IGR unmasks failing retirement system

The Fourth Intergenerational Report (IGR), released yesterday, contained some interesting tid-bits which help to illustrate why Australia’s retirement system is failing, despite its massive (and growing) cost to taxpayers.

First, superannuation (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.

Anyone undertaking an objective analysis of the above statement would conclude that Australia’s superannuation system is seriously awry.

By the end of the IGR forecast period (2055), the compulsory superannuation system will be 62 years old, meaning workers entering retirement will have made a lifetime of contributions.

And yet despite the tens-of-billions of dollars worth of budgetary concessions provided to super each year, and their growing  financial burden (concessions are forecast to grow 10.8% per annum between 2014-15 and 2017-18 alone), the proportion of Australians relying an the Aged Pension – either full or in part – is not projected to decline!

Central to the problem is that concessions are very poorly targeted, with higher income earners receiving the lion’s share of concessions when they contribute to super, whereas lower income earners actually incur a tax penalty (see below table).

ScreenHunter_2985 Jun. 25 16.14

As such, the lion’s share of concessions have gone to those on the highest incomes (see next chart).

ScreenHunter_3316 Jul. 15 13.21

Obviously, by providing massive taxation concessions to those on the highest incomes, the Budget is losing many billions of dollars of forgone revenue each and every year. Meanwhile, super is failing to relieve pressure on the Aged Pension, since those that are most likely to need it – lower and middle income earners – receive minimal concessions (or get penalised), which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.

Then there is the problem is that superannuation can be accessed well before the Aged Pension (i.e. tax free at 60) – a problem that will be exacerbated if the Pension access age is pushed-out to 70, but the superannuation access age remains the same.

Adding insult to injury is that Australians are being gouged by excessive superannuation fees, which further hinders their ability to build up a retirement nest egg (see next chart).

ScreenHunter_3313 Jul. 15 13.06

One obvious solution is to provide everyone with the same superannuation concession (e.g. 15%), rather than skewing concessions towards the wealthy. This way, contributions would be lifted where it is most needed – for those at the lower end of the income scale – reducing pressures on the Aged Pension and reducing overall costs to the Budget.

The IGR also noted the following about the Aged Pension:

A pensioner can continue to receive some payment and the Pensioner Concession Card with assets (excluding their primary residence) up to $771,750 for single homeowners and $1,145,500 combined for couple homeowners. A single person who does not own a home can have assets up to $918,250 and a couple up to $1,292,000 combined and still receive a part pension. A single pensioner can also earn up to $1,868.60 per fortnight (approximately $48,580 per annum) in income and continue to receive a part pension, while a couple can earn up to $2,860 per fortnight combined (approximately $74,360 per annum).

For example:
• Kathleen and Steve are 68, own their home and have $1.1 million in superannuation, shares and bank accounts. They have no other income. They will receive a part-rate pension.
• Liam is 75 is single and has superannuation, an investment property and shares valued at $910,000. He does not own a home and has no other income. He also receives a part-rate pension.
• Lillian is 85, single and lives in her own home worth $1.5 million. She has bank accounts valued at $50,000 but has no other income. Lillian receives a full-rate pension.

Again, it is hard to deny that the Aged Pension is very poorly targeted, providing far too much assistance to those with significant assets – both financial and non-financial (e.g. owner-occupied housing).

Given the Aged Pension is the fastest growing area of welfare expenditure, and the proportion of workers supporting retirees is projected to shrink, it makes good budgetary sense to tighten the means test on the Aged Pension to ensure that only those in genuine need receive it.

Otherwise, richer older Australians will continue to receive a free taxpayer ride, while poorer segments of society (and the young, in particular) are required to shoulder the burden of Budget cuts.

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Leith van Onselen
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  1. What does this picture look like without the inflated house prices? Doesn’t everything just fall apart if housing is not part of the equation?

  2. Days gone by the oldies that contributed so much. Aka war vets you didn’t mind they had a free ride. They deserved it. These days aka the boomers. Had a free ride their whole life… They do not deserve it. It’s only time until the wind changes where people will not be afraid to attack this bunch.

    • ” These days AKA the boomers. Had a free ride their whole life..”

      With all due respect Byron, these arguments are so [email protected]#!ing annoying it isn’t funny.

      You didn’t live in that time so how do you reach this conclusion? As a ‘boomer’ (61 yo) I grew up with SFA, worked part time after school and scrimped / saved for most things in life.

      My children, on the other hand, wanted for nothing and had everything I didn’t have!

      Gen X / Y /??? have lived through arguably the greatest period of consumerism of all time. Boomers gave their kids everything they didn’t have themselves. We dressed ourselves from Target while our kids ‘wouldn’t be seen dead’ in anything other than overpriced Billabong / Nike / whatever.

      Unfortunately we’ve all been duped into believing the lifestyle we’ve enjoyed will last forever. I think the boomers will adjust better to the new reality.

  3. Just interested, Leith. You always focus on the contributions tax. (Which is fine, I’m not saying you shouldn’t.) I find that in my own situation that’s a pretty trivial part of the puzzle. Our super often goes up in a year by multiples of our earned income, and this is untaxed, whereas our earned income is pretty heavily taxed. What’s your view on the tax-free status of earnings within the fund and the tax-free status of income coming out after 60?

  4. flyingfoxMEMBER

    I think we also need to change the mindset of Australians. We seem to want to and go out of our way to reduce tax and try and get something from the government.

    Even if the terms of the pension were reduced, we will still get people that will try and get under the new bar by bequeathing estates before retirement etc.

    • Yes, I notice that this culture of doing what ever just to avoid taxes is well ingraved in every Australian. And then eveyone wants free education and age pension. But even the very low wage paid with investment property, are planning to use their superannuation for paying the mortgage and then living on age pansion. Everyone I know has this same intention.
      But I know that when I get to pansion age, the age pension will be almost gone, so I am following the old tradition of saving for retirement.

  5. Leith i take your point on this – but if you look at chart 4.3 it is effectively the inverse of a chart that shows the proportion of income tax paid by the income deciles.

    Of course a flat tax in super will benefit those who earn the highest amount most, but that doesn’t mean it’s wrong.

    Surely capping non-concessional contributions at a lower rate would be better

    Also – it’s worth pointing that amending tax law within super would impose a burden on businesses – or on the super funds themselves

    Right now – an employer just pays the gross 9.5%, and the superfund knows 15% goes to tax

    Imagine either the employer having to adjust this for every employee based on tax rates, or the superfund where the money goes having to allow for it.

    There are no shortage of problems with Super – i share your view on many on them make no mistake about that, but the last thing we need to improve the finances of this country is more complexity in taxation


    • BuyHighSellLow

      Actually it would not be overly difficult for the super fund. Because the contributions are 9.5%, the superannuation fund knows the individuals salary by default. It would be a very simple formula to work out the tax liability if it was progressive rates. It would also be quiet easy to audit

    • flyingfoxMEMBER

      We can send probes to the other side of the solar system, I think we can work it out relatively easily.

    • Of course a flat tax in super will benefit those who earn the highest amount most, but that doesn’t mean it’s wrong.

      It’s a flat tax. It’s regressive, and in fact massively regressive in this case when compared with income tax.

      So yes, that does mean it’s wrong.

      The rest of your spiel about complexity is just nonsense. It would be trivial to calculate a marginal tax rate on superannuation, given the superannuation is directly proportional to your salary. A couple of formulas in an excel spreadsheet can do it, so I think the billion dollar super funds and ATO can do it.

    • kinetic ritual

      Complete furphy about ‘complexity’ imposing burdens on business. Most accounting/payroll systems can already deal with differential rates.

      As for there being nothing wrong with a highly regressive tax that benefits the wealthy at a time when the government is looking to cut health and education expenditure … WTF ?


    “Otherwise, richer older Australians will continue to receive a free taxpayer ride, while poorer segments of society (and the young, in particular) are required to shoulder the burden of Budget cuts.

    Seniors. Time to pick up your end of the log!

    One of Cliff’s ‘little known facts-

    Down Vic way, the stamp duty concession is another ‘nice’ perk for the seniors. If they do ‘downtrade,’ the out of pocket savings are considerable.
    On a $400k buy, the concession available drives a $16,370 duty down to $5645. And, those savings will likely be spent near the Rhine, Mekong, Danube, Thames or Hudson rivers. Considering their extraordinary house price lifts enjoyed already, this is just 360 wrong. Another fine example where wildly distorted RE prices and the damage they do swing like a wrecking ball.

  7. If taxation from flows of income are insufficient at the Commonwealth level then tax the stock. From yesterday’s intergen report, at the end of 2013-14, total superannuation assets were $1.84 trillion, around 116 per cent of GDP. A progressive marginal tax on the stock would only need to average circa 3.5% for the Cth to break even.