A new Treasury paper, released on Friday, claims Australia’s retirement system is giving the wealthiest Australians twice as much financial assistance as those on the lowest incomes:
The overall level of public support provided by the retirement income system should be targeted to those who need it most. Higher income earners generally have a greater capacity to accumulate savings pre-retirement and make larger superannuation contributions. This can lead to higher tax concessions being provided to this group as a result of the generally flat rates of tax on superannuation contributions and earnings. The application of an additional 15 per cent tax on superannuation contributions for those with total remuneration of $250,000 or more, combined with the LISTO (which effectively refunds contributions tax for low income earners) are designed to reduce the ‘gap’ in tax concessions between low and high income earners. The Age Pension means test also acts to narrow the gap in retirement outcomes across groups with different levels of household wealth by targeting government support in retirement to lower wealth households. Nevertheless, cameo modelling suggests that over a lifetime, more public support may be provided to those in higher income brackets (Figure 4)…
Superannuation earnings attract the largest superannuation-related tax concession in dollar terms, closely followed by employer superannuation contributions. The revenue forgone as a result of superannuation tax concessions is expected to continue to grow as the superannuation system matures…
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:
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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.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
