Super changes to cost low income earners $27k

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By Leith van Onselen

While Robert Gottliebsen celebrates yesterday’s win for wealthy retirees, details have emerged about the cost of the Government’s super changes on lower income Australians.

As explained yesterday, the new Coalition Government jettisoned the former Labor Government’s planned changes to superannuation, which would have seen tax concessions reduced on super funds earning over $100,000 per year. It also cancelled the Low Income Super Contribution (LISC) – a policy that refunds the 15% tax on super contributions for workers earning less than $37,000 a year.

The former Labor Government’s superannuation policies were designed to improve the equity and sustainability of the system. Under the current system, all employees that contribute compulsorily into super pay a flat 15% contributions tax, which effectively means that the amount of concessions received increases as one moves up the income scale (see below table).

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For example, someone that earns in excess of $180,000 per year receives a 30% tax concession for each dollar that they contribute into super (i.e. 45% marginal tax rate less the 15% flat tax). At the other end of the scale, someone that earns less than $18,200 per year in effect gets penalised 15% for each dollar that they contribute into super.

Given that the main idea behind superannuation is to both adequately provide for retirement and take pressure off the aged pension, the current system is inherently flawed and designed to fail. By providing massive taxation concessions to those on the highest incomes, the Budget loses billions of dollars of forgone revenue. At the same time, the super system is unlikely to relieve pressure on the aged pension, since those that are most likely to need it – lower income and middle earners – receive minimal (if any) concessions, which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.

Today, The Australian has published analysis of the Coalition’s super changes, which estimates that the abandonment of the LISC will cost 3.6 million workers up to $27,000 each in lost retirement earnings:

Industry Super Australia chief executive David Whiteley said removing the low-income contribution would undermine the integrity of the system by increasing the tax burden on those earning less than $37,000.
“There’s a moral imperative to make sure that just because you’re on a low income you’re not going to pay more tax on your super,” Mr Whiteley said…

Nearly one in three working Australians would pay higher taxes on their super through the removal of the LISC and their retirement nest eggs would be $27,000 lower on average.

“The maximum impact for a low-income earner from the loss of the LISC is a 15 per cent cut in their super accumulation,” Mr Whiteley said.

The sustainability of Australia’s superannuation system will worsen as the population ages, the number of retirees balloons, and the working aged population shrinks. What is needed is root-and-branch reform of the system, aimed at both lowering and sharing concessions across the income scale, and reducing pressures on the pension system. Instead, the Coalition’s announced changes have worsened the sustainability of superannuation, and are therefore retrograde policy.

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Unconventional Economist


  1. Strewth! I reckon we should just tax all businesses to death so workers can have more money for retirement. There is no limit.

    Edit: Again here we have an industry spruiker quoted as the expert on the subject. Why shouldn’t RE agents get free shots here too?

    • As I understand it, the former government was going tax the earnings of super funds that earned over $100K p.a.

      Not sure how the LISC was going to work. I’m guessing the employer still pays the 15% on the contribution and the employee gets it back.

      In neither case was the tax on businesses going to be increased.

      • I believe I missed the point of the post. So my apologies for that.
        However re contributions I think everyone has given up pretending that this was ever paid by employees and certainly even Labor did not pretend that teh increase from 9 to 15% was going to come from anything other than employers. That was also certainly their advertising.

    • It always amuses me when people view superannuation as a business tax. In reality businesses hire people based on the total cost of employment. High superannuation ultimately means lower wages.

      • No Blind Freddy We hire people based on certain responsibilities and rules applying at the time. When the laws are changed, as in teh case of Super, it’s straight baloney to pretend that the increased costs of both the wages and the compliance are paid for by anyone else other than the business.
        Amuse you it might but you probably don’t pay a single wage to anyone and feel no responsibility to anyone to keep them employed.

      • You make it sound like companies have been dumped with a massive overnight burden. Initial implementation included 3% wage rise sacrifice which highlights the fallacy of it being an “employer contribution”.

        It always comes down to total cost of employment which makes superannuation no different to other indirect taxes such as payroll tax. I am surprised they didn’t try to disguise the medicare levy as a a gift to employees.

  2. This is a sensible preservation of the conservative status quo, whereby low income earners have a true incentive to improve their financial position, and the compact with high income earners and job creators to maintain their status is kept in tact. What Labor was proposing, as usual, was the worst kind of socialist wealth re-distribution, driven by base envy. It made no more sense than a private frequent flier scheme re-allocating the points of its Platinum status members to infrequent economy class travellers. At the end of the day, people should be grateful that they are allowed to board the aircraft at all. It does you no good to resent those passengers in front of the curtains. Sit down, shut up, and eat your peanuts.

    • ^
      This right is the rhetoric that is endemic within the established class of middle-aged white guys that rule this country. They honestly, truly, believe that this is altruism and beneficial to lower income people. Seriously, -15% concession for low incomes vs. +30% for >$180k’s.. That provides a good incentive?

      Please, a little bit of pain can often provide positive incentive but this is nothing more than a foot on the proverbial throat.

      The effective marginal tax rates for people on low incomes are already distorted beyond comprehension. This is doing nothing to fix it. It just goes to show that Coalition governments are intellectual featherweights when it comes to reform. Treasury would be scratching their heads at this mob.

    • In other words…..”let them eat cake”, eh?

      Remind me how well that one ended again?

      (Yes, I know the quoted phrase was probably never uttered by Marie Antoinette, but it is entirely representative of the prevailing attitude of the elite in 1789 France)

  3. Taxing the super of the rich will only encourage further tax avoidance. Multiple super accounts would be set up in the name of their spouses, kids, family trusts etc in order to avoid paying this tax. The only beneficiaries of this policy would be accountants and I think the govt administration costs would largely negate the revenue.

    • Ah – the its better to do nothing argument. Was only a matter of time until someone trotted this out.

  4. Or we could stop input taxing super contributions completely and undo the implicit 2.5% pay cut forced on all private sector workers between now and 2016.

    Employers do *not* pay super in any meaningful sense, the tax incidence of mandatory direct deductions such as income tax, social welfare or super falls wholly upon the employee.

    Win, win all round.

  5. This possibly has less real effect on low income earners than the changes to LITO implemented by the previous government. Low income earners are not likely to secure enough super in any case and I wonder if for many real money in real time when really needed is of more benefit?

    • You’re defending the indefensible by suggesting low income earners shouldn’t even bother trying to save for retirement?

      Extraordinary. How do sleep?

      • Low income earners will require state assistance in retirement regardless. My guess is most would prefer real money in real time to cover day to day cost of living pressures which impact in the here and now. Some spurious figure quoted xxx years into the future under a super system that governments love to tinker with and is subject to any future financial dislocation seems a bit of a raw deal. They need the money now.

      • Never thought I’d say this, but I agree with 3d1k – most low-income earners would prefer to have (and would benefit from) having their super contributions as cash in their hands, right now. I say this as someone who worked in the superannuation industry until quite recently, and spoke to many low-income account holders.

        However, that is irrelevant to the issue at hand, which is the gross unfairness of employees earning below $37,000pa having to pay more than their marginal tax rate for wages on their super contributions. The LISC was an overdue policy to fix an inequitable state of affairs. The Coalition should be lambasted for dumping it….and Labor should be condemned for taking so long to have implemented it in the first place, given that LISC only started on July 1 2012.

    • The logic is inescapable:

      If low income earners dont have enough of their own money for retirement, they will need State-financed pensions.

      Who pays for the latter burden, in the future, if the former isnt encouraged now in the present?

      It certainly wont be high income earners (maybe a few who dont have astroturfers on the payroll will cough up more) – it will be future middle and lower income earners.

      Well done old bean:

    • General Disarray

      I didn’t think your credibility could take much more of a hit but it appears there is no limit to the beating you are willing to give it.

      Give it a rest, man. It’s on life support.

  6. It really doesn’t matter. The system is not sustainable now, and will become sustainable, and the odds of the average worker being able to save enough for their retirement is zilch. As the ‘Baby Boomer’ retires in the next 20 years, their pension and medical cost will blow out the budget deficit. To pay for it, the superannuation funds of the younger generation will be looted.

    • Jumping jack flash

      “It really doesn’t matter” +1.

      But it could be worse, the younger generation could actually borrow the cash to buy the boomers out when they liquidate their assets for their “self funded” retirements.

      read: retirements funded by younger generation’s debt.

      Then if the status quo is maintained, the boomers spend most of their retirement cash on imported items and overseas holidays, and in doing so the younger generation lose their ability to repay the debt because all that borrowed cash heads overseas instead of being used as wages for the younger generations

      A marvelous system.

  7. Government of the wealthy, by the wealthy, for the wealthy.

    And, please, do not trot out that tired old argument about how we in Australia are the “wealthy” of the world. I’ve heard that so many times I’ll break someone’s jaw the next time. Yes, by all means, appreciate what we have but do not tell me that what we have is egalitarian democracy and because we’re better off compared to most other societies we should “shut up and eat our peanuts” – why? Because some joker with delusions of grandeur says so? It is simply the extension of the rule of the elite under a “democratic” smokescreen.

    No-one’s advocating a class war or “kill the rich” or anything of that sort. Make it fair and equitable. That’s all.

    But, who’s listening?

    Welcome to the brave new world.

  8. See, this is why Russell Brand is calling for a ‘revolution’. Entrenched advantage, where capital is taxed at a lower rate than labour across the western world, is bringing this to a head. Negative gearing, tax breaks for the rich…it has to stop or else a death spiral of zero consumer spending growth will drive the whole ship onto the rocks. Sure, richies might take an isolationist view (pull up the life ropes….I’m OK), but it’s give and take in equal parts or the straw man comes apart at the seams. Wake up suckers.