How to reform Australia’s superannuation system

Liberal MP, Jason Falinski, believes the overwhelming majority of MPs in Canberra do not want to lift Australia’s superannuation guarantee (compulsory superannuation) to 12%, as currently legislated. From The AFR:

[Falinski] told the Financial Services Council Summit in Sydney on Tuesday that behind closed doors support for a freeze was widespread, including among Labor MPs.

“It’s fair to say that in Canberra if you get most members of parliament, regardless of which side they sit [and] without a microphone around them, you wouldn’t find a lot of support for an increase in the super guarantee much over 10 per cent,” he said.

“The reason for that is report after report after report has demonstrated that we don’t have a system that is necessarily as efficient as it needs to be”…

“A prevailing view in Canberra, that putting more money into a system that refuses to respond to consumer needs is not something people would like.

Lifting the superannuation guarantee without first fixing the underlying design problems would be a recipe for disaster. All it would do is heighten inequities already entranced across the system, rob the federal budget of much needed tax revenue, and reduce workers’ take home pay (since compulsory superannuation is salary sacrificed by employees).

The key problem with Australia’s superannuation system is that the lion’s share of tax concessions on contributions / earnings flow to higher income earners – those whom are the least likely to be reliant on the Aged Pension – as illustrated in the next table:

This set-up ensures that superannuation is used as a tax shelter by higher-income earners, while not adequately reducing lower-income earners’ reliance on the Aged Pension. In turn, the cost to the federal budget from the superannuation guarantee outweighs any future savings from the Aged Pension, as modelled by the Henry Tax Review and the Grattan Institute.

Division 293 remedies the concession imbalance for very high income earners above $250,000. But even then, the overwhelming majority of superannuation concessions still flow to higher income earners, whereas lower income earners continue to be disadvantaged by the system, as shown illustrated below:

Therefore, making superannuation concessions more equitable is paramount before policy makers even consider raising the superannuation guarantee to 12%. This could be done by replacing the 15% flat tax on contributions / earnings with a flat 15% concession, as illustrated in the next table:

Under this proposal, everyone that contributes to superannuation would receive the same concession (15%). Accordingly, the superannuation system would be made progressive and lower income earners, in particular, would get a better deal.

It would also save the federal budget money, since the tax sheltering effect among high income earners would be reduced. Lower income earners would also retire with larger superannuation balances, thereby reducing pressure on the Aged Pension.

Sure, there are other reforms that could be done around excessive fees, contributions caps and the like, but they are secondary to fixing the inequitable concession system.

The key point is that policy makers must not raise the superannuation guarantee (compulsory super) from its current 9.5% to 12% without first reforming the way that contributions / earnings are taxed. They must fix this problem first, not add to the inequities.

Leith van Onselen


  1. 25 % max lump sum. No taxes during accumulation ( no access without a terminal diagnosis ) and normal tax rates on pension phase income

  2. Strange EconomicsMEMBER

    This argument to fix to a flat 15 % concession first
    is true but it is too complicated for the pollies. And it has no marketing attention slogan.

    How about try just “Freeze super contributions is like a wage rise ” – “or more homebuying instead of super ” that might work.

    Why would govt politicians (and their high income supporters)
    go through the pain to change super or support any sort of reduction in the tax shelter for 180k+ earners?
    The learned lesson myth was they won the last election by keeping tax lurks.
    Too hard. They’ll just cancel the increase , so it can be spent on mortgages !

    • Haha, completely nails it. It’s all about keeping the RE market puffed up.

      Since SMSF puffing into houses was reduced, we need to puff somewhere else.

  3. Is there a suggestion that workers take home pay would be higher if employers did not have to pay compulsory super.. I disagree with that. I don’t for a minute believe employees wages would go up if compulsory super didn’t exist.

    • It’s good, but if we don’t fundamentally restructure incentives to pile into RE, then RE prices will just zoom straight up to capture the new inflow of spending.

      “All good! Equity mate! There’s your super”.

      [edit: puffing money into RE is exactly what TPTB are going to want if/when we go into a major housing/debt crisis…hmm…we might just see Cameron get his way, but not for the reasons he wanted].

  4. Diogenes the CynicMEMBER

    Needs reform. Not achieving its objective of reducing reliance on the Age pension. No taxes in and taxes out is a much better idea but it won’t get up as those 15% taxes on inflows are pretty substantial now.

  5. How about abolishing this welfare for the sydney financial services industry altogether?

    Older people (>65) can get a flat nonmeans tested pension from the government that is sufficient for a very modest quality of life

    The government can “fund” this with taxes on the wealthy (including elderly wealthy people)