Treasurer Scott Morrison has stepped-up his rhetoric on superannuation reform, proclaiming over the weekend that the Government would crack-down on retirees accumulating “tax-free inheritance pools” for their children. From The Australian:
“We’ve said the purpose of superannuation now and by definition then any tax incentives that are put into the system to support superannuation is to ensure that people would be less reliant, or not reliant at all, on a welfare payment — i.e. the pension — in retirement.
“There are a whole range of people for whom landing on the pension is not a reality for them, but there are particularly middle-income earners in particular … who are most likely to be drawing down heavily on a welfare payment.”
“Our argument on super is we’ve got to ensure the incentives are targeted to address the purpose and are not there as a form of building tax-free inheritance pools to pass on.”
Mr Morrison said the government would “always have to be very careful” when tinkering with arrangements for people in the retirement phase.
“You are effectively applying a retrospectivity when you’re looking at a retirement phase,” he said.
So, reading between the lines, it looks like the Government will base its super reform on:
- Making contribution concessions more progressive – as advocated on this site, by Deloitte Access Economics, and the Henry Tax Review – so that lower and middle-income earners can build-up bigger retirement balances;
- Limiting the amount of superannuation than can be built-up so that it is not more than needed for a comfortable retirement; and possibly
- Introducing an inheritance tax on tax-free super passed on to heirs.
It is also clear that the Government will not seek to restore the 15% tax on the superannuation earnings of those aged over-60, which was eliminated by former Treasurer Peter Costello, because such a change would be “retrospective”, even though this is one of the most egregious and inequitable holes in the super system, and is costing the Budget dearly in foregone revenue.
To give credit where credit is due, Scott Morrison is at least looking hard at the superannuation issue, which is far more than could be said for former Prime Minister and Treasurer Tony Abbott and Joe Hockey, who ruled-out reform altogether.
However, if the retirement system is to be made sustainable and fair for both lower-middle income earners and future generations, the following reforms are required:
- Changing the superannuation contribution/earnings system so that everyone receives the same concession, such as marginal tax rate less 15%. This way, lower paid workers, who are currently penalised under the 15% flat tax system, would receive greater benefit, whereas higher income earners (e.g. those earning between $180,000 and $300,000, who receive a 30% concession currently) would receive less benefit. Put simply, the current concession system needs to be made progressive.
- Re-instating the 15% tax on superannuation earnings for those aged over 60, bringing it back into line with those aged under 60. After all, why should a retiree earning $100,000 through their superannuation investments pay zero tax, whilst those aged under 60 and earning $100,000 via their salary pay around $25,000 in tax?
- Curbing the generous “transition-to-retirement” superannuation rules, which enable those approaching retirement to avoid paying tax.
- Placing a lifetime cap on the amount of super that one can accumulate and still receive tax concessions. Superannuation must be used as a genuine retirement savings scheme, not a tax shelter.
- Limiting lump-sum withdrawals, thus preventing people from blowing their funds and falling back on the Aged Pension.
- Including one’s principal place of residence in the means test for the Aged Pension. 80% of retirees are home owners, and excluding what for many is their biggest asset from their ability to fund their own retirement makes little sense. It makes even less sense when home ownership amongst the younger generations – those that being called upon to fund the Aged Pension – is plummeting.
- Extending the government’s Pension Loans Scheme – a state-run reverse mortgage scheme that allows eligible retirees to borrow against their homes to receive payments from the government equivalent to the full Aged Pension – to all retirees. The interest rate through the Pension Loans Scheme is only around 5%, repayable from the estate or sale of the property, and home owner retirees could continue to live in their home as they do now. For all intents and purposes, they would experience no change in their living standards, but with less long-term drain on the Budget (and younger generations).
So far, both sides of politics have flagged reform to some aspects, which is encouraging. But nobody is willing to go anywhere near far enough to restore balance and fairness to the system.
Still, we are at a far better place than 12 months ago under messers Tony Abbott and Joe Hockey.
