Major changes to superannuation tax concessions are not warranted

Superannuation tax concessions are not costing more than $40 billion a year, and will not exceed the cost of the age pension by 2060.

It is time Treasury stopped peddling this misleading analysis of superannuation and how it is taxed, and for the Treasurer, the Prime Minister and a myriad of so-called experts and commentators to stop accepting Treasury’s position.

While the 2023 Tax Expenditures and Insights Statement does have some important caveats in its opening chapter, it once again omits the analysis it included in the 2017 statement of alternative benchmarks against which superannuation tax expenditures might be measured. The choice of benchmark is hugely important – the one Treasury relies on in reports before and since 2017 reveals tax expenditures of about $40 billion or more; the alternative one included in the 2017 statement suggested about $10 billion.

What’s wrong with this picture?

Treasury’s preferred benchmark is based on a ‘comprehensive income tax’, which assumes employer contributions and fund earnings would otherwise be paid with earnings and subject to individuals’ marginal rate of personal income tax, while the retirement benefits from superannuation would be exempt from tax. That benchmark has never actually existed or been suggested for superannuation.

The alternative benchmark is based on an ‘expenditure tax’, applied either when contributions are made (using individuals’ marginal rate of tax) or when benefits are paid (based on the incomes generated in retirement); no tax would apply to fund earnings.

In 2017, Treasury analysed how the first of these forms of expenditure tax would affect the calculation of tax expenditures and revealed a totally different picture to the one based on a comprehensive income tax.

So what benchmark should be used?

How does Australia’s current regime compare with the typical OECD approach? Ours is a complex regime, a result of history. While the standard OECD expenditure tax approach exempts contributions and fund earnings from tax and taxes benefits in full, we have chosen to tax contributions and earnings, albeit at a modest level, and fully exempt benefits.

Why is the expenditure tax approach widely preferred? Because superannuation is about spreading lifetime earnings to finance consumption in retirement: the tax regime should, as far as possible, be neutral as to the effective price paid for consumption in working life and retirement.

No country applies the benchmark Treasury uses to its superannuation arrangements. The comprehensive income tax approach would impose a heavy penalty on savings that are long-term. The injustice of such an outcome is particularly clear in respect of the superannuation contributions compulsorily levied and compulsorily preserved to retirement.

Not only does Treasury’s approach grossly exaggerate the amount of tax concessions, but it suggests they are skewed to benefit high income earners when that result only reflects the fact that Treasury’s benchmark regime would penalise those earners the most for making savings for retirement.

Interestingly, unpublished research by Treasury’s former chief modeller revealed a few years ago that our regime, following the Turnbull reforms, has a remarkably similar impact to the orthodox approach – at nearly all income levels. If Treasury used the standard expenditure tax as its benchmark, it is likely the tax expenditures would disappear altogether.

Tinkering, not major change

We should be generally happy with our current tax arrangements for super, only ever considering minor tinkering to address problem areas.

Jim Chalmers and Anthony Albanese, rather than highlighting the ‘cost’ to revenue of the system and causing the media and everybody else to think they must have a hidden agenda for ‘reform’, should be highlighting that Labor’s superannuation achievement is for the most part being taxed appropriately; and that it has no intention to introduce any major changes, not because of political concerns, but because they are simply not warranted.

It is nonetheless true that the increasing contributions into superannuation are impacting revenues as income otherwise received as wages are diverted into superannuation. That demands care to ensure the superannuation savings are being properly used.

Some tinkering is certainly needed because there is evidence of people using superannuation for other than genuine retirement purposes. For this reason, caps on contributions were imposed (and tightened) some years ago, and there is also a case for an aggregate cap on the savings that attract the 15 per cent tax on earnings.

I suspect the $3 million proposed by the government is about right, but this should be indexed as its value will otherwise shrink markedly over time. Middle and higher income people forced to save 12 per cent of their earnings, and encouraged to save more because they won’t be eligible for the age pension, should not be penalised if their savings are for genuine retirement purposes: they are not receiving undeserved tax concessions.

I suspect many senior executive staff in the public service and senior academics are currently on track to accumulate more than $2 million from compulsory savings, and many current and former public sector workers on the old defined benefits schemes have or will have pensions worth more than $2 million, some more than $3 million.

Some tinkering is also still required elsewhere in the superannuation system, particularly to assist retirees to find the products that will best suit their requirements: protecting them from the uncertainty of their lifetime and from inflation and market risks; helping them address contingencies, such as health and aged care; and linking with any age pension entitlement. This would not only provide welcome support but also reduce the extent to which accumulated savings are being left in inheritances, exacerbating future inequality.

More detailed analysis of the retirement incomes system and superannuation tax arrangements by experts Andrew Podger, Robert Breunig and John Piggott will be published in a forthcoming open access ANU Press book on the Intergenerational Report.

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