Labor’s super changes part fix for Costello mess

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By Leith van Onselen

The Australian Labor Party (ALP) has vowed that it will reform Australia’s superannuation system if it wins government, proposing two measures that would reduce tax concessions received by high income earners.

Under the ALP’s plan, those aged over 60, who currently pay zero tax on superannuation earnings, would be required to pay 15% tax on earnings above $75,000 per annum from 1 July 2017, provided their superannuation account balances are also above $1.5 million. Labor expects around 60,000 retirees to be impacted by the change.

The ALP would also lower the current high income superannuation threshold, which requires a superannuation contributions tax of 30% instead of the standard 15%, from $300,000 currently to $250,000, and is estimated to affect around 110,000 people.

According to the ALP’s estimates, the combined measures would save the Budget around $14 billion over a decade.

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Let me state from the outset how happy I am to see the ALP vowing to address Australia’s unsustainable and inequitable superannuation system. As shown yesterday by the ABC’s Fact Check, Australia’s superannuation system has become a mechanism for the wealthy to avoid paying tax rather than a genuine retirement scheme, with the lion’s share of superannuation concessions flowing to the highest income earners, with lower income earners severely disadvantaged by the system:

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…the top 10 per cent of income earners reap about 38 per cent of the government support provided via superannuation tax concessions.

This money would otherwise be paid in tax if the superannuation concessions weren’t available.

The chart shows that the bottom 10 per cent of income earners are actually disadvantaged by paying 15 per cent tax on their superannuation, because their overall tax rate is below 15 per cent…

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Moreover, even when the Aged Pension is taken into account, Australia’s highest income earners are receiving the lion’s share of taxpayer support from the retirement system:

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So clearly something needs to be done to reform the superannuation system to make it both more equitable and sustainable, particularly given that superannuation concessions are one of the biggest and fastest growing areas of budget expenditure.

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Indeed, tax expenditures on superannuation concessions were estimated by Treasury to cost a total of $29,700 million in revenue foregone in 2014-15 and were also forecast in the December Mid-Year Economic and Fiscal Outlook to grow by a whopping 10.8% per annum between 2014-15 and 2017-18 – far quicker than the growth of the broader economy – creating ever growing headaches for the Budget.

That said, one wonders why the ALP has not resorted to fully unwinding the erroneous reforms by former Treasurer, Peter Costello, which dramatically increased the super concessions received by older Australians and higher income earners?

In the 2006 Budget, Costello reduced the tax rate on superannuation earnings for those aged over 60 from 15% to zero – a move dubbed by Saul Eslake as “one of the worst taxation policy decisions of the past 20 years”. So while younger Australians must pay full income tax on their wages/salary earnings and 15% tax on their superannuation earnings, older Australians got to pay absolutely nothing. Costello’s decision was one of the biggest inter-generational theft jobs ever and is part of the reason why the superannuation system is so unsustainable and inequitable, especially in light of an ageing population and declining share of workers.

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In short, Labor should have sought to unwind Costello’s over-60s superannuation bribe in full, rather than only for earnings over $75,000 and for balances of $1.5 million or more.

Labor’s minor tweak to the high income superannuation surcharge also does not go far enough to unwind Costello’s Budget vandalism, which in 2005 eliminated the 15% contributions surcharge on high income earners. Under Labor’s proposal, the superannuation concession system on contributions would go from this:

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To this:

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Thus, we would still be left in a situation whereby many high income earners – i.e. those earning between $80,000 and $250,000 – continue to receive the biggest superannuation concessions, whereas those on the lower end of the income scale – i.e. earning less than $37,000 – receive few concessions or are penalised for contributing to superannuation.

Don’t get me wrong, Labor’s reform proposals are very welcome, and will hopefully trigger a broader debate and counter-proposals by the other parties. However, they do not go far enough to unwind Peter Costello’s Budget vandalism, which greatly worsened the equity and sustainability of the superannuation system, undermined the progressiveness of the tax system, and blew major holes in the Australian Budget.

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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.