John Hewson: End the superannuation rort

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By Leith van Onselen

Former federal Liberal Party Leader, John Hewson, has written a well-argued piece in The AFR today, joining the chorus to wind-back superannuation concessions granted to high income earners:

It’s worth reconsidering concessions granted for super: they’re as costly as the age pension ($44.8 billion compared to $44.9 billion in age pension), but are growing more rapidly…

Treasury estimates that from the combined support of superannuation tax concessions and the age pension, most people (about 80 per cent) receive around $270,000 support over their lifetime. In contrast, the top 1 per cent of male income earners receives about $520,000 support over their lifetime, because of significant tax concessions to high-income earners.

Surely, we don’t believe that the top 1 per cent require that much incentive to adequately save for their retirement.

These tax concessions not only skew heavily towards high-income earners: low-income earners are actually penalised for saving (you read that right: penalised)…

As a result of this poorly targeted tax concession, 36.1 per cent of the benefits go to the top 10 per cent of income earners, whereas the bottom 10 per cent don’t receive any assistance at all, but are instead penalised.

The egregious nature of Australia’s superannuation concessions are highlighted by the below table, which shows how under the current 15% flat-tax system, low income earners are effective penalised for placing money into super, whereas high income earners receive the largest concessions:

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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.

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 and middle income 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.

The exclusion of the family home from the assets test for the aged pension and the ability to withdraw one’s super as a lump-sum (instead of an annuity) also creates an incentive for households to borrow to purchase an expensive home in the lead-up to retirement, retire at 60, withdraw their super tax-free as a lump sum, use the money to pay-off their mortgage or to fund 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.

In fact, the latest Retirement and Retirement Intentions survey by the Australian Bureau of Statistics found that “of those who had made contributions, 55% had received all or part of their superannuation funds as a lump sum payment”. It also found that “many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home… or to buy or pay off a motor vehicle”.

This is why I keep arguing for holistic reforms to Australia’s retirement system – both superannuation and the Aged Pension – to improve its integrity, fairness and sustainability, including:

  • Increasing the eligibility age for the Aged Pension to 70 years (from 65 currently and 67 from 2023);
  • Increasing the access age to superannuation (from 60 years currently) so that it more closely matches the pension access age;
  • Reducing the ability to draw superannuation as a lump-sum;
  • Providing everyone with the same superannuation concession (e.g. 15%); and
  • Including one’s owner-occupied home (or some part thereof) in the assets test for the Aged Pension and related benefits, and/or  reducing the eligibility thresholds for income and financial assets, so that welfare flows only to those in genuine need, rather than those well capable of taking care of themselves.

Irrespective, Australia’s ineffective and poorly targeted superannuation system is a major and growing problem, and desperately needs to be reformed.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Canada’s RRSP system functions quite well, contributions up to 18% of prior year earnings are tax deductible in the year of contribution, but all withdrawals are fully taxed at withdrawal.

    This gives savers a nice tax refund at the end of the year and also deters large lump sum withdrawals as they would be taxable at the full marginal rate.

  2. ceteris paribus

    There is now little doubt that superannuation, as it is presently structured, is a piece of rubbish as public policy.

    The fascinating thing is whether the Coalition will move on it under its slogan of ending welfare entitlement.

    Two reasons make me doubtful. First, the irate response any proposed change elicits from articulate and addicted consumers, who benefit. Second, and equally importantly, the Coalition’s familial links with the banks and the wealth industry. Think Brogden, Sinodinos etc.

    Only time will tell.

  3. John Hewson was a technocrat first, a politician second. He had the misfortune of coming up against the one person Labor possessed who could torpedo his ’93 campaign.

    It’s worth speculating though, on what might have happened if Hewson had beat Keating. For one, I think John Howard would have become just a failed footnote of Australian history. Most likely he would have left politics and we might have avoided the 11 years of middle-class-welfare gravy train we had from 96-2007.

    Despite what Keating said prior to that election, I find it very hard to see Labor’s Senators passing the GST in the form Hewson proposed during the campaign.
    So I think we would have seen a DD election in early 94 which the Libs would have probably still won.

  4. Couple of tiny things…

    1) Your table doesn’t take into account the medicare levy.

    2) The div 293 tax effectively raises the super concession to 30% if you earn adjusted income of over $300,000.

    3) The tax concession is only available on concessional contributions (i.e. – total tax saving per year is $7875 this year, increasing to $9450 next year (or $11025 next year for oldies) (plus future earnings at the concessional rate)

    4) current access to super age is 55 not 60. Its just that it’s tax free after 60.

    5) If the PPR is included in the asset test, you will force old people out of their homes they have lived in their whole lives because of capital appreciation, and subsequently disconnect them from their communities. (not saying it shouldn’t happen, just that it will have this result).

    That said, I’m all for a fairer system. The previous govts plan to tax income over a certain threshold made sense as it readjusted the tax concessions high account balances received back to the same as the aged pension.

    • 5) People keep on citing this possibility (and I note that danna does not endorse it per se). But that argument only applies to a subgroup within a much larger group that currently benefit from the exclusion. Someone who sells their family home and buys a more expensive luxury apartment also has their PPR excluded…why?

      It is a totally artificial “forced choice” argument.

      Surely the better answer is to target it better; say give a blanket exclusion for PPR only after the age of, say 75 (you should be able to cope with moving house at 65, especially if you already cannot afford it at that point without getting a welfare subsidy); or only once the house has been owned for more than 20 years (obvious risk of distortion – but there must be other possibilities); or only include it in part. Better targeting is the answer.

      “We must give free money to millionaires to give money to the impoverished” was never a good argument.

      • dumb_non_economist

        How is the cost of buying and selling going to be taken into account? If you downgrade from 1mil to say 750k you have just burnt 50k!

        If you reverse mortgage what are the traps there? I’ve read of people ending substantially out of pocket doing this in the US.

      • @d_n_e True, there are transaction costs in adjusting your circumstances to suit your situation.

        But while that is obviously a factor, in itself it should not be a reason to never act. You’re not dead yet! Ultimately it is a question of allocation between liquid funds and illiquid real estate.

        In light of those transaction costs you may want to keep the money in housing and if you do, that is fine; but I don’t see why the government should subsidise you for that choice, yet withdraw that subsidy if (for example) you instead invest it in shares in a biotech start up trying to cure cancer, or even if you just contribute to the economy & jobs by consuming whatever takes your fancy.

        Sure, a little old lady who is too old to contemplate change is a different story. But that is not a 65-70 year old (or even a little bit older) – you may not be able to work, but you can still be involved in the world and you are too young to just sit in your house with your memories at that age.

        The real travesty is that the current system of incentives literally punishes you for copping the transaction costs, withdrawing excess capital from your house and applying it to a more productive or useful (or ANY other) purpose.

        The only rationale is that shelter is a basic essential – but that doesn’t justify the current system of totally unlimited and untested expenditure on housing.

      • dumb_non_economist

        Liu,

        You basically force people to downsize and in the above situation you have just relieved them of 20% of their assets you have forced them to realise!! Hardly fair.

        Edit: I don’t disagree about the need to tackle this issue, but this needs to be accounted for.

    • Mark HeydonMEMBER

      I agree with those calling for PPR to be included in the assets test. To avoid the issue of pension aged people being forced to move out of their lifelong home, it should be quite simple to implement a HECS style scheme to claw back the over payment of pensions from the proceeds of sale of the PPR on death.

    • 2) Should have read “The div 293 tax effectively raises the super concession tax rate to 30% if you earn adjusted income of over $300,000”.

      A much easier way to count the PPR in any aged pension calculation would be to just allow an exempt portion, which would be much easier to administer. E.g. – First $800,000 of your PPR isn’t counted as an asset.

  5. Hewson: “It’s worth reconsidering concessions granted for super: they’re as costly as the age pension ($44.8 billion compared to $44.9 billion in age pension), but are growing more rapidly…”

    Don’t forget the compulsory super contributions themselves. These cost more than $60 billion per annum (also growing), have a deadweight cost equivalent to that of a payroll tax, and are spent chiefly on pumping up the values of existing assets.

    Compulsory super has not yet made a substantial dent in the pension bill. In the absence of compulsory super, the pension bill would be only slightly higher than the current $44.9 billion per annum.

    Thus, in our determination to contain the allegedly out-of-control pension bill, we have created a boondoggle that is manifestly more expensive and more out of control.

  6. Yes, this exactly. Thanks Gavin.

    Compulsory super is a nasty regressive tax which funnels money away from workers and into frequently unproductive zero sum ‘investments’.

    It should be killed of as soon as possible.

  7. Also, if you raised the access to super age to the access to aged pension age, you would have a lot of people (labour intensive trades etc.) not able to access their super but not able to work… end result – more people on other govt benefits. same with increasing the aged pension age – if people are unable to work it doesn’t matter to what age you push the eligibility for the aged pension, they will simply be moved from the aged pension to another govt benefit. While these ideas would have a negative effect on the lives of pensioners, both these actions would have a benefit to the budget bottom line, as the age pension is linked to male earnings so grows at a faster rate than other govt benefits.