Super industry talks its book on reform

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By Leith van Onselen

The self-managed superannuation fund (SMSF) industry has hit back at calls to tackle generous superannuation tax breaks for the wealthy, disputing Treasury estimates that the cost to the annual budget is some $30 billion. From The Canberra Times:

“Until we get a better measurement to understand the real economic costs and benefits of super tax concessions they should not be targeted as a way of meeting the national deficit,” SMSF Association chief executive Andrea Slattery said.

“It is often quoted that the cost to the annual budget of super tax concessions is $32 billion, but the way that expenditure statement is calculated is 100 years old and out of date”…

In its submission to the tax inquiry the SMSF Association made a preliminary estimate that the real cost of the current tax concessions on super was more likely $15 billion a year at worst, while at best the regime could add $5 billion a year to revenue…

SMSF Owners’ Alliance executive director Duncan Fairweather also called on the government not to crack down on super tax breaks for the rich ahead of the next election.

“Hanging an argument for a tax change on the dodgy number $32 billion costing, a number that not even the Treasury will stand by, would be poor policy making,” he said.

Mr Fairweather also said that claims super tax concessions were unfairly skewed toward the wealthy “don’t bear scrutiny”.

The ‘hoax’ figures quoted by the industry are illustrated in the table below:

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As you can see, eliminating the concessional taxation of employer superannuation contributions, whereby super contributions are taxed at 15% rather than at the employees marginal tax rate, was forecast to cost the Budget a whopping $16,300 in 2014-15.

Similarly, the concessional taxation of superannuation entity earnings – whereby earnings within super funds are taxed at just 15% before the age of 60 and 0% afterwards – was forecast by the Treasury to cost the Budget $13,400 million in 2014-15.

To add insult to injury, superannuation concessions were also forecast in last December’s Mid-Year Economic and Fiscal Outlook to grow by a whopping 10.8% per annum between 2014-15 and 2017-18 – well in excess of the growth in the economy.

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Essentially, what the SMSF industry is arguing is that Treasury’s tax expenditures measurement is wrong, and that it is incorrect to simply add the costs of the two types of super tax concessions together (i.e. C3 and C6 above).

In one sense, they are correct: if employer contributions were taxed more heavily then there would be less in the super funds to create earnings that would be taxed.

However, these complexities of measurement are besides the point. The fact is, superannuation concessions are costing the Budget many billions of dollars in revenue foregone. They are also growing rapidly. Even if their true cost was half the amount estimated by Treasury above, their cost to the Budget would still be a ginormous $15 billion this year, rising to some $20 billion in 2017-18!

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Indeed, the Parliamentary Budget Office has estimated that replacing the current flat superannuation tax rate of 15% with a progressive system that is closely based on a person’s marginal income tax rate would generate $10.3 billion in budget savings over the first three years, whilst still ensuring that superannuation remains a tax-effective investment for everyone. How is such reform not worthwhile?

The SMSF industry also needs to explain why it is efficient and fair that the amount of superannuation tax concession received grows as one moves up the income tax scale. For example, a very low income earner earning up to $18,200 effectively pays 15% for their superannuation concession, whereas a high income earner earning up to $300,000 enjoys a 30% tax benefit (see below table).

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The Murray Inquiry into Australia’s financial system agreed that the system makes little sense, noting that “the majority of superannuation tax concessions accrue to the top 20 per cent of income earners (Chart 4.3). These individuals are likely to have saved sufficiently for their retirement, even in the absence of compulsory superannuation or tax concessions”. 

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In a similar vein, the SMSF industry needs to explain why it is appropriate for those aged over 60 to pay zero tax on superannuation earnings, while workers aged under 60 must pay full tax? Take, for example, a retiree aged 61 that earns $100,000 through superannuation earnings. They currently pay zero tax. Compare this against someone of working age that earns $100,000 in labour income, who must pay around $25,000 in income taxes. How is this fair? And how does applying zero taxes on one group (over 60s) not automatically raise the tax burden on the other (workers)?

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The bottom line is that superannuation concessions in their current form are both highly inequitable and inefficient, costing the Federal Budget many billions in foregone revenue whilst reducing the progressiveness of the tax system. They have increasingly become a mechanism for richer older people to avoid paying tax, rather than a genuine means for Australians to pay for their own retirement and avoid drawing on the Aged Pension.

As noted in this year’s inter-generational report, despite its massive and growing cost to the Budget, superannuation will do little to relieve pressures on the Aged Pension, with the proportion of Australians relying on the Aged Pension – either full or in part – not projected to decline by 2055 (my emphasis):

In 2013-14, around 70 per cent of people of Age Pension age were receiving the Age Pension. Of these, 60 per cent were in receipt of the full-rate pension. As Australia’s superannuation system matures, and compulsory contributions increase, many Australian workers will retire with much larger superannuation balances. The proportion of part-rate pensioners relative to full-rate pensioners is expected to increase. The proportion of retirees receiving any pension is not projected to decline.

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If the industry had any morals, it would be pushing for superannuation reform, in the interests of inter-generational equity and Budget sustainability, rather than muddying the waters with arguments about rubbery figures from Treasury, which are besides the point.

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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.