Ken Henry backflips on super concessions

By Leith van Onselen

The Henry Tax Review, released in 2010 and chaired by former Australian Treasury Secretary, Ken Henry, acknowledged that current arrangements around superannuation concessions were inequitable and explicitly recommended making superannuation concessions more progressive:

The structure of the existing tax concessions is inequitable because high-income earners benefit much more from the superannuation tax concessions than low-income earners…

Based on the 2008–09 tax rates, around 1.2 million individuals do not receive a personal income tax benefit from their concessional superannuation contributions. An additional 1.2 million people receive a concession of only 1.5 percentage points (Treasury 2008). This compares with around 200,000 taxpayers (those earning more than $180,000) who receive a concession on their superannuation contributions of 31.5 per cent…

Superannuation contributions should be taxed at a progressive but concessional rate. This would be achieved by treating employer superannuation contributions as income in the hands of the employee, taxed at marginal personal income tax rates. A flat-rate refundable tax offset, payable to the individual, would apply to these contributions to ensure that investing in superannuation retains its preferential tax treatment over other types of saving…

Under the reform proposed by the Henry Review, everyone that contributes into superannuation would receive the same tax benefit, thus maintaining the progressiveness of the income tax system. It would also mean that lower income earners – those that are most likely to rely on the Aged Pension in retirement – would be better placed to build a retirement nest egg, thus limit costs to the Budget from the Aged Pension.

With the above considerations in mind, it was interesting to read Henry’s warning yesterday in The AFR that reforming super concessions could undermine the superannuation system:

“It has always been understood that the encouragement of private saving would come at the cost of somewhat lower public saving. It was always understood that the superannuation system would have a budgetary cost.

“It was always understood that those who have the capacity to save, because they have higher incomes during their working lives, would benefit most from the tax concessions, with lower income employees benefiting most from the pension”…

“The biggest threat to the sustainability of superannuation is not fiscal sustainability or fairness, but complexity. Any proposals to change current arrangements should bear this in mind.

“The fact that one part of the tax system raises less revenue than it might, or that it is not as progressive in its impact as other elements of the tax system, is not a sufficient reason for taxing it harder.”

One can only wonder why Henry’s views around super have seemingly changed?

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Leith van Onselen
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    • What!! Seriously? Then he is as independent on this issue as my cat is on whether we should have chicken for dinner.

      What a joke. Let the regulatory capture roll on.

    • Yeah, am I reading this all wrong? He is basically saying make it fairer. It will work against his own interests to tax higher income earners more within super.

  1. ceteris paribus

    Complexity is the problem?

    Then get off your arse Treasury and manage the complexity- for the sake of sustainability and fairness.

    Sorry. Whether Henry is influenced by being on the NAB Board or not, he shouldn’t have taken such an appointment in the first place. He has had a privileged working life, dispassionately settling matters of the highest public policy.

    There were many others ways in which he could have served as a public statesman. People want everything. They are never satisfied.

  2. That is very disappointing to hear that from Ken Henry. Very, very disappointing.

    Scratch Ken from my list of economists who have a clue.

    • Sorry, I seem to be missing the point. Can you explain it so a 12 year old can understand it?

      • Lemme C, it’s impossible to explain because there are no grounds for saying “Henry has done a Backflip”. Below is recommendation 19 from the Henry Review;

        “Recommendation 19: The rate of tax on superannuation fund earnings should be halved to 7.5 per cent. Superannuation funds should retain their access to imputation credits. The 7.5 per cent tax should also apply to capital gains (without a discount) and the earnings from assets supporting superannuation income streams”.

        As there are relatively low concessional contribution caps and a 30% contributions tax already applies to people earning over $300K, the bulk of the tax break for high income earners is in the concessional tax rate on fund earnings, which Henry proposes to halve. Also ommitted in the article is the Henry Review quote “the maximum contributions tax rate should be 15% for the majority of taxpayers” and the recommendation to increase the over 50s concessional cap from $35K to $50K, which is a much more generous position than where we are now. Where is the backflip exactly?

  3. Didn’t someone call him a loser yesterday?

    Something along the lines that the popular kids (lab/Lib) don’t listen to him therefore he is a loser even though he might be right?

    Maybe he is changing his tune to get a few more facebook friends.

    Or, he has an ulterior motive, get in and brush shoulders with those in powers at any cost so that you can influence policy later.

    • Ding ding! That was me.

      My reading of his statements is that they’re not against reform per se. It is true that super has a short term budget cost vs no super. It is also true that complexity is undesirable.

      To my mind, it is possible to hold those beliefs AND advocate for super reform because the budget cost has become too high, and the system too inequitable.

      Whether Ken Henry now believes there should be no reform is difficult to tell from the quotes.

  4. Well the original Henry Review quote is out of date for a start. Since then high income earners pay an additional 15% contributions tax, therefore only receive a 19% tax break on contributions, less than someone on $45K.

    • Only those that earn over $300k pay the additional contributions tax. Meanwhile, the lowest income earners receive no concession. Therefore, the quote remains true to this day and the system remains massively inequitable.

  5. “The system is massively inequitable”?

    Earn $45K, tax break 19.5%
    Earn $80K to $180K, tax break 24%
    Earn $180-$300K, tax break 32%
    Earn $300K+, tax break 19%

    The bulk of the tax break benefit (and therefore cost to taxpayers) taking in to account the number of taxpayers in each category, overwhelmingly goes to the $80K to $180K group.

    • You conveniently left out the sub $45k groups. Funny that. Also, from the above, the $180k to $300k group gets the biggest concession.

      Tell me, why are you against giving every taxpayer the same concession (e.g. MR minus 15%)? It’s a no-brainer.

  6. No, I’m not against a flat tax based on the taxpayer’s marginal rate – where did I say that?

    What I am against are generalisations along the lines of “high income earners get all the benefit” and “the system is massively inequitable”. Are you sure your suggestion is a no-brainer though? A 15% benefit would mean a higher effective tax rate on contributions for the vast majority of taxpayers, meaning lower superannuation balances and more downstream demand on pensions, leading to higher taxes. Have you modelled the system impact out?

    The $180K to $300K group only represents 2% of taxpayers therefore the majority of impact on the taxpayer is in the $80K to $180K group, which is where the total number of taxpayers clusters.

    I left the below $37K group out because there are very few full time earners in this category.

    • “I left the below $37K group out because there are very few full time earners in this category.”

      So you cherry picked the data to suit your point? Super is not just for full-time earners.

      “What I am against are generalisations along the lines of “high income earners get all the benefit” and “the system is massively inequitable”.”

      It isn’t a generalisation. Did you not read the Murray Financial System Inquiry:

      “…the majority of superannuation tax concessions accrue to the top 20 per cent of income earners (Chart 4.3). These individuals are likely to have saved sufficiently for their retirement, even in the absence of compulsory superannuation or tax concessions… It is not clear that superannuation tax concessions for this income cohort will significantly reduce future Age Pension costs…”

      The Inquiry’s chart was also very telling. You can view it here.

      “A 15% benefit would mean a higher effective tax rate on contributions for the vast majority of taxpayers, meaning lower superannuation balances and more downstream demand on pensions, leading to higher taxes.”

      Rubbish. Lower income earners – those that are most reliant on the Aged Pension – would fare very well, whereas concessions to the wealthy would be reduced. The 15% number was plucked out of thin air. It could just as easily be MTR minus 20%.

      “Have you modelled the system impact out?”

      Of course not. But the Henry Inquiry obviously did, which is why it recommended such an approach. It is also logical, which is more than I can say for your arguments.

      Stop defending the indefensible.

  7. The data that you quoted is not relevant to the discussion, it refers to total tax benefits of which the major component for high income earners is the 15% tax rate on super funds earnings. For example, the tax benefit in my fund from earnings is way ahead of the tax benefit on contributions. If you care to read the Henry Review in full rather than pluck one item out which suits your point of view, it recommended a halving of the 15% tax rate on earnings, which will make the graph you clipped look a whole lot worse.

    • Explain to me once again why we have a system that provides increasing tax concessions as one moves up the income tax scale (up to $300k) and why this system is fair and in the Budget’s long-term interest?

      Simple question. How about a simple answer instead of your current obfuscation?

      • No obfuscation involved, I’m trying to stick to the topic which is the alleged Henry backflip. It seems you want to move off that topic now and broaden it out – fair enough.

        My view is that you need to look at the entire tax system rather than picking pieces out. Whilst high income earners, at least those in the $180K to $300K band, get the largest tax break on contributions as individuals, they also pay the bulk of total income tax and receive no transfer payments. They also get a higher tax deduction on donations and negative gearing, but ultimately that’s a by-product of paying more tax in the first place. I am not opposed to flattening out the benefits on super, particularly in the $180K to $300K band, but I am opposed to hyperbolic statements about inequity that deliberately fail to take in the big picture.

        • Righto Stiches. You have revealed your true bias. So you: 1) do not support a progressive tax system; and 2)like the current super concession system because it undermines this progressiveness.

          Thanks for clearing this up. Now I understand where you are coming from: self-interest. Unbelievable…

      • flyingfoxMEMBER

        but ultimately that’s a by-product of paying more tax in the first place.

        That’s the whole idea of progressive tax system no?

        Whats the point if this can be essentially circumvented?

      • How you work that out I have no idea. So by me saying that any analysis of individual taxes should look at progression based on an “all taxes/all benefits/all transfer payments”, that means I am against progression – huh?

        And on the weak and tired “self interest” point, I currently get a 19% tax break so nothing that you have suggested would affect me personally, in fact your last suggestion of 20% would be better for me. Great piece of detective work…

      • To AlexD, thanks for the suggestion but try to understand the point being made rather than asking whether someone understands a basic concept. A regressive tax by itself does not make it “bad”, provided that the level of progression across the entire tax system, including flat taxes, is considered reasonable or acceptable. This is of course subjective but by OECD comparisons, we have very low flat taxes, highly progressive income tax and the world’s most progressive transfer payment system.

        For clarification on the lightweight “self interest” point made by another poster, I am happy with the Unconventional Economist’s suggestion (as per the Henry Review) to apply a fixed benefit of 20% on contributions – for high income earners ($300K+) that is better than what they are getting now. Interestingly The Unconventional Economist did not respond when I highlighted the second part of Henry’s recommendation, which was to reduce super fund earnings tax from 15% to 7.5%.

  8. Again the focus on tax concession begs the 2 more fundamental problems with the current super system IMHO:

    (a) no limits to what can be accumulated (that was a shameful decision by Costello);

    (b) lump sums (its a retirement income system, not a “payoff my mega mortgage have a great time & then put my hand out for the pension” scheme).

  9. This is a tiny nit-pick, but the principle stated in AFTS doesn’t line up with the recommendation: Superannuation contributions should be taxed at a progressive but concessional rate.

    A 20% flat refundable offset on SG conts would be akin to flat taxation, not progressive taxation. Have I misunderstood something here? Regardless, a tiny nit pick. The rec is still a vast improvement over the current regressive concession.

    Not adopting this rec is one of the tragically missed opportunities of the Rudd government. It still leaves a bitter taste in my mouth. One can almost imagine what was going through the minds of Rudd’s 14-year old ‘policy advisors’:

    “Hmmm, AFTS says this reform will increase retirement savings by $60bn over 10 years, an increase equivalent to raising SG to 12%. Ya know what? Let’s just go with the 12% SG thing. It reads better in a press release. Better headline too.”

    I swear to god, my rage over this keeps me up at night. If they’d just adopted the damn rec, the superior distributional result would have meant lower aged pension payments in the future. I thought it was a no-brainer. I was wrong. After all, the brainless hacks in Rudd’s office DID manage to stuff it up…