recommendations would “make the retirement vehicle hardly worthwhile” and “knee-cap the retirement plans of those in their late-40s and beyond who are relying principally on super”.

That’s not right. Let me explain.

Super tax concessions are excessively generous, extending well beyond any plausible purpose for our superannuation system to provide for income in retirement. They cost the budget a lot – up to $45 billion a year, or 2 per cent of GDP – and soon they will cost more than the Age Pension. It’s unsustainable.

It’s also unfair. Two-thirds of the value of super tax breaks benefit the top 20 per cent of income earners, who are already saving enough for a more-than-comfortable retirement.

These tax breaks do little to reduce Age Pension spending for the same reason: they mostly benefit people who would never have qualified for the pension in the first place.

Much of the boost to super balances from tax breaks is never spent. By 2060, one-third of all withdrawals from super will be via bequests – up from one-fifth today.

With the federal budget deep in deficit and big spending pressures looming, curbing super tax breaks should be a priority.

Here’s how super tax breaks should be reformed.

First, the tax breaks on super contributions should be restructured to offer smaller tax breaks, per dollar contributed to superannuation, for high-income earners. Low-income earners suffer more financial stress than high-income earners, and they live shorter lives on average, so have less time in retirement to spend their super.

The pre-tax contributions of people earning more than $220,000 a year should be taxed at 35 per cent, instead of the 30 per cent charged to those earning more than $250,000 currently, saving the budget $1.1 billion a year.

Most large pre-tax super contributions look like tax minimisation by wealthier, older Australians, rather than genuine retirement saving. So the cap on pre-tax super contributions should be lowered, from $27,500 to $20,000 a year, saving $1.6 billion a year.

Second, superannuation earnings in retirement – currently tax free – should be taxed at 15 per cent, the same as superannuation earnings before retirement. This would save the budget at least $5.3 billion a year, and much more in future.

The top 10 per cent would pay an extra $7,000-to-$7,500 a year on average. Most retirees have no super – they would be unaffected by this change and would stand to benefit much more from the increase in health and aged-care spending these revenues would help fund.

Third, earnings on super accounts larger than $2 million – rather than $3 million as proposed by the Albanese Government – should be taxed at 30 per cent. This would save about $3 billion a year, compared to about $2 billion a year under the government’s plan.

In total, our proposals would save the budget more than $11.5 billion a year.

But, contrary to Mr Coorey’s concerns, super would remain much more concessionally taxed than any other saving vehicle, including the family home. Super tax breaks would still cost the budget more than $30 billion a year, but those tax breaks that remain would genuinely support Australians’ retirement incomes, not tax minimisation and estate planning.

Nor would our changes compromise the adequacy of Australians’ retirement incomes. That’s because our reforms would wind back tax breaks that overwhelmingly benefit the top 20 per cent of Australians by wealth, who are already saving enough for their retirement.

The Coalition government’s Retirement Income Review found that self-funded retirees are the most financially comfortable cohort in all of Australia today. And younger people working today that can expect to rely on their super in retirement in the future will be wealthier still.

The inescapable fact is that super tax breaks need to be wound back if Australia is to begin to tackle its budget problem.

If Mr Coorey and others find this so objectionable, I ask them: “What’s your solution?”

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