Australia’s superannuation system is welfare for the rich

Just a week after The Australia Institute (TAI) released a report – funded by Industry Super Australia – backing an increase in the superannuation guarantee (compulsory superannuation) to 12%, the chief economist of TAI, Richard Denniss, has blasted Australia’s superannuation system for “stealing from the poor to give to the rich”:

Welcome to the topsy-turvy land of superannuation, in which taxpayers give the most assistance to those who need it least, and no assistance to those who need it most…

Much is made of the enormous size of Australia’s $2.9tn pool of superannuation savings, but we talk much less about the fact that the only reason it grew so big was that we literally force the vast majority of employees to spend 9.5% of their income buying superannuation every week. Let’s be clear: if we forced all Australians to get a massage every week or buy a new Australian car every year, we would have an enormous massage and car industry as well.

For more than 10 years, I’ve been trying to explain just how unfair, unaffordable and inefficient the Australian superannuation system has become, but you don’t just have to take my word for it any more. The commonwealth Treasury recently concluded that “modelling suggests that over a lifetime, more public support may be provided to those in higher income brackets”…

In Australia, taxpayers contribute 10 times as much money to the superannuation accounts of the people in the richest 1% than they contribute to the people in the poorest 10% of workers.

Put another way, the graph below also shows that, over the course of their lives, those Australians lucky enough to be in the top 1% of income earners will receive over $700,000 in taxpayer contributions to their personal superannuation account, while those in the bottom 10% will receive less than $50,000.

…we hand out $43bn a year in tax concessions for super. It’s obscene and it only survives because the superannuation industry is so skilful at confusing people, boring people, or both…

Put simply, when it comes to our super funds, we tax the earnings of those with millions at far less than their marginal tax rate and we tax the earnings of those with small balances at far more than their marginal tax rate. Tax concessions for superannuation literally amplify inequality in Australia…

It would be easy to cap the generosity of tax concessions to those with the most and boost support for those with the least. We do it with the age pension and we could do it with super, if we wanted to.

Indeed, one of the biggest knocks on Australia’s compulsory superannuation system is that because of Australia’s flat 15% tax on contributions, those on lower incomes receive minimal concessions (or are penalised), whereas those on higher incomes receive the biggest tax concessions on contributions:

Division 293 remedies the situation for those very high income earners above $250,000. But even then, the lion’s share of superannuation concessions still flow to the highest income earners, whereas the lower income earners continue to be disadvantaged by the system, as illustrated clearly in Figure 4 above.

An obvious solution to improve both equity and Budget sustainability would be to abandon raising the compulsory superannuation guarantee and instead replace the 15% flat tax on contributions/earnings with a flat-rate refundable tax offset (e.g. 15%). This way, everyone that contributes to superannuation would receive the same tax concession, the system would be made progressive, and lower income earners would get a better deal.

It’s a no-brainer.

So why did TAI last week release a report funded by Industry Super Australia arguing to lift the superannuation guarantee when there are clearly fundamental problems with the system? Lifting the superannuation guarantee would merely amplify these inequalities and inefficiencies.

Follow the money…

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.

Comments

  1. The table is incorrect for the 0-18200 bracket and 18200 – 37000 brackets.

    It makes out that such earners are subject to a 15% concessional contributions tax. In reality, the LISTO (google it if you don’t know) reimburses this, meaning that in effect 0% is paid on their concessional contributions.

  2. Fine, strip the concessions back, but you then can not force people to contribute 12% of their income for life, to an account they cant access for 40 years that is subject to further restrictions and taxation at the whim of any govt at any time over that period in return for a insignificant 15% tax concession today.

    Especially for those that receive no other govt transfer payments in the intervening period (no family tax benefits, child care subsidies, access to age pension, concession cards, concessional rates, registration etc etc..)

    • this.

      it should be voluntary.

      concessionarily taxed for those below say $XX income

      Wealthy people do not receive the concessions, ormaybe a small concession.

      • But if it’s voluntary how would the super industry get such a large amount of well deserved fees? These fees feed jobs, and unemployment will rise if you scale down. <=sarcasm

        • “But if it’s voluntary how would the super industry get such a large amount of well deserved fees?”

          The compliance of putting your money in a trust that quarantines distributions, and pays a 15% tax rate will remain quite onerous, even if the status if voluntary.

          Put a price on that compliance.

          Want management of those funds inside that 15% tax vehicle? Management still takes billable hours.

          • I disagree that it would be onerous. With modern systems, the cost should be nowhere the current price charged.

            Basically the super industry would experience a fall in revenue due to a voluntary system due to:
            -smaller amounts in super equals to less funds under management
            -greater competitive pressures due to the voluntary system meaning genuine competition on fees.

          • How much do you think these system cost to develop?

            To develop API’s with ATO systems, to pay rolls, to reconcile on a daily basis.

            BT introduced Panorama in full version a bit over a year ago, it cost $1 billion. It’s be a disruptor to the point retail platforms are now generally cheaper than industry funds.

            But I don’t think some suburban accountant with MS Excel is going to be able to develop the same level of compliance tracking.

            “-smaller amounts in super equals to less funds under management”

            Most compliance systems are a fixed cost, you’d likely see these costs amortised among fewer members see fees rise.

            “-greater competitive pressures due to the voluntary system meaning genuine competition on fees.”

            The introduction of Panorama has seen this, to the point as I said retail are generally cheaper than industry funds.

            FASEA will likely see further downward pressure within 18 months.

          • “Most compliance systems are a fixed cost, you’d likely see these costs amortised among fewer members see fees rise.:
            Bolloks. When the super system was way smaller the industry promised us that when it is bigger fees would be smaller due to economies of scale. Hasn’t quite turned out that way, though competitive pressures from industry funds have made some retail funds drop their fees.

            But rather than arguing, let’s have a market based solution — making the super system voluntary. Then the fees charged by super funds will be subject to market forces rather than the current system. It’s not an exact analogy, but in the US the managed fund industry charges average fees way below what our super funds do.

          • “Bolloks. When the super system was way smaller the industry promised us that when it is bigger fees would be smaller due to economies of scale. Hasn’t quite turned out that way, though competitive pressures from industry funds have made some retail funds drop their fees.”

            And what would you surmise is the likely reason for this failure to deliver these fee savings?
            i) Economies of scale didn’t arise
            ii) Finance execs kept fees where they are to ensure extraordinary profits?

            As far as the systems being a fixed fee, there is very very little marginal cost to a ledger system, or course it’s a fixed cost.

            “But rather than arguing, let’s have a market based solution — making the super system voluntary.”

            Great, as super is but one part of the income retirement system, I also want paying into the old age pension voluntary as well, another component of the income in retirement system. I mean having this is not a market solution. If one makes their retirement savings voluntary, then that person opts out of ever receiving an old age pension yes?

            Or, understand that the reason it was introduced was to compel retirement savings, otherwise we would see no one make an effort to save, and too many dipping into welfare.

            “Then the fees charged by super funds will be subject to market forces rather than the current system. It’s not an exact analogy, but in the US the managed fund industry charges average fees way below what our super funds do.”

            What were US fees 10 years ago?

            Australian fees are shrinking quite drastically. A product fee composition of a quality platform admin and quality investment management is now approaching 0.6%, and still dropping.

            I’m not saying grubby finance execs haven’t captured extraordinary profits from super in recent time, but quality advice has been the driver of chasing these competive market forces, wihch are in play.

            It’s the industry funds which are now high fee charging, with opaque fee structure, little investment transparency and disingenuous insurance offerings.

          • “Or, understand that the reason it was introduced was to compel retirement savings, otherwise we would see no one make an effort to save, and too many dipping into welfare.”
            This is also inaccurate. Super was originally made widespread in the 1980s to decrease wage rises so as to attack the then high inflation rate. Compulsory super introduced in the 1990s was to extent this to the full populace. At no point was it ever stated that the main aim of compulsory super was to save government pensions, but rather to increase retirement incomes. Which isn’t the same thing.

            The evidence suggests that the costs of having a super system in revenue foregone (due to it being concessionally taxed) exceeds any pension savings. Comments about mandatory super being justified on fiscal grounds are unsubstantiated.

          • “This is also inaccurate. Super was originally made widespread in the 1980s to decrease wage rises so as to attack the then high inflation rate.”

            No, that was a circumstantial by product, the ‘widespread’ part of superannuation prior to 1993 were defined benefit and constitutionally protected funds, and they were not designed whatsoever to have a primary purpose of quashing inflation.

            By their definition, they are precisely income in retirement products.

            If you were going to design a tool to quash inflation this would not be it, otherwise Paul Volcker would have opted for it too.

            “Compulsory super introduced in the 1990s was to extent this to the full populace. At no point was it ever stated that the main aim of compulsory super was to save government pensions, but rather to increase retirement incomes. Which isn’t the same thing.”

            Yes it was to have retirement income self-funded, and the reason for that was the have the recipients have variable amounts based on their input, i.e. linked to their earnings over time. It was proposed because the age pension was the same payment for everybody, which would not achieve an equitable outcome.

            If it wasn’t “self-funded”, then SG would go into a common pool, rather than as individual members

            “The evidence suggests that the costs of having a super system in revenue foregone (due to it being concessionally taxed) exceeds any pension savings. Comments about mandatory super being justified on fiscal grounds are unsubstantiated.”

            I agree there are too many generous concessions, I argued this even in conjunction with the transfer balance cap, and it obscene any resistance was against it.

            The generosity of concessions aren’t required as it is compulsory. But is is designed as:
            A) to be self funded – those who put more in, get more out.
            B) Primarily as a income stream in retirement to replace the welfare of the age pension.

            It is being let down, or harming the country by:
            A) Being overly generous with concessions.
            b) Left in the hands of bottom feeding investment managers churning it into the ASX8 or inefficient commercial property, rather than being a $1+ trillion source of funds for growing real wealth.

          • We’ll agree to disagree whether, in the 1980s, the main aim of making super more widespread in industrial agreements was to curb inflation, as that isn’t central to the main issue here.

            “I agree there are too many generous concessions, I argued this even in conjunction with the transfer balance cap, and it obscene any resistance was against it.”
            Be that as it may, if you look at the major super taxation reforms in recent years they have hardly dented the size of the concessions as measured in the annual government tax expenditure statements. Therefore, realistically, while you might (accurately) state that compulsory super doesn’t need such large tax concessions to incentivise contributions, realistically they are for the most part here to stay. As noted, super likely costs more in such concessions then it saves in lower pension payments, meaning that arguments justifying its compulsory nature on fiscal savings lack merit.

  3. Welfare for the rich, paid for by whom? The rich?

    Superannuation is a Trust, a special type of trust.

    It is a trust that cannot pay distributions of income, until it meets the right preservation status.

    It is people’s own money going in there, being it remuneration or capital.

    The concession for to this is a 15% tax rate.

        • Ok I see it.

          “An obvious solution to improve both equity and Budget sustainability would be to abandon raising the compulsory superannuation guarantee and instead replace the 15% flat tax on contributions/earnings with a flat-rate refundable tax offset (e.g. 15%).”

          Shows a misunderstanding by the author.

          Overwhelmingly, the concession is applied to the earnings derived by the fund, not the pre-tax concessional contributions made to the fund by the member, which are capped at $25,000 p.a.

          To get to a MTR of 47%, you’re already paying a minimum SG of $17,100, and we’re talking about 2% of the population at most. The savings here between the two scenarios are $4,250 per person.

          An $850,000 commercial premises in an SMSF is the things getting $15,000+ tax from highest MTR< or $7,500+ tax savings compared to a company tax rate.

          It's 0% tax in pension phase. Anyone who thinks the concessions on contributions is the tax burden has no idea.

  4. A couple of other points.
    Super costs more to our nation over the long term than providing a pension.
    Super is tied up out of the economy in cash shares and overseas investments beside the money invested in housing which is great for the wealthy top 30% and no one else.
    Howard had super up at $250k per annum. WTF!
    Super has been nothing but a tax write off for the rich and a chance for undesirable to get their hands on your money and pay themselves a wage of their choosing from it.
    Keating stuffed this one up playing right into the hands of the neoliberals.

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