Today, the Pascometer has published an interesting article outlining a proposal by the Association of Super Funds of Australia (ASFA) to tax superannuation lump sum withdrawals in order to prevent retirees from running down their retirement savings. From Business Day:
The superannuation industry’s peak body wants a 15 per cent tax applied to lump sum superannuation withdrawals, rising to 30 per cent for withdrawals over a certain, yet to be defined, limit…
ASFA argues that it is necessary to encourage individuals not to run their retirement savings.
“The primary purpose of superannuation is to provide financial security in retirement. This purpose is not currently being achieved with any certainty as there are many potential leakages that are a cost to the system’s integrity and the taxation concessions provided.”
ASFA says the leakages include both using superannuation benefits too slowly for estate planning purposes and using them too quickly. In the latter case, the result is having insufficient protection against the financial consequences of living a long time or longer than most other people and “excessively running down retirement savings when they become available to either fund excessive consumption and/or debts that were built up in the lead up to retirement in the knowledge that a lump sum would be available”…
…the ratio of workers to retirees today is five to one, but it’s projected to be just 2.7 to one in 2050; the percentage of Australians aged over 65 rises from 13 per cent today to 22 per cent; the life expectancy of men and women today is 86 and 89 respectively but that will be 91 and 93 in 2050; the cost of healthcare as a percentage of gross domestic product will rise from 4 per cent today to 7.1 per cent in 2050, the cost of the age pension rises from 2.7 per cent to 3.9 per cent and the cost of aged care rises from 0.8 per cent to 1.8 per cent.
The cynic in me would argue that ASFA’s proposal reeks of self-interest. By discouraging super balances from being withdrawn as lump sums, balances will remain higher for longer, therefore, allowing the superannuation industry to glean higher management fees.
That said, the proposal is also very good policy. One of the many flaws in the superannuation system is that it allows an individual to retire at 60, withdraw their super tax free as a lump sum, piss the money away on overseas trips and consumption, and then go on the aged pension from 65 years of age. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension. Put simply, it is a loop hole that must be closed, and taxing superannuation lump sums, whilst at the same time encouraging retirees to withdraw their savings as a annuity (instead of the pension), is a good step.
More broadly, the flat 15% tax on superannuation contributions should also be axed in favour of a flat 15% concession. Under the current 15% flat tax arrangement, the amount of super concessions rises as one moves up the income tax scale, resulting in a system whereby higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement. A flat 15% concession, by comparison, would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
