The Australian Council of Social Service (ACOSS) has released its submission to the Government’s retirement income review, which charts a fairer path for retirement policy by calling for “structural reform of inefficient tax breaks for superannuation to improve retirement incomes for the majority while helping to fund future growing needs in health, aged care and social security as the population ages”.
ACOSS claims that “too much is spent supporting the retirement incomes of a well-off minority, and too little on income support and basic services for all who need them”. In particular, there is “a serious imbalance in the federal government’s support for retirement, with an estimated $30 billion ‘spent’ each year on inefficient tax concessions for super”:
We need a comprehensive Retirement Incomes Review, to settle the core purpose of superannuation, including the minimum adequate income level which should receive public support, and to design the changes we need to deliver on this goal…
With the ballooning costs of tax expenditures, the need for structural reform of superannuation is compelling. At the same time, health funding to the States is about to be cut by $10 billion a year and those older people who are struggling the most – those on Newstart Allowance and those who rent privately – get too little help…
Generous tax breaks come at a high cost and are skewed overwhelmingly towards people on higher incomes. For instance, a person on the top marginal tax rate saves five times as much per dollar invested in super as one on the lowest rate.
Half the value of these tax breaks goes to the top 20% of taxpayers. These concessions should be replaced by a simple 20% rebate for contributions made to superannuation from all sources, as the Henry Report recommended.
In the retirement phase, for too many, superannuation has become a tax avoidance and succession planning scheme rather than a retirement income system. This is inequitable, costly to the budget and bad for the economy, with our need to drive investment into more productive economic activity.
High income earners are ‘churning’ their income and assets through their super accounts to reduce their tax rate to 15% or zero… The tax threshold for an older couple is $58,000 and super fund earnings and benefits are tax free on top of that… only one in five people in that age group pays any income tax… This is not sustainable if governments are to fund health and aged care over the next 20 years.
The fairest way to help restore revenue levels needed for future health and aged care needs includes removing tax shelters so that people who can afford to pay income tax – regardless of age – do so on an equitable basis”.
ACOSS offers several sensible options for reform that would significantly strengthen the Budget to fund essential services and improve equity, namely:
- Reforming superannuation tax arrangements. ACOSS argues correctly that the 15% flat tax on superannuation contributions mean that people on the highest tax rate usually receive five times the benefit as people on the lowest tax rate, per dollar contributed by employers. ACOSS recommends that tax arrangements for both compulsory and voluntary contributions should be fully reset, in a revenue-neutral way, based on the proposals in the Henry Tax Review, namely applying a simple 20% rebate for contributions made to superannuation from all sources.
- Removing the exemption for superannuation fund earnings after retirement, thus extending the 15% tax rate to fund earnings in that stage (but not to super benefits, which are tax-free). ACOSS suggests this could be offset by a rebate for people below the tax-free threshold.
- Extending the 2% Medicare Levy to incomes sheltered from tax by these and other arrangements, thus extending the existing 2% Levy to income that is currently sheltered such as the 50% of capital gains that are not taxed. ACOSS argues this is a first step towards curbing inefficient tax shelters in the tax system generally.
ACOSS also argues that social security support for people struggling to get a job (including older people) is inadequate. In particular, the $37 a day Newstart Allowance (which 1 in 7 social security recipients aged 45-65 now relies on) is too low and should be increased for all recipients, regardless of age. The same can be said for the $64 a week private rental subsidy, Rent Assistance, which is well below housing costs for the 1 in 10 Age Pension recipients who rent privately.
Overall, I can’t fault ACOSS’ reasoning, which would help improve the sustainability of the Budget whilst also improving equity.
After all, it is the myriad of inequitable and inefficient tax concessions that are causing the most harm to the Budget. It, therefore, makes most sense to target these areas first, rather than cutting support to the young and vulnerable, which was the Coalition’s approach in last year’s Budget.
The Abbott Government would do well to take ACOSS’ recommendations on board.
