Labor readies $5m superannuation cap

Financial Services Minister Stephen Jones will tell the AFR Super & Wealth Summit that Labor is looking at scaling back tax concessions for large self-managed superannuation funds.

Jones will say that there are 32 SMFS with assets of more than $100 million, and that the concessional taxation of such funds comes at a cost to the budget that must be taken into account.

Cutting on back on tax concessions paid to people with large SMSFs could raise billions a year, and could help to reduce the structural budget deficit, which is currently estimated at around $50 billion a year:

“We have 32 self-managed super funds with more than $100 million in assets – the largest self-managed super fund has over $400 million in assets,” Mr Jones will tell the Summit.

“I celebrate success, but the concessional taxation of funds like these has a real cost to the budget which needs to be considered”…

Under current rules, retirees with more than $1.7 million in super can leave the excess funds in their accumulation account and receive a generous concessional tax rate of 15 per cent on earnings and contributions, well below the top marginal income tax rate of 45 per cent.

Thirty-two of Australia’s biggest self-managed super funds have more than $100 million in assets, costing taxpayers about $200 million a year in taxpayer-funded concessions.

The Australian Treasury’s Tax Benchmarks and Variations Statement 2021-22 revealed that the budgetary cost of superannuation concessions had ballooned past $40 billion, and is expected to grow over the forward estimates:

Treasury’s Intergenerational Report also projected that the cost of superannuation concessions will overtake the cost of providing the aged pension by around 2040:

Cost of superannuation to overtake aged pension by 2040.

Finally, Treasury’s Retirement Income Review, released in 2020, estimated that the superannuation system will cost taxpayers more in net terms over the long run, that is after taking into account savings in Aged Pension costs. The Retirement Income Review also found that superannuation concessions are poorly targeted to high income earners, thus 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, Labor is right to implement measures like the $5 million super cap to rein in costs for the budget.

However, rather than tinkering at the edges, it would make far more sense to unwind the superannuation system altogether and direct the budget savings into providing a more generous and comprehensive Aged Pension. This would improve efficiency, equity and budget sustainability.

Sadly, the superannuation industry is now so large and powerful that genuine reform is impossible. And Labor is its biggest champion.

So, we are stuck with the current inefficient and inequitable behemoth where only minor tweaks are possible.

Thanks Paul Keating.