Submissions to the Retirement Income Review have now closed. Unlike the usual government or parliamentary inquiry at which the submissions are dominated by the money-makers and vested interests, this one has drawn a huge range of submissions expressing a great range of views.
There should therefore be no excuse for the Treasury Inquiry to avoid recommendations to end the tax rorts in the system.
Tax concessions for superannuation should be there solely to help people to provide enough to fund a comfortable retirement. There is no logic in the Government providing tax deductions for any further contributions.
People may argue over precisely how much is needed to fund a comfortable retirement, but surely most would agree that $1 million or above is enough.
So people with balances over $1 million should not get an annual tax deduction of $25,000 if they contribute that much to their fund, as they do now.
That money, in effect provided as a gift from the Government, is not being directed at “achieving adequate retirement income” because a person with a $1 million superannuation balance has already achieved that aim.
However, under the present system a person with a $10 million balance and a $1 million a year income can still put $25,000 in and get a $25,000 tax deduction. That has nothing to do with funding a reasonable retirement. It is a legalised rort and should be stopped.
It gets worse. People over 65 who are still earning can each year withdraw $25,000 from their superannuation tax free and then put the $25,000 straight back into their superannuation fund and claim that contribution as a tax deduction. Again, that tax deduction is a straight gift from the Government none of which contributes to “achieving adequate retirement income”. The concession should be adjusted according to how much the person has taken out of the fund that financial year, cutting out altogether if the person has withdrawn $25,000 or more.
The inquiry has no excuse for not recommending an end to the patent unfairness of the present system. The only people who get tax deductions from concessional contributions are those who can afford to make them, typically people in the workforce and on higher incomes – usually men in their 50s. Those on lower incomes or out of the workforce lose the chance to get the concession for the time they are on lower incomes or out of the workforce.
Typically, women are out of the workforce more than men. When their children grow up, they often return to the workforce and get higher pay so they can afford to make deductible contributions. But they are limited to $25,000 a year. Over their lifetime they therefore get lower tax benefits than those who have continuous work or lots of years of high enough income in which to make the deductible contributions.
A fairer way to apply the tax concessions would be not to have a flat limit applying to everyone, but to calculate the amount of concessional contributions a person can make according to how much they have in their account (or accounts), tapering to zero once the person has the $1 million or so balance that would provide a comfortable retirement.
Someone with a low balance should be able to make tax deductible contributions way over $25,000 and people with large balances should not get any tax deduction for adding to their already comfortable retirement fund.
People with low balances should be able to make higher “catch-up” deductible contributions so that over their lifetime they get an equal crack at the tax benefits and that those benefits are not weighted to the already wealthy.
The unfairness extends to the tax regime on superannuation earnings. With the present flat tax of 15 per cent on earnings, the vast bulk of the total tax concessions goes to people on higher incomes who would otherwise have their earnings taxed at more than 40 per cent.
High-income people usually have higher balances so gain bigger benefits. The tax on superannuation earnings should be made progressive, but not based on income, but rather based on the balance of the person’s superannuation account or accounts. Say, zero on balances up to $100,000, 15 per cent up to $750,000, 30 per cent up $1 million and 40 per cent thereafter. Or it could be more gradually stepped.
The importance of a progressive rate based on the balance rather than income is that it is fairer to people with low balances, especially women who have often been out of the workforce caring for children but then earn a high income later in life.
A contested issue is whether the 9.5% compulsory employer contribution should rise to 12% in 2025 as legislated. Employers, businesses and the conservative side of politics want it stopped at 9.5%, using all sorts of specious arguments rather than the real reason: we and our mates are selfish and greedy and do not want to give working people a fair go.
They say that an increase in super would result in a commensurate fall or freezing of wages. But history shows no such correlation. Moreover, wages have been flat-lining in any event. And even if this is the case, employers would not be out of pocket so why are they against it?
They are against it for two reasons. First, they will be forced to pay an employee benefit. Second, they do not such vast amounts of money to be in the part control of employees. Heavens, they might engage in ethical investment.
They say employees should have their money in their pocket so they can make the choice between superannuation, buying a house, investing or spending. Well, we know nearly all of them would blow nearly all of it, as they did before the system was set up.
The system corrected an historic wrong in Australian society when until 1992 only professionals and high-income earners got decent retirement benefits and the workers were thrown on to the age pension to eke out their time living hand to mouth.
Now we have a $3 trillion asset which has swept away Australia’s net foreign liabilities as we replace foreign investment in Australia and increasingly invest overseas. Without the scheme we wold have squandered the money on consumer junk.
At 9.5% superannuation will merely exclude people from the aged pension and leave them with scant little more for a comfortable retirement.
Politicians know this. Federally, they provide 15.4% for themselves. To freeze other employees’ contribution at 9.5% would be hypocrisy of a type that one would hope would not pass the Senate.
Crispin Hull
This article first appeared in The Canberra Times and other Australian media on 8 February 2020.