12% superannuation will punish lower income earners

Research by Australian National University (ANU) associate professor, Geoff Warren, has warned that lifting Australia’s superannuation guarantee from the current 9.5% to 12% will hurt lower-income earners – a claim rejected by industry rent-seekers:

MP Jason Falinski… said the ANU findings added to evidence that the scheduled rise was not in the best interests of all workers.

“This is yet another study in a long series of studies, indicating that the super guarantee does not benefit people on low incomes,” he said…

Industry Super Australia, whose super funds are expected to control more than $1 trillion in assets by the time the guarantee is rolled out, said the research was flawed and misleading…

“It draws dangerous conclusions – if implemented millions of Australians would be left struggling to make ends meet on the pension, or forced to work until they drop.”

The notion that lifting the superannuation guarantee is bad for lower-income earners is hardly controversial.

The Henry Tax Review explicitly recommended against lifting the superannuation guarantee because it would rob lower-income earners of much needed disposable income over their working lives:

“Although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth. This means the increase in the employee’s retirement income is achieved by reducing their standard of living before retirement…

The retirement income report recommended that the superannuation guarantee rate remain at 9 per cent. In coming to this recommendation the Review took into the account the effect that the superannuation guarantee has on the pre-retirement income of low-income earners”.

The Australia Institute’s chief economist, Richard Denniss, also recently blasted Australia’s superannuation system for “stealing from the poor to give to the rich”, and claimed that the current concessions structure “literally amplify inequality in Australia”:

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…

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…

A key reason why Australia’s compulsory superannuation system so heavily benefits the wealthy is because of the flat 15% tax on contributions and earnings, which gives those on lower incomes minimal concessions (or penalises them), whereas those on higher incomes receive the biggest tax concessions:

Therefore, lifting the superannuation guarantee from 9.5% to 12% would merely heighten the above inequities, rob lower-income workers of disposable income, as well as increase net costs to the federal budget (since higher income earners are unlikely to go on the aged pension anyway).

Instead of lifting the superannuation guarantee to 12%, the 15% flat tax on contributions/earnings should be replaced 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, lower income earners would accumulate larger retirement balances without forgoing additional take-home pay, and the federal budget would save via reduced aged pension costs.

The only losers from abandoning the scheduled lift in the superannuation guarantee to 12% would be the rent-seeking fund managers, since they would accumulate less funds under management to skim fees from. Let them eat cake!