Melbourne University professor, Kevin Davis, who was a panel member on the 2014 Murray Financial System Inquiry, is the latest in a conga-line of commentators calling for a universal Aged Pension to be applied funded by reining in superannuation tax breaks:
Gifting all retirees the age pension while restoring a personal tax rate on superannuation drawdowns would provoke “squeals” from wealthy retirees, but would boost incomes for most Australians and save wasted money on estate planners…
[Davis] said the cost of providing the age pension to an extra 1.4 million part pensioners and one million current non-pensioners would cost the government $30 billion a year.
But this cost, which would provide part-pensioners with an extra $10,000 and non-pensioners an extra $20,000 a year, would be largely offset by increased budget revenue if the move to a universal pension was paired with the introduction of margin income tax rates on pension drawdowns from superannuation savings, which are currently tax free…
“The proposal, if radical, appears feasible and has the potential to reduce much of the bureaucracy and costs associated with age pension administration and tax complexity and regulations regarding superannuation,” he said.
“Any policy change involves winners and losers, but a judicious choice of tax rates can mean that the only losers will be those with retirement superannuation balances currently generating tax-free income in the region of $100,000 per annum and above….
[Superannuation] concessions, about $40 billion a year, mean the super system is projected to cost the federal budget more in foregone revenue than the taxpayer saves in age pension outlays until at least 2070. The age pension currently costs $50 billion a year.
“Our current tax and benefit treatment of retirement incomes is a mess,” Professor Davis said.
“Currently much of financial planning seems to be about structuring affairs to maximise age pension entitlements. The age pension means test and other eligibility requirements create bureaucratic nightmares and involve significant resource costs for their implementation. There are ongoing fights about the taper rate,” he said.
Similar arguments were made in Dr Cameron Murray’s submission to the Retirement Incomes Review, as well as Mercer’s submission.
There is certainly strong merit in abandoning the current superannuation concession system altogether in favour of making superannuation contributions tax-free, but treating all superannuation withdraws and universal Aged Pension receipts as income, taxed at the marginal rate for the individual involved (including for heirs who inherit superannuation savings from their deceased parents).
The whole purpose of superannuation was to regard it as deferred income, and it was intended as a replacement/supplement for pensions not as a means of saving capital. Further, such an approach would discourage lump-sum withdrawals, since these would be taxed at a higher rate than if withdrawals were spread over a large number of years, making retirement savings last longer.
Indeed, if I were to create a retirement system from scratch, then the above approach would be far superior than the current convoluted system of concessionally taxing super contributions on the way in but treating them tax-free when they are withdrawn, alongside the complicated (and frequently manipulated) pension means/assets test.
That said, changes along these lines would be revolutionary rather than evolutionary, thus would be highly unlikely to be implemented given how entrenched the current broken system is.
Therefore, the best we can hope for are pragmatic iterations to the existing superannuation system, such as abandoning the scheduled increase in the superannuation guarantee, alongside tinkering to make superannuation concessions more equitable and progressive.
Regardless, everyone but those with their snouts firmly in the fees trough seems to agree that the current superannuation structure is inequitable, inefficient and unsustainable, and needs reforming.
