A Super Idea For A Better Retirement Plan


Before the 2014 budget was handed down, the government asked for a report on public spending to be undertaken by the contentious Commission of Audit. The cost of tax expenditures (concessions) was not included in its remit.

This was quite an omission, because tax expenditures cost the budget over $100 billion per annum – a quarter of all revenue. And the largest tax expenditure is in the area of superannuation.

Age pension costs are over $40 billion – a tenth of the budget – and growing at 6.5 per cent a year. The Commission recommended cuts to age pension spending, which led to the government announcing that it would raise the pension age to 70, and restrict pension indexation to the price index. This will lead, over time, to a fall in the pension relative to general community standards.

Superannuation tax concessions cost almost as much as the age pension and are growing so rapidly – 11 per cent a year – that on Treasury projections they will overtake the pension spend by 2016-17. So the government is seeking to cut back the slow-growing, more equitable part of retirement income assistance, which does the most to alleviate poverty, whilst leaving rapidly increasing concessions for the rich untouched.

Over 50 per cent of the total benefit of tax concessions flows to the top 20 per cent of income earners.

Not only are tax concessions untouched, but the government wants to abolish the only progressive parts of the whole system – the low income contribution for those earning up to $37,000 and the high income surcharge introduced by the previous government on incomes over $300,000.

Absent these provisions, the super tax system is a flat 15 per cent on everyone irrespective of their actual income, except that those over 60 can reduce the tax on their fund earnings to zero by shifting to pension phase.

Over 1,500 small self-managed super funds have assets over $10m and in many cases the income in these funds is entirely tax-free.

The pension and tax systems oppose each other. The pension system directs assistance to the poor; the tax system to the rich. The tax system encourages savings; the pension means test discourages both work and savings.

Some of the tax benefits ultimately reduce pension entitlement, but the total cost of the pension and the tax concessions, at some $80 billion, far exceeds the $55 billion it would cost to simply pay the pension to everyone.

This realisation led us to a very simple solution. Why not make the pension universal – free of means test, and abolish super tax concessions?

This would leave enough – even on the Treasury’s conservative ‘revenue gain’ figures – to raise the base pension rate by 25 per cent, ensuring that most people gained more on the pension side than they would lose on the tax side.

On our estimates, 80 per cent of the population would benefit. Particular benefits would flow to people, largely women, who had spent time out of work and therefore not been able to save over their working life.

Such a system would eliminate the need for changes to the preservation age, and make redundant proposals for compulsory annuitisation of all or part of superannuation lump sums. It simplifies, and makes more equitable, the whole system.

This is not a radical proposal. A similar system is already in place in New Zealand.

The New Zealand system achieves very low rates of poverty and very high rates of workforce participation among older people – 30 per cent more than Australia. While the existence of the means test in Australia is not the only difference between the two countries, it is obviously a factor in allowing older New Zealanders to stay in work.

If Australia had similar aged participation rates, GDP would be $60 billion higher.

This shows that the pension means test is not well designed. It creates very high effective tax rates on pensioners over a wide range of private incomes, and creates disincentives to save or to work.

These tax rates are so high that if they were reduced, they would actually bring in more revenue. If GDP was $60b higher, tax revenue would rise by $15b and means test abolition would be self-financing.

Short of the full New Zealand/National Superannuation approach, a number of steps could make the retirement income system more rational.

Tax concessions could be pared back along the lines suggested, for example, by the Henry Report (which would tax contributions at the individual’s tax rate but provide a uniform percentage rebate) or by the Grattan Institute (who would limit concessional contributions to $10,000 and tax fund-earnings in the pension phase).

The Grattan proposal saves $9b; this could easily finance a halving of the 50 per cent pension taper to 25 per cent as well as, say, improvements in rental assistance for pensioners.

It is well known that renters in private accommodation are among the most disadvantaged of all pensioners.

But these are all lesser options. The National Superannuation approach is a comprehensive plan which would provide a major rationalisation of what is currently a complex and incoherent set of retirement income policies.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.