On May 29, the government announced by way of media release the extension of an emergency COVID measure.
The temporary halving of minimum drawdown rates for retirement superannuation accounts — introduced in March 2020 while the Australian stock market was in freefall — would continue for another year.
The explanation was terse and does not stand up to scrutiny.
The biggest beneficiaries of the extension are the wealthy retirees, who use super to escape tax on funds they are building up to hand on to their children.
It provides no benefits to less well-off retirees who need to use money in super to live on in retirement.
Before the temporary halving of drawdown requirements in March 2020, a retiree aged between 65-74 would be required to withdraw at least 5% of their account balance each year.
The minimum withdrawal rate increased with age.
The merit in the requirement (even if the numbers used have an unavoidable element of arbitrariness) was that it limited the ability of wealthy retirees to use super as a pure tax dodge.
Super is meant to be for retirement
Funds in super retirement accounts have a zero tax rate on earnings and are untaxed when withdrawn…
The explanation in the media release is little more than unsubstantiated waffle:
“Today’s announcement extends that reduction to the 2021-22 income year and continues to make life easier for our retirees by giving them more flexibility and choice in their retirement.
For many retirees, the significant losses in financial markets as a result of the COVID-19 crisis are still having a negative effect on the account balance of their superannuation pension”.
The second sentence certainly warrants scrutiny.
APRA statistics show that in the year to March 2021 the rate of return for institutional super funds was 18.2%
This is well in excess of what was required to reverse the temporary loss in the March quarter of 2020 that prompted the original decision…
Super as a tax dodge
But the rationale for the drawdown requirement was to limit the use of super as a wealth maximisation strategy for the benefit of heirs.
The purpose of super is meant to be to provide income security and a reasonable standard of living in retirement.
That’s what the 200-page report of the retirement income review commissioned by Treasurer Josh Frydenberg told him in November.
The key beneficiaries of the extension will be the well-off who already get the most benefit from Australia’s super system.
Retirees who need super to live on won’t benefit in the least.
All this will mean is that wealthy retirees will accumulate bigger nest eggs to pass onto their heirs via tax free inheritances. This contradicts the recommendations from Treasury’s Retirement Income Review, which wants retirees to spend their nest eggs:
Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests. Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations…
For example, assuming no change in how retirees draw down their superannuation balances, superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059 (Chart 3H-5)…
Although inheritances can help people to prepare for retirement, they are distributed unequally, with wealthier people tending to receive larger inheritances than those with lower wealth (Chart 3H6). Inheritances therefore increase intragenerational inequity…
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All of which goes to show that superannuation is more a tax minimisation scheme for the rich than a genuine retirement system.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
