Super rent-seekers demand more pork

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By Leith van Onselen

The Australian superannuation industry appears to be lobbying for the indexation of superannuation contribution limits, which would enable contributions to rise in relation to wages growth. From the AFR:

…after taking over the Howard super model, in 2009, [Labor] halved the standard tax concessional contribution entitlement to the current $25,000 a year…

While those over 59 are this year allowed to contribute up to $35,000 with tax concessions to super…

If [indexation] comes this year, it will be a welcome move, says Louise Biti, of financial services researcher Strategy Steps, given that encouraging super didn’t appear to be a priority for Labor during office…

Australians should be encouraged to save super for not just their retirement, says Biti, but also to finance any time in age care…

Saving more super should also be encouraged to supplement the strained government age pension system, says Biti…

Financial planner Peter Crump, of ipac South Australia, the new national chairman of the SMSF Professionals’ Association, says it will be a positive development if the government agrees to restore indexation to super.

Super contributions today are a shadow of what they were in 2007 when the Howard reforms were introduced.

Superannuation concessions are one of the biggest and growing drains on the Federal Budget. According to the Australian Treasury, concessions on superannuation contributions were estimated at $16.5 billion in 2012-13, with concessions on superannuation earnings valued at $15.5 billion. Moreover, according to the Treasury, concessions are overwhelmingly skewed towards higher income earners, with the top 5% of contributors receiving just over 20% of contribution concessions, and higher income earners also receiving the lion’s share of the earnings tax concessions.

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The proposed indexation of superannuation contributions would likely worsen Budget outcomes and also reduce equity in the super system.

Without changes to the way that contributions are taxed, so that they are spread more evenly across the income spectrum (see below table), the introduction of indexation would likely see the proportion of tax concessions granted to higher income earners increase, since they are most likely to be the ones with the means to contribute up to the contribution limits.

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For this reason, the Grattan Institute recently recommended capping concessional superannuation contributions to $10,000 a year – a move that would raise around $6 billion a year and have almost no impact on the bottom 20% of the population.

Moreover, for similar cost to the Budget of introducing indexation, the Government could instead reintroduce the Low Income Super Contribution (LISC) – a measure abolished by the Abbott Government that refunded the 15% tax on super contributions for workers earning less than $37,000 a year (see above table). Removing the tax penalty on superannuation contributions by reinstating the LISC would enable lower income earners to save more for their retirement (reducing pressure on the Aged Pension) whilst also ensuring that concessions were shared more evenly across the income scale, rather than being captured primarily by those on the highest marginal tax rate (thus improving system equity).

AustralianSuper chair and Reserve Bank of Australia board member, Heather Ridout, agrees, yesterday calling on the government to reinstate the LISC:

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“[I] am strongly of the view that it should be retained”…

“It is absolutely regrettable that low-income earners’ marginal tax rate is the same as the concessionary rate of tax on super.”

Any reforms of superannuation must be targeted at improving both equity and the sustainability of the system. The industry’s calls to introduce indexation, without reforming the flat 15% tax on contributions, fails on both counts.

[email protected]

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About the author
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.