Budget reform focus shifts to superannuation

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By Leith van Onselen

With the Budget lifting the Aged Pension access age to 70 by 2035, affecting those born after 1965, debate has now shifted to the efficacy of Australia’s superannuation system, which allows retirees born before 1 July 1960 to access their super at age 55, and those born after 30 June 1964 to access their super at 60.

The Commission of Audit Report, released earlier this month, recommended that a five year gap be maintained between the access age for superannuation and the Aged Pension, so that it would ultimately settle at 65.

Treasury Secretary, Dr Martin Parkinson, seems to agree, noting in yesterday’s post-Budget lunch that the superannuation access age would most certainly have to rise:

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”Without putting any numbers on what the preservation age should be or when it should change, I think it’s inevitable that pressure will build for changes in that area’.

A key concern with Australia’s superannuation system is that it allows someone to retire early, withdraw their super as a lump sum, blow it on housing, a new car, holidays, or other consumption, and then fall back on the Aged Pension.

Indeed, the latest Retirement and Retirement Intentions survey by the Australian Bureau of Statistics found that “of those who had made contributions, 55% had received all or part of their superannuation funds as a lump sum payment”. It also found that “many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home… or to buy or pay off a motor vehicle”. 

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As noted by Grattan Institute CEO, John Daley today:

“Every dollar you draw from super before you hit the pension age does nothing to help reduce the government’s pension liabilities”.

It is a problem that would only be exacerbated if the Pension access age is pushed-out to 70, but the superannuation access age remains the same.

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Of course, early access to superannuation wouldn’t be such a problem if people were not also receiving such big concessions to invest into super. But they are, and this is costing the Budget tens-of-billions of dollars in income tax foregone.

To make matters even worse, superannuation concessions are very poorly targeted, with higher income earners receiving the lion’s share of concessions when they contribute to super, whereas lower income earners actually incur a tax penalty (see below table).

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As John Hewson noted recently:

As a result of this poorly targeted tax concession, 36.1 per cent of the benefits go to the top 10 per cent of income earners, whereas the bottom 10 per cent don’t receive any assistance at all, but are instead penalised…

Treasury estimates that from the combined support of superannuation tax concessions and the age pension, most people (about 80 per cent) receive around $270,000 support over their lifetime. In contrast, the top 1 per cent of male income earners receives about $520,000 support over their lifetime, because of significant tax concessions to high-income earners.

So, by providing massive taxation concessions to those on the highest incomes, the Budget is losing billions of dollars of forgone revenue. The super system is also failing to relieve pressure on the Aged Pension because those that are most likely to need it – lower and middle income earners – receive minimal concessions (or get penalised), which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.

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Indeed, addressing the inequitable structure of superannuation concessions is arguably an even more pressing issue than raising the access age, a view shared by Industry Super Australia CEO, David Whiteley, who today notes:

“There’s 3.5 million Australians earning less than $35,000 that don’t get tax concessions on their super contributions. So the first thing you do is fix that. The second thing you do, is not increase the super guarantee.”

Any credible discussion about restoring the Budget back to long-term health, and improving equity, must place reform of the superannuation system front-and-centre, starting with:

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  • Providing everyone with the same superannuation concession (e.g. 15%), rather than skewing concessions towards the wealthy;
  • Increasing the access age to superannuation (from 55/60 years currently), so that it more closely matches the pension access age; and
  • Reducing the ability to draw superannuation as a lump-sum, to ensure that balances are not exhausted too quickly.

As noted recently by The AFR’s David Bassanese, Australia’s ineffective and poorly targeted superannuation system is a major and growing problem and “politicians have little choice but to chip away at these grotesque failings over time”.

[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.