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).
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.