New Grattan research shows what is at stake in the superannuation debate
- Written by John Daley, Chief Executive Officer, Grattan Institute
The Federal Government’s plan to wind back superannuation tax breaks would create a fairer superannuation system more aligned to its purpose of providing income to supplement the Age Pension, according to new Grattan Institute analysis. It would also contribute to budget repair.
The analysis shows how either of the reform packages proposed by both major parties would be a big step in the right direction. It explores how the current system provides much larger benefits to those with such ample resources that they will never qualify for an Age Pension. And it shows how the proposed changes would affect them - and pretty much nobody else.
As they debate the Coalition government’s proposals to wind back tax breaks on superannuation, politicians on all sides can do three big things: create a better and fairer superannuation scheme; take an important step towards repairing the Commonwealth budget; and show that our political system still works.
Both main parties have laid out their preferred reforms to super tax concessions. While they agree on all but the details, they are yet to strike a deal. Our new research shows what is at stake.
A better, fairer, super system
First and foremost, the proposed reforms to superannuation announced in the 2016 budget are about making super better, and fairer.
Tax breaks should only be available when they serve a policy aim. The purpose of super identified in the budget and due to be defined in legislation is to provide income in retirement to substitute or supplement the Age Pension. Super tax breaks don’t fulfil this purpose when they benefit those who were never going to qualify for an Age Pension in the first place.
The plans of both the government and the ALP would be big steps towards aligning super tax breaks more closely with their purpose. They would trim the generous super tax breaks enjoyed by the top 20% of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension.
Retirees with large superannuation balances will start paying some tax on their superannuation savings, but still pay much less tax than wage earners on lower incomes. For a small proportion of women with higher incomes later in life, the changes will reduce their catch-up contributions. Yet the changes will reduce the tax breaks far more for wealthier old men.
Claims that the budget changes will affect many low and middle-income earners are wrong. Our research shows the changes will affect about 4% of superannuants, nearly all of them high-income earners who are unlikely to access the Age Pension. Nor are the proposed changes retrospective. Many reforms affect investments made in the past, and no-one suggests they are retrospective. Rather, the changes will affect taxes paid on future super earnings, and entitlements to make future contributions to super.
Any plausible combination of the packages on offer would make the super system fairer. At present, someone in the top 1% of income earners can expect to receive nearly three times as much in welfare and tax breaks from super in their lifetime as an average income earner. The government’s changes would trim some of these excesses: the top 1% would instead receive just twice as much as low or average income earners. And by targeting tax breaks that go to the top 20% of income earners, neither side’s plan would see much of an offsetting increase in Age Pension spending.
Authors: John Daley, Chief Executive Officer, Grattan Institute