Super concession costs to overtake aged pension by 2040

The Australian Treasury’s latest Intergenerational Report (IGR) estimates that superannuation tax concessions as a portion of the economy will increase from 2% to 2.9% by 2060, and that the cost of super tax concessions will surpass the cost of the aged pension by 2040:

In the future, more Australians will retire having made superannuation contributions while working. This will reduce the call for government support through the Age Pension. However, superannuation attracts favourable tax treatment which reduces government revenues. The projected combined total of Age and Service Pension expenditure and superannuation tax concessions is estimated to grow from around 4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61…

Over the next 40 years, spending on the Age and Service Pension is projected to fall from around 2.7 per cent of GDP in 2020-21 to 2.1 per cent of GDP in 2060-61, reflecting the maturation of the superannuation system…

The cost of superannuation tax concessions represents forgone tax revenue for the government…

Tax concessions as a proportion of GDP are projected to increase from around 2.0 per cent in 2020-21 to 2.9 per cent in 2060-61. The increase is driven primarily by earnings tax concessions rising from around 1.0 per cent of GDP in 2020-21 to 1.9 per cent of GDP in 2060-61, while contributions tax concessions are projected to remain largely unchanged at 1.0 per cent of GDP during the same period (Chart 7.4.6).

The total projected cost of Age Pension expenditure and superannuation tax concessions together is expected to increase from around 4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61. As a result of the maturing of the superannuation system, government spending on the Age Pension is projected to decline as a proportion of GDP but the cost of superannuation tax concessions is projected to grow. By around 2040, the cost of superannuation tax concessions will exceed the cost of Age Pension expenditure.

While the above might seem like a decent result in light of the projected ageing of the population, it is important to note that Treasury’s Retirement Income Review, released late last year, estimated that the superannuation system will cost taxpayers more in net terms over the long-run. The Retirement Income Review also showed that superannuation concessions are poorly targeted to high income earners, thereby increasing inequality:

To the extent that superannuation tax concessions are contributing to higher superannuation balances of lower- to middle- income earners, they help to reduce Age Pension expenditure. But the main influence behind the growth in superannuation balances is the SG. Tax concessions are largely concentrated among higher-income earners who are close to and above preservation age. Across the income distribution, the lifetime cost of superannuation tax concessions is projected to outweigh the associated Age Pension saving (Chart 13)…

Surely, lower income earners, and by extension taxpayers, would be better served by abolishing the compulsory superannuation system and redirecting the savings into boosting the Aged Pension?

Compulsory superannuation acts like a tax and forces people to forgo current consumption, which is especially pernicious for lower-income earners.

Moreover, because superannuation balances at retirement depend upon how long one works and how much they earn, the system inevitably misses lower income earners and those with broken work patterns like mothers.

The aged pension, by comparison, suffers none of these flaws. It is universally available and well targeted to those most in need.

Unconventional Economist
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