Superannuation is a tax dodge for the rich

AFR senior correspondent, Aaron Patrick, has taken aim at Paul Keating’s compulsory superannuation system, claiming it “has evolved into a state-sponsored tax shelter for non-self-made millionaires”:

Super is stacked in favour of the rich… men like former prime minister Paul Keating who spent their careers in high-paid careers now benefit from super rules so loose that today more than 10,000 people with $5 million and above in their accounts receive at least $70,000 a year in tax concessions…

“With higher-income earners receiving more superannuation tax concessions than lower- and middle-income earners, the superannuation tax concession component of government support increases inequality of private incomes for people aged 65 and over,” the [retirement] review states on page 40…

The consequence, according to the analysis by Callaghan, Kay and Ralston, is that superannuation has evolved from promoting retirement self-sufficiency to preserving family assets to pass on to children…

While the debate rages over increasing the superannuation guarantee, which would generate tens of billions for the superannuation and finance industries, a more serious challenge is mostly ignored.

Over the long term, super tax breaks are going to become a bigger budget cost than the age pension, which already consumes 2.5 per cent of total economic output, according to the review.

In other words, Keating and his fellow rich retirees will get more from the state than most struggling pensioners.

Well argued. Because one’s superannuation nest egg is a function of how much they earn and how long they work, it automatically misses lower income earners and those with broken employment histories (such as mothers).

Accordingly, the lion’s share of tax concessions flow to higher income earners – a situation made worse by the 15% flat tax on superannuation contributions/earnings, which gifts higher income earners the biggest tax benefits:

As illustrated above, taxpayers spend at least twice as much supporting the retirements of the top 1% of income earners as they spend on someone receiving the age pension.

Looking at superannuation specifically, the top 1% of income earners are projected by the Treasury to receive more than $700,000 in superannuation concessions over their working lives, roughly 14-times the $50,000 of concessions received by the bottom 10% of income earners.

Thus, the superannuation system effectively takes the disparities in working-life incomes and magnifies them in retirement, enshrining inequality in the process.

At a minimum, the scheduled increase in the superannuation guarantee to 12% should be cancelled by the federal government, since it would only worsen the above inequalities and further damage the federal budget.

Preferably, the compulsory superannuation system should be abolished altogether, with the massive budget savings redirected into lifting the Age Pension – Australia’s true retirement safety net.

Unconventional Economist
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  1. FFS, here we go again.

    “taxpayers spend at least twice as much supporting the retirements of the top 1% of income earners as they spend on someone receiving the age pension”.

    Care to rephrase that one? Last time I checked, paying those poor aged pensioners was the no.1 line item of federal govt expenditure? No withstanding the argument against individuals with $5m super accounts, lets quickly fact check that statement

    “As at 29 June 2018, 2.6 million people aged 65 and over received income support payments, equating to 2 in 3 (67%) of the population aged 65 and over” of those 95% receive the age pension (or ~2.5m people). Now, how many super accounts exist in the 99th percentile? and total expenditure on that is twice as much as what you say?

    Come on….

    Now, give me the chart that shows total taxes paid vs total benefits received over ones retirement (hell, lifetime?) and then you can have a proper discussion on equality.

    Don’t lecture me on someone’s entitlements from society without first discussing their contributions.

    • I'll have anotherMEMBER

      To rephrase your argument on equality:

      “I earned millions of dollars because of daddy’s hedge fund and therefore paid heaps of tax. Therefore I deserve massive tax breaks at the cost of poorer citizens, that would be fair and equal”.

      Realise this is fairly extreme example but your line of reasoning doesn’t stack up in my books.

        • I'll have anotherMEMBER

          It felt like reading an old man shouting at the sky, furious at the idea some thought it unreasonable he was recieving huge tax breaks whilst sitting on a massive pile of cash.

          “I’ve paid my dues you young whipper snappers! Leave me my pile of gold and be gone!”.

          Guess what boomers, it is unreasonable and you are judged harshly by most of the younger generation for it.

          This government is a facilitator of intergenerational theft and Boomer welfare. Super is just the tip of the iceberg.

          • Strange Economics

            Sounds like old man Murdoch…
            Then again there’s plenty of parents saying that.

            No use trying to get a revolt against this – half the population is hanging on boomer parents wealth,
            while the other half are not ever going to vote liberal.

          • I'll have anotherMEMBER

            That’s why we need the Labour party to get back to looking after working class Stranger Economics.

            Of course the party for real-estate investors and retirees will look after their own. At the moment there is no clear political alternative, most of the working class have been swept up by coalition.

      • Even StevenMEMBER

        I think BB is just making the point that $1 of concessions is not the same as $1 given as a handout. One individual may have been a contributor to society and the latter may have been a useless bum who never even sought to make a contribution (and arguably shouldn’t be entitled to a dime).

        I can see where this debate ends – it will boil down to value judgements of what mix of those receiving benefits are useless bums, pensioners who should have (but didn’t save) for their own retirement and genuine unfortunates (and similarly for those receiving concessions). But I think BB is quite right to point out the false equivalency that $1 = $1. It’s overly simplistic.

        • Thank you, quite a simple point I thought, but a hard one to grasp when it buts up against your ideology. Too busy slinging petty judgement and insults to actually read the post.

          I was also pointing out that that in aggregate, the total govt funds spent to support pensioners still far exceeds the total dollars spent on ‘millionaires’ though the original post appears to deliberately obfuscate that point.

          no one, including myself has EVER argued that those with $5m + balances should be entitled to the tax breaks they have, as I pointed out latter, those whom don’t already have that capital WILL NEVER be entitled to those same tax breaks, yet any reform is once again target at those yet to accumulate the balance not those that already have it.

          So yes, you tend to get a little shitty when someone continually suggests a heavily restricted 17% deduction on your income (for having your funds locked in an environment where the rules will continually change for the next 30 years) is directly equivalent to an age pension being paid to individuals, whom in many cases (no doubt hundreds of thousands) are actually ‘wealthier’ than the income tax payers that are funding it!

          Oh, and for the record, I am a few decades off being a boomer nor will I be a beneficiary off the largess offered to previous super holders. My vested interest is in ensuring that any changes the system are based on reasonable interpretation of the facts, not cherry picked data to support ones cause.

          “Preferably, the compulsory superannuation system should be abolished altogether, with the massive budget savings redirected into lifting the Age Pension ” What happened to the UBI concept? So, how exactly does raising the age pension alone provide a fair outcome for those in the 40-80th percentiles? It simply further entrenches the inequality experienced by the average working Australian?

  2. Maybe historically true. Not really now.
    And it is predicated on the government helping itself to 49% of your earnings as an income earner. Lower the tax rate and instantly the money the government is “gifting” you in super tax concessions reduces.
    You pay 30% on super contributions and earnings (Division 293). Unless you are povvo.
    You can contribute a maximum of $25K per year. You save at most 5K (25*(0.49-0.3)). You can only have a maximum balance of $1.6m.
    It is the lamest tax dodge around.
    Better dodges with $50K instant asset write offs, dodgy car log books and running the household expenses through the company accounts (mobiles, TVs, media subscriptions, “conference”/dining tables etc.). Also better, cash work and JobKeeper payments.

    • TheLambKingMEMBER

      It is the lamest tax dodge around.

      The big logical fallacy is to say that the Super ‘tax dodge’ is a ‘cost’ and assume that get government will get all the money that it ‘costs’. What will happen will be that the ‘rich’ will find some other tax dodge – and there are plenty! At least Super (mostly) goes into productive resources – take this away and it will (mostly) go into more negatively geared houses!

      This is (mostly) an IPA/LNP campaign to ‘get’ at Union power. There are plenty of issues with Super – but to scrap it is ideological madness.

      • I'll have anotherMEMBER

        “Continue giving millionaires tax breaks to the tune of billions because they’ll just do something else to avoid paying tax.”

        Ok mate.

    • Exactly, why not ramp the top marginal rate up to 60%, then the ‘support’ will be off the charts!

      Once again, the numbers are focused on those whom have already mostly converted their incomes to tax advantaged capital wealth. The problem will be ‘solved’ by stopping anyone else from doing so. Of course, those lucky few will be grandfathered. As you point out, those who have high incomes today but comparatively lower wealth receive BUT A FRACTION of the superannuation tax advantages offered to the boomers before them.

      But of course, the tax payer is being robbed, disadvantaging that aged pensioner receiving the full aged pension, while stuck at home in their 7 figure exempt residence. Until such time as they need to pop into hospital, for that 40k hip replacement, paid for by all those freeloaders receiving more support than them.

      • I'll have anotherMEMBER

        Agree the pension should be properly means tested.

        As bad as giving millionaires massive tax concessions.

    • Strange Economics

      Povvo, as in under 180K a year per person. Very povvo..
      And considering their tax rate with Medicare is 45 2% medicare, these povvos are still getting a 17% break. Plus remember tax free earnings when they retire.
      Friends parents were horrified that they have to pay some tax over 1.6 million in their massive super tund. Tax ! at their age !

  3. The even greater economic cost is the fees, upward of $30 billion a year.

    That’s not just $30 billion of cash. Apart from the economic rent earned by the industry, that $30 billion represents resources that might have been employed elsewhere.

    Even if just half of it could be saved, that’s equivalent to a project the size of Westconnex every year.

    And for what?? What does it produce?

    Superannuation is – and always was – a make-work scheme for Sydney fund managers, created by a Sydney Treasurer and expanded by a Sydney Prime Minister.

    It’s the equivalent of manufacturing protection for the 21st century. Except that at least manufacturing gave you the security of domestic supply in times of crisis. Funds management produces nothing at all.

    The next time there’s an epidemic – or a war – we can’t all eat funds management. We can’t live in funds management. Funds management won’t make our cars go.

    We have no comparative advantage in funds management.

    Some of us understood this more than 30 years ago and have been issuing warnings for decades:

    Get ready for the ban on lump sum payments.

    Get ready for the “Ghost of 30/20”.

    • TheLambKingMEMBER

      That’s not just $30 billion of cash. Apart from the economic rent earned by the industry, that $30 billion represents resources that might have been employed elsewhere.

      Another logical fallacy. Superannuation is our version of a ‘Sovereign Wealth Fund’. If the nation is not forced to save then it mostly doesn’t. So when you have a resources boom like we have just had we spend it rather than save – on cars, but mostly houses. The $30bil that would not have been ’employed’ elsewhere, instead, we would have a housing stock ‘worth’ another $20bil and a bunch of new cars and iphones.

      Sure, there are problems. And the wedge that the funds take is over the top – but it is mostly the retail funds that collect those fees. But a few tweaks is what is needed. Getting rid of our national Sovereign Wealth Fund forced savings is nuts!

      • Not every disputed argument is a “logical fallacy”. Logical fallacies relate to logic.

        Leaving that aside . . . .

        First, “If the nation is not forced to save then it mostly doesn’t.”.

        There’s not much evidence to support that assertion. Evidence from Australia suggests that household savings – including superannuation – actually fell following the introduction of compulsory superannuation and even became negative until the external shock of the GFC:

        More recent evidence suggests that higher superannuation is offset by dis-saving elsewhere:

        This is a variant of the principle of Ricardian Equivalence, the notion that people adjust their savings rates according to their expectations of future income. The evidence for classical Ricardian Equivalence – involving changes in tax rates – is ambiguous, but it is much more plausible with a system of identified “savings” which people are told is their own.

        Traditionally in Australia, people saved by buying a house and then paying off the mortgage. The introduction of compulsory “savings” – taken from wages – reduced both (a) the incentive and (b) the capacity to do that, plausibly leading to results observed.

        Secondly, even if it were the case that forced savings increased total savings, that’s not an argument in support of Australia’s system of byzantine complexity and cost. Australia has one of the most expensive pension systems in the world.

        (BTW, this part of your argument really is a “logical fallacy”, the informal “Fallacy of Irrelevance”. The effect of forced saving on total savings is irrelevant to the argument concerning the choice of which method of forced savings to use. You might not be aware that there are many other systems of government-mandated saving used in other countries.)

        Third, there is the claim: “So when you have a resources boom like we have just had we spend it . . . “. Isn’t that what’s just happened?? The very evidence cited seems to argue against your case! If Australia’s expensive system of superannuation didn’t stop it, then how is that evidence in favour of the system??

        Fourth, the reference to a “sovereign wealth fund” is an example of “framing”. If one frames the Australian system as a “national sovereign wealth fund” then who could oppose that. Unfortunately, real sovereign wealth funds (Norway’s or Singapore’s) hold . . . well . . . actual net sovereign wealth, of which Australia doesn’t have much, due in part to the high levels of household debt cited earlier.

        Fifth, savings are relevant to capital formation only if they are not diverted in some other way. Australia’s superannuation system has grown in parallel with the other (expensive) finance industry make-work schemes: the privatisation and private infrastructure industries which have allowed governments to:

        a) sell existing assets to superannuation funds in order to fund current expenditure. This occurred during the early phase of superannuation and offset the economic value of the (diminished) household “saving”; and

        b) push new capital expenditure off budget, thereby allowing higher recurrent expenditure that would be politically possible if they were required to disclose their actual levels of borrowing.

        (The NSW Land-Titles-Office-for-Sports-Stadiums scam comes to mind.)

        Finally, saving are savings (for the saver) only if there is a reasonable prospect of savers receiving their money – with a suitable rate of return – some time in the future. (The story of William Kiffin is apposite here.)

        The preservation age for superannuation has already been extended. For anyone under the age of 30 it will be at least another 35 years before they see their “savings”. To put that in perspective, it is longer than the current system has existed.

        Older Australians, or at least those who worked in the finance industry before 1985, will remember the old “30/20 Rule” which required complying funds to “invest” 30% of their funds in government and semi-government bonds. With such a large pot of money available it would be naive to expect that politicians will be able to keep their hands off it. If there is a choice between taxing people today and skimming off part of a pension that they will see only in 35 years, what do you think a politicians will do?

        Combined with a rent-seeking funds management and private financing industry (to which many politicians look for their own post-political income) , the Australian system all but guarantees that young people will never see more than a portion of their supposed “savings”.

        And all of that is on top of the resources being wasted in administering the system.

      • Also, just to clarify, the figure of $30 billion isn’t the amount saved each year. It’s amount spent on administering the unnecessarily complex system.

        Even if that $30 billion were spent entirely on iPhones, you’d at least have $30 billion of iPhones.

    • Some great arguments you have made about super being a vehicle of confiscation in the future. I would say the best bet against this, would be to have a SMSF and hold assets such as precious metals in it. Then if the government decided to try and confiscate your funds in the future, you can say the gold was stolen by robbers or your boat sunk while fishing with your metals and they got lost. See I got a plan. On a serious note, the comments you made in 2013, show that you really understand the nature of super and I think your tip on not putting any extra funds in, which seems counter intuitive to getting rich, may well be the best tip I have received in many years. Thanks Stephen.

      • By way of disclaimer, I’m not providing investment advice.

        The choice between super and non-super will depend on one’s age.

        Those nearer to preservation age may enjoy tax benefits (as described in this article) with minimal sovereign risk. In particular, voluntary contributions are handled differently from other contributions.

        However, the younger one is, the longer one is exposed to the risk that the rules of the system will be changed. In fact, they are changing all the time.

  4. There is certainly an argument for a negative division 293 tax. That is, if your average tax payable is less than 15% you should get a refund of your super tax.

    • The low income super tax offset (LISTO) is a government superannuation payment of up to $500 to help low-income earners save for retirement. If you earn $37,000 or less a year, you may be eligible to receive a LISTO payment. This is usually paid directly into your super fund. The LISTO is 15% of the concessional (before tax) super contributions you or your employer pays into your super fund.


  5. alwaysanonMEMBER

    Every year I get a Division 293 notice/bill from the ATO that claws back something like $3k of my Super balance in additional tax (I take the option to let them pull that out of Super rather than pay it). So there is a definite limit on the contribution concession side. I get that letting your earnings/capital gains in there be tax free once you retire is a big one though…

    • It is a big one, and just as the 1.6m limit was the first salvo, it will eventually be switched off entirely. Rendering UE’s favorite chart largely moot.