It’s super, not pensions that’s killing the Budget

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By Leith van Onselen

Think tank, the Australia Institute, will release a new report today arguing that it is superannuation that is the major burden on the Federal Budget and calling for superannuation concessions, which overwhelmingly benefit the wealthy, to be scrapped in favour of a non-means tested Aged Pension. From WA Today:

Four in five retirees eventually get either full or part age pension…

However, that cohort of wealthier retirees, currently enjoys a major advantage over other taxpayers because the flat 15 per cent rate on super contributions…

…the rate of growth of super tax concessions is greater than that of the pension…, meaning the cost of the tax concession will soon overtake the pension to become ”the single largest area of government expenditure,” by 2016-17.

…the Commonwealth bill for these concessions is projected to rise at a staggering 12 per cent annually to be $50.7 billion in 2016-17.

”The overwhelming majority of this assistance flows to high-income earners,” the report finds.

”Low-income earners receive virtually no benefit…’

To address the problem, the report’s authors, David Ingles and Richard Denniss, have called for an end to the favourable taxation of superannuation and the introduction in its place of a ”universal age pension”, which would be non-means tested.

Certainly, the cost of superannuation concessions is a ginormous issue, and it is worrying that it has been completely ignored in the Coalition’s war on entitlements.

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In fact, shortly after being elected, the Coalition made the whole situation worse by shamelessly jettisoning the former Labor Government’s planned changes to superannuation, which would have seen tax concessions reduced on super funds earning over $100,000 per year. It also cancelled the Low Income Super Contribution (LISC) – a policy that refunds the 15% tax on super contributions for workers earning less than $37,000 a year.

The former Labor Government’s superannuation policies were designed to improve the equity and sustainability of the system. Instead, under the Coalition’s policy, all employees that contribute compulsorily into super went back to paying a flat 15% contributions tax, which effectively means that the amount of concessions received increases as one moves up the income scale (see below table).

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For example, someone that earns in excess of $180,000 per year receives a 30% tax concession for each dollar that they contribute into super (i.e. 45% marginal tax rate less the 15% flat tax). At the other end of the scale, someone that earns less than $18,200 per year in effect gets penalised 15% for each dollar that they contribute into super.

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, the Treasury estimated that the top 5% of contributors would receive 20.3% of contribution concessions, with higher income earners also receiving the lion’s share of the earnings tax concessions.

Given that the main rationale behind superannuation is to both adequately provide for retirement and take pressure off the Aged Pension, the 15% flat tax system is inherently flawed and designed to fail. By providing massive taxation concessions to those on the highest incomes, the Budget loses billions of dollars of forgone revenue. At the same time, the super system is unlikely to relieve pressure on the aged pension, since those that are most likely to need it – lower and middle income earners – receive minimal (if any) concessions, which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.

But rather than winding back entitlements, the Coalition’s approach to super has exacerbated inequities in the system, ensuring that generous concessions flow to those on higher income earners, whilst lower income earners receive next to no tax benefit. It’s a rort that must be stopped, either by eliminating superannuation concessions altogether, or as I have argued previously, providing all tax payers with the same concession (e.g. 15%).

A related issue is that superannuation can be accessed well before the Aged Pension – a problem that will be exacerbated if the Pension access age is pushed-out to 70, but the superannuation access age remains the same. As the Australian Institute correctly notes in the article above, “if the purpose of super is to take pressure off the age pension, why are we letting people get their hands on it15 years earlier?”, disproportionately benefiting the wealthy in the process.

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That said, I do not agree with The Australia Institute’s proposed implementation of a universal non-means tested pension. The means test is on the existing Aged Pension is already too weak, excluding entirely not just one’s principle place of residence, but also allowing those with significant financial assets to receive welfare. As noted by Peter Martin last week, already 70% to 80% of the mature aged population passes the assets test and receives at least a part pension, as well as other taxpayer-funded benefits:

Included are couples earning $70,000 (untaxed if it’s from super) with up to $1.1 million in assets, plus their “family home” which they are allowed to expand or upgrade knowing it won’t be caught in the assets test.

Anyone who fails this test is by definition well off. But the well off aren’t left out. About half of them get the seniors supplement and Commonwealth health card, which entitles them to cheaper prescriptions. There’s no assets test, millionaires can get it. There is an income test, but it comes with a hole. Singles with more than $50,000 and couples with more than $80,000 in taxable income can’t get the card. But income from superannuation isn’t taxable, so it isn’t counted. It is possible to receive $200,000 a year from super (plus $50,000 in other income) and still get the card. Almost certainly an unintended consequence, it makes a joke of the tight rules that apply to younger Australians who actually need help.

Meanwhile, under current arrangements, the cost of the Age Pension will continue to rise from $39.5 billion a year to a forecast $72 billion in ten years’ time, with the funds having to come from significantly higher taxes on the working-aged population, and/or major cutbacks to other government programs.

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A holistic approach to retiree entitlements would, therefore, see overall superannuation concessions slashed, particularly for those on higher incomes, along with an increase in the superannuation access age, as well as tighter means testing of the Aged Pension, so that benefits only flow to those in genuine need.

Some obvious policy responses aimed at improving the equity and sustainability of the Budget include the following retirement reforms, along with cutting back other egregious tax concessions like negative gearing and poorly targeted programs like Abbott’s Paid Parental Leave:

  • Increasing the eligibility age for the Aged Pension to 70 years (from 65 currently and 67 from 2023);
  • Increasing the access age to superannuation (from 55 years currently, increasing to 60) so that it more closely matches the pension access age;
  • Reducing the ability to draw superannuation as a lump-sum;
  • Providing everyone with the same superannuation concession (e.g. 15%); and
  • Including one’s owner-occupied home (or part thereof) in the assets test for the Aged Pension and/or reducing the eligibility thresholds for income and financial assets, so that welfare flows only to those in genuine need.
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Genuine entitlement reform is about shared sacrifice, but with those deriving the greatest benefits and most able to look after themselves bearing the largest cuts.

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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.