While the Federal Treasury has made much about the cost of maintaining the tax concessional status of superannaution, Mike Taylor writes that a the industry is mounting a serious and convincing counter-argument.
It started with Don Russell, the former senior adviser to Prime Minister, Paul Keating, and it has been continued by the Association of Superannuation Funds of Australia (ASFA) and the principal of actuarial consultancy, Rice Warner, Michael Rice - a strong defence of the continuing beneficial tax treatment of superannuation.
Russell laid the foundation for that defence in the weeks leading up to the Federal Budget when he used a Super Review post-retirement and ageing forum to argue that elements within the Federal Treasury should stop arguing about the tax concessionality of superannuation in terms of foregone revenue.
Rather, Russell argued that in the absence of that tax concessionality, the Superannuation Guarantee regime could not have been sustained.
It was a theme readily taken up by Rice who, writing in one of company’s recent analyses, claimed the fundamental issue missing in recent debate over the concessional tax treatment of superannuation “is simply that the current system works”, albeit he acknowledged that some simple enhancements would improve the regime.
“But a wholesale restructuring of the taxation of super, aimed at creating more equitable and adequate retirement outcomes, would deliver little additional benefit,” Rice wrote.
“This is a policy area in which Rice Warner has a long history. We support upholding current taxation concessions, along with some further policy enhancements. In Rice Warner’s view, a sensible policy would keep concessional caps at no more than current levels, but would also:
- Allow concessional caps for couples at 150 per cent of the single person’s cap (even if one partner is not working).
- Limit non-concessional contributions to no more than concessional ones (why encourage people to shift too much into tax-privileged investments’).
- Tax pension earnings at 15 per cent (or maybe the whole system, accumulation and pension, at 12 per cent if we didn’t want increases in taxes overall).
- Include the family home above $1 million in the assets test for Age Pension.
Rice suggested that alternative ideas like the creation of mandatory ceilings on lifetime savings were interesting but unnecessary and were certainly not new, in circumstances where the concept had been canvassed by the Coalition in 1990 but not adopted
“The idea was not adopted as policy then, and in Rice Warner’s view is a distraction to the core problem now - appropriately funding our ageing population,” he said.
According to Rice it is difficult to set an annual limit that is equitable for everyone in circumstances where some people will be able to afford the maximum contributions each year, whereas others will only have a brief period late in life where they can make large voluntary contributions.
“The current levels are fairer than the higher levels of past years - and would look more equitable if the LISC concession, that is removal of the tax on contributions for low-income earners, was reinstated,” he wrote.
“Put simply, tax concessions work. They provide compulsion for employers to contribute for their employees and stimulate incentives for voluntary contributions.”
Rice said that the May Federal Budget had shown that the cost of looking after retirees in Australia was the nation’s largest expense at $40 billion a year and that the figure was projected to increase significantly to $50 billion in 2018.
“In addition, as the baby-boomer generation moves through retirement, we can expect health costs and aged care costs to grow rapidly. But these costs are the result of inadequate savings by previous generations,” he wrote.
“We simply need to enable working age Australians to build reasonable superannuation in order to help reduce their own costs in future. A well-targeted, enhanced system of tax concessions is the most sensible pathway to achieve this outcome.”
Both Russell and Rice would have been heartened by recent research undertaken by ASFA’s director of research, Ross Clare, which reinforced their points.
Clare’s research reinforced the point that the tax concessional status of superannuation was not only serving to relieve pressure on other Government expenditures but to relieve pressure on the Budget in the out years.
Clare’s opening conclusion was that, “There is clear evidence that super is boosting people’s retirement incomes and decreasing reliance on the Age Pension”.
“Our projections indicate that the proportion of people in 2023 reaching the qualifying age for the Age Pension who are self-funded retirees will be around 40 per cent. This means significantly lower Age Pension expenditure after 2025 as a result of superannuation savings,” his analysis said.
Clare then went on to point out that his research had shown that reducing the concessional caps placed on superannuation had significantly reduced the tax concessions applied to high-income earners.
“Individuals in the top tax bracket received around 13 per cent of the tax concessions applied to superannuation contributions in 2011/12, down from 15 per cent in 2009/10 and substantially less compared to 2005/06 levels,” he wrote
The third point made in Clare’s analysis was that the bulk of employer contributions went to middle and low-income earners, with most of the tax concessions for contributions flowing to middle-income earners.
“Around 90 per cent of employer contributions go to individuals paying less than the top marginal tax rate, with 57 per cent going to those paying a marginal tax rate of 30 per cent or less,” he said. “This means 75 per cent of the tax concessions applied to contributions go to those paying either the 30 per cent or 38 per cent marginal tax rate - this is a large part of the Australian workforce.”
Clare’s research argues that the majority of tax concessions applied to investment earnings flow to middle and high-income earners who generally have higher superannuation balances with 65 per cent of the tax concessions applied to superannuation investment earnings flowing to individuals with a taxable income of more than $80,000.
He noted that some individuals in this income range had account balances in the millions.
“The majority of tax concessions on earnings during the pension stage go to low and middle-income earners. Almost 70 per cent of the tax concessions applied to superannuation earnings in the pension phase flow to people earning less than $80,000.”