Super rorts are costing the budget billions

The ABC’ business editor Ian Verrender has published an explosive report on how Australia’s wealthy use Australia’s superannuation concession system to shelter themselves from paying taxes:

Back in 1992, when compulsory superannuation was introduced, it was supposed to take the pressure off federal government finances; to augment the age pension.

But superannuation tax breaks introduced over the decades since now threaten to overwhelm the budget within the next 20 years, costing more than a national pension.

Along the way, those tax breaks have helped transform the scheme from a retirement fund into a tax shelter, primarily used as an intergenerational wealth transfer system for the nation’s richest families…

The ATO data is two years old. But it shows a dramatic lift in wealth among the top self-managed funds from the previous year, with 27 funds holding more than $100 million each…

The existing tax concessions come at a huge cost — around $36 billion, according to last year’s budget papers. That’s more than double and close to triple what we spend on unemployment benefits…

Logically, it makes no sense to force a worker struggling on $60,000 a year, probably with no house, to be paying a higher tax rate than a person with $100 million in a superannuation account…

Which makes you wonder. Perhaps we would have been better off with a government-run sovereign wealth fund, like the one set up by Mr Costello for public servant superannuation…

If the federal government ever hopes to return the budget to some kind of balance, something needs to be done and quickly.

MB has been making the same arguments for years.

Treasury’s Intergenerational Report showed that superannuation funds under management will soar from around 157% of GDP currently to a projected 244% of GDP by 30 June 2061:

Superannuation assets

Superannuation assets will grow strongly.

The IGR also showed that the cost of superannuation concessions will over take the cost of providing the aged pension by around 2040:

Cost of retirement system

Cost of superannuation to overtake aged pension by 2040.

Meanwhile, Treasury’s Retirement Income Review, released last year, estimated that the superannuation system will cost taxpayers more in net terms over the long-run, that is after taking account savings in Aged Pension costs. 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)…

Therefore, the biggest winners from Australia’s superannuation system are the funds themselves, which will get to glean fatter fees from the strong growth in funds under management.

But for Australian taxpayers, it would make more sense to unwind the superannuation system altogether and direct the budget savings into providing a more generous and comprehensive Aged Pension.

The decision to lift the superannuation guarantee to 12% is the entirely wrong policy that will only succeed in further feathering the industry’s nest.

Unconventional Economist

Comments

  1. This is a bit overblown by Verrender. It is virtually impossible to cram that much into an SMSF these days. Those very large funds are a relic from an earlier era.

    In addition, the Transfer Balance Cap will now make most of that income assessable (albeit at 15%) – not perfect but an important improvement on the Howard/Costello disaster.

  2. A partial solution is to mandate/encourage annuities and cut out the allocated pension/lump sum. That should help to deal with the inheritance issue at least.

  3. There is one solution staring us in the face: pay a decent aged pension. Most of the conversation has been about lifting super to 12%, but little conversation on the adequacy of the aged pension.

    • The Benevolent Society did a study on the adequacy of the aged pension a few years ago

      file:///C:/Users/tsilver/AppData/Local/Temp/Pension%20Adequacy_Final-2.pdf

      Essentially, homeowners have enough for day-to-day living expenses, but can’t cope if something big goes wrong and often can’t afford home maintenance. Renters are living in really abject poverty.

      We have one of the least generous aged pensions in the OECD.

      https://data.oecd.org/socialexp/pension-spending.htm

      If we got rid of the superannuation tax concessions, or only allowed them up to a cap in the accumulation phase and taxed withdrawals in the pension phase, we could afford a decent aged pension. As it is, they really only benefit the top 20%, especially the top 10%, apart from the forced savings aspect.

  4. When Howard & Costello did the silly changes to super some time ago we wrote a letter to Accounting bodies basically saying it was going to cause huge long term issues & would mean Super is a Tax Haven etc etc. We suggested to have an RBL (reasonable benefit limit) of say $1.0m & that all earnings on any amount over the RBL should be attributed to each of the members & taxed at their marginal tax rate whatever that was. We came at this more on the argument that one the tax concessions to super were ridiculous & unsustainable & two why should someone who has bucket loads in super be better off than a person with the same assets/income outside of super & for whatever reason could not get money into super?

  5. Logically, it makes no sense to force a worker struggling on $60,000 a year, probably with no house, to be paying a higher tax rate than a person with $100 million in a superannuation account…

    So then just fix the tax rates. Simples.

    Which makes you wonder. Perhaps we would have been better off with a government-run sovereign wealth fund, like the one set up by Mr Costello for public servant superannuation…

    The efficient gov pensioncrats running a super funds management fixes the ever fatter fees paid now. But recall we all pay 7.5% in income tax from 1946 on still for universal non means tested pensions for anyone aged, disabled, widowed, etc. We still pay the National Welfare Fund levy 40 years after liblab disappeared the Fund, ceased it’s separate accounting, and rolled the funds then billions held in Treasury Bills into consolidated revenue to pay for al the usual idiocy and rorts. It is probably harder for govt to again steal super/pension funds now, as currently these are not held in a Parliamentary “Trust” as was the NWF in grasping pollies’ hands.

  6. Hill Billy 55

    The funds in super should be transferred to a sovereign wealth fund over a maximum of 5 years. Those who haven’t done so after the 5 years have the assets compulsorily acquired by the SWF.

  7. Makes for great headlines but the $100m super account issue is a 0.0001% problems and hardly a big one to fix, less that 2% can ever be converted to tax free pension as well. You could easily legislate a maximum super balance with ZERO political capital required to implement it….. yet it hasn’t been done….. by either side? Why

    And as far as handing it all to a SWW, lol, just think of all the car parks, toll roads and NBN rollouts that one could have funded! And then there is the green initiatives, $10b out the door within 2 years on ‘social impact’ investments, oh, and maybe Harry could do with a few billion to build social housing ghettos at $850k per 1 bedder.

    Lets face it, after 5 years you are going to sell (sorry, recycle) most of those assets to the likes of Transurban anyway, so just skip the complexity of the middle man and simply turn the SWW into an interest free credit line for corporate Australia.

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