Inside Story

If the future is more super, then the future is greater inequality

The superannuation guarantee shouldn’t rise until the system is made fairer

Mike Steketee 5 February 2021 1680 words

Women retire with smaller super balances, on average, and a lower tax subsidy. fcscafeine/iStockphoto

“Pretty soon,” says a delighted woman riding up and up an escalator, “the amount of super paid on top of our wages will go up and up and up and up, all the way to 12 per cent guaranteed. That extra money will make a big difference when I retire, put my feet up. You see, your future is even more super.”

Paid for by industry superannuation funds, this recent TV ad is designed to pressure the government to deliver on its promise to lift the compulsory super rate from 9.5 per cent to 12 per cent in increments of 0.5 per cent, starting in July and finishing in 2025.

The ad’s promise of extra money for nothing sounds great. Except, of course, it doesn’t work that way. Four pieces of research over the past decade — the review of taxation by former treasury head Ken Henry, a Grattan Institute study, work by the Reserve Bank and, most recently, the Retirement Income Review headed by former treasury official Michael Callaghan — have all come to the same conclusion: increases in compulsory superannuation come predominantly from wages.

Arguments to the contrary, including by Labor and the super industry, are unconvincing. Sure, wages growth has been very slow anyway, but that doesn’t mean it wouldn’t be slower still if employers have to increase the superannuation rate further.

Yes, the ad’s description of a 12 per cent rate being guaranteed is correct — so long as you believe politicians keep their promises. This particular pre-election promise by the Morrison government falls into the category of making-promises-we-don’t-believe-in-but-are-necessary-to-help-us-win-the-election. Whether Morrison keeps the promise depends on how much pressure is applied through public opinion, including that influenced by advertising campaigns, versus the wishes of those in the government who have always opposed compulsory super.

And if the future is even more super, as the ad argues, then the future is also even greater inequality — something the Labor Party is supposed to be against. More super is fine if that’s what people want to do with their money, but it’s a bad idea if a large chunk of it comes from taxpayers boosting the retirement incomes of people often better off than themselves.

When treasurer Josh Frydenberg released the final report of the Retirement Income Review in November, he highlighted a few of its findings, including that “the age pension reduces income inequality among retirees, as low-income retirees receive the largest age pension payments.” That’s true, but he left out the rest of the report’s conclusion: “While the age pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality.”

That design applies a flat rate of 15 per cent tax on contributions and earnings, meaning the higher your income, the more you save in tax by not paying normal income tax rates of up to 47 per cent.

In June 2018, more than 11,000 people had more than $5 million each in their super accounts. The review calculated that a super balance of $5 million attracts around $70,000 a year in tax concessions on earnings. A $10 million balance attracts more than $165,000. By contrast, the full age pension, with supplements, is worth $24,552 a year for an individual or $37,014 for a couple.

To those who argue that people who pay more tax should be entitled to higher concessions, the review points out that higher-income earners receive not only bigger concessions in dollar terms but also “more superannuation tax concessions than lower-income earners as a percentage of superannuation contributions.” (My emphasis.)

The Henry report calculated that 37 per cent of superannuation tax concessions went to the top 5 per cent of taxpayers. The latest report says the total cost of the concessions on both contributions and earnings grew by almost 40 per cent to $42 billion in the four years to 2019. Unchanged, it projects their value to increase from 4.6 per cent to 5 per cent of GDP over the next forty years, while spending on the age pension will fall from 2.5 per cent to 2.3 per cent. In short, inequality will increase.

Politicians on both sides of the fence used to worry about such unfairness. “A major deficiency of the current system is that tax benefits for superannuation are overwhelmingly biased in favour of high-income earners,” treasurer Peter Costello said in his first budget speech in 1996. And he did something about it by imposing a tax surcharge on superannuation contributions for high-income earners. But a few years later, in 2003, he responded to complaints about administrative complexity by starting to phase out the surcharge. It disappeared altogether in 2005.

Costello’s complete conversion to the interests of the super industry and greater inequality came in 2006, when he introduced tax-free super for all retirees as well as allowing people to tip up to $1 million into their funds before applying generous caps on their annual contributions.

When Wayne Swan’s turn as treasurer came in 2007, he started in the same place as Costello nine years earlier. He spelled out the regressive impact of super concessions on an income tax system that was supposed to be progressive. While those on incomes above $180,000 received a 31.5 percentage point reduction in their marginal tax rate, someone on $35,000 received just 1.5 percentage points.

The situation was even worse for those whose incomes were below the tax-free threshold, who were still taxed 15 per cent on their compulsory super contributions. In other words, they were being penalised for being required to put money into superannuation. Swan fixed that with a rebate, as well as halving the caps for super contributions attracting the tax concession. But he baulked at further reform to tackle inequity, including the Henry report’s recommendation for a uniform 15 per cent tax deduction on contributions for most people.

Apart from their gaining little or nothing in tax subsidies, the superannuation system is a raw deal for many low- and middle-income earners for another reason: as their super income increases, their pension payments fall because of means testing, with the result that they are little or no better off for having been compelled to put aside 9.5 per cent of their salary.

Governments have tinkered further to tackle some of the worst excesses. Costello’s surcharge has been resurrected, with people with incomes above $250,000 now paying 30 per cent tax on contributions. Superannuation balances above $1.6 million (around 1 per cent of retirees) also attract extra tax.

But the basic inequity of the system remains. And it has increasingly been ignored in the debate, despite the best efforts of organisations such as the Australian Council of Social Service, which has a long track record of well-researched campaigning for a fairer system.

The system’s inequity also raises questions about its sustainability. When Josh Frydenberg released the Callaghan report he highlighted its finding that the costs of the overall system were “broadly sustainable.” But he didn’t mention why the report uses the word “broadly.” While higher superannuation balances should reduce the cost of the age pension slightly over the next forty years, the cost of the super tax concessions are projected to grow and exceed the cost of the pension by about 2050. “The increase in the SG [super guarantee] rate to 12 per cent will increase the fiscal cost of the system over the long term,” the report adds.

While the report doesn’t make specific recommendations — something for which the politicians will be grateful — it does make some pointed observations. One of them stresses the unfairness and unsustainability of tax-free super in retirement:

There are areas where superannuation tax concessions are not a cost-effective way to help people achieve adequate retirement incomes. In particular, the cost of the earnings tax exemption in retirement will grow faster than the growth in the economy as the system matures and provides the greatest boost to retirement incomes of higher-income earners.

The report observes that “extending earnings tax to the retirement phase could also simplify the system by enabling people to have a single superannuation account for life and would improve the sustainability of the system.”

It also points out that the present structure discriminates against women, who retire with smaller super balances, on average, and less of a taxpayer subsidy.

Successive reports, including Henry’s, the Grattan Institute’s and Callaghan’s, have found that increasing the super guarantee is not necessary to give people adequate retirement incomes. The benchmark typically applied for maintaining living standards in retirement is 65 to 70 per cent of previous income. This is based on people facing lower costs in retirement, often having paid off their home and raised and educated their children, and no longer needing to save for retirement.

The latest review found that, assuming what it called an efficient drawdown of savings, this benchmark was reached or exceeded for all income levels at the present compulsory super rate of 9.5 per cent. Even given the “inefficient” way many people spend their super — by withdrawing at only the minimum required rates of 4 per cent or 5 per cent, for example — the inquiry found that most retirees’ income was 60 per cent or more of that while working.

Particularly in the earlier years, that means retirees often aren’t running down their savings and feel that they can cover unexpected expenses and, in particular, leave an inheritance. While that is their choice, it doesn’t mean that it should be encouraged by government policy. “Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations,” is how the report puts it. And because inheritances are not distributed equally, it adds, they increase inequity in the next generation.

Many developed countries have some form of inheritance or wealth tax. Australia has none. To the contrary, we have a form of reverse wealth tax, with taxpayers subsidising inheritances via the super system. The bigger the amount, the bigger the subsidy.

The super guarantee should not be increased without first making the tax concessions fairer. Otherwise, higher-income earners will receive even bigger taxpayer subsidies — largely paid for by the taxes of lower-income earners, many of whom benefit little from the system but are compelled to put money aside that could be better used to meet their present-day needs. •