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Why we should continue to tax earnings into retirement

Everyone knows the current superannuation system is unsustainable. But there is a solution, according to a senior superannuation industry lobbyist.

While oversimplifying the issue of a misallocation of tax concessions in superannuation, Bernard Keane’s article yesterday is correct that the system needs reform to more effectively achieve its dual goals of: 1) reducing the cost of the age pension to the government; and 2) increasing standards of living in retirement.

The current superannuation system is achieving both outcomes, with the National Centre for Social and Economic Modelling concluding that the system currently reduces age pension outlays by $5.7 billion per year, which will rise to $11.1 billion per year in savings per year by 2030 as baby boomers move into retirement with larger super balances. Superannuation is also ensuring that even when retirees still receive a part-pension in spite of having larger savings, they are better able to afford the healthcare and aged-care services that are so critical to enjoying a decent standard of living in retirement.

More than 50% of the tax concessions are afforded to fund earnings — that is, the growth of the almost $2 trillion already locked into the system. Earnings tax concessions, however, will increasingly favour the wealthy, as they naturally have contributed more. This is where Keane’s analysis unfortunately falls short and does not offer any solutions. It is very difficult for a government to justify introducing a new tax on money already locked in the system and unable to be withdrawn. The public would rightly feel aggrieved if the government changed the rules without allowing fund members to change their behaviour in response.

The previous government’s attempted tax on growth over $100,000 in retirement was a very poor attempt to manage this issue. It was developed without any consultation, and impossible for funds to determine how much growth was realised in any given year by each individual fund member. The necessary IT systems simply don’t exist, and the cost of building them would have resulted in significant growth in member fees.

The current government was correct to ditch the tax. In turn, however, it must face up to the unsustainable growth in the concessions as a proportion of the overall budget.

The superannuation industry has seen the writing on the wall, and the tax white paper due to be commissioned in the second half of 2014 is the opportunity to agree on a path to more sustainable tax concessions. It will necessarily include retention of the $1 billion per year Low Income Superannuation Contribution, which corrects a quirk in the system whereby low-income people are charged more tax because of their super contribution than they would have if they received the money as income. It should, however, also take a serious look at maintaining earnings tax into the retirement stage, rather than reverting to 0% the day people retire.

Continuing earnings tax in retirement will target people with larger balances, raise significant revenue as the bulk of baby boomers move into the otherwise “tax-free” retirement phase (likely around $4 billion each year), and ensure that self-managed super funds’ capacity to game the tax system is reduced. It is also much simpler for funds to implement and will not cause higher fees that erode members’ balance.

*The author works in the superannuation industry and asked to remain anonymous

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  • 1
    Jude
    Posted Friday, 16 May 2014 at 1:33 pm | Permalink

    I am 70 and continue to pay tax. This is because I am a member of the Commonwealth Superannuation Scheme which was closed to new members back in 1991.

    When Peter Costello exempted superannuants from paying tax, this privilege was extended to all except those members of this scheme. At the time his reason was that this was an unfunded arrangement, even though members were required to contribute. So I’d like any superannuation review to look at every inequity, not just those the debate centres around.

  • 2
    bushby jane
    Posted Friday, 16 May 2014 at 3:30 pm | Permalink

    I just don’t get why Labor’s attempt at taxing super income over $100k should be so difficult. Wouldn’t it just be calculated from tax returns?
    Also, what is wrong in reverting back to what tax arrangements there were before Howard declared tax free super withdrawals? (I admit to not knowing much about super)

  • 3
    AR
    Posted Friday, 16 May 2014 at 5:30 pm | Permalink

    Jude - I’m in the same position, after a career in public service.

  • 4
    CML
    Posted Friday, 16 May 2014 at 6:46 pm | Permalink

    @ bushby jane - I agree with you. It can’t be that hard. Almost seems the likes of Anonymous don’t want it to happen?

    Also, his/her suggestion that $4 billion dollars could be raised/annum by continuing to tax “earnings”, simply doesn’t cut it. Not when Bernard is talking about this rort being worth $30 billion currently, rising to $50 billion in the near future.
    There has got to be a better way than reducing the old age pension, and leaving the bulk of retirees worse off, while the wealthy continue to get away with ripping off the system, scot free!

  • 5
    Posted Saturday, 17 May 2014 at 12:15 am | Permalink

    I’m no expert either, but from this article I gather that Labor was trying to tax increases in each member’s superannuation assets of more than $100,000.. But one of the strengths of superannuation and similar investments is that each member’s investment is pooled with each other’s rather than held in a separate account.

    So to calculate each member’s increase one would have to take the increase of the fund overall and divide it by each member’s notional share of the increase. To do that one would have to make some judgements. Would one calculate each member’s share assuming that the scheme was liquidated at the end of the tax year, or would one take into account each member’s share should they stay in the scheme until they retire. Would one assume that members would stay in the scheme until 65 (the new 70)? Would one assume that members would continue contributing at their current rate or project future pay increases? Etc.

    Such calculations are made to apportion superannuation assets upon dissolutions of marriage, but I imagine it would be much more complicated for all the members of a scheme. Apart from everything else, one would have to collect new data about members’ retirement plans and likely future earnings. Not impossible, but difficult and expensive. If there is an easier and more efficient way to impose such a tax it is much to be preferred.

  • 6
    Daly
    Posted Saturday, 17 May 2014 at 5:05 pm | Permalink

    My understanding of Labor’s policy was to tax the EARNINGS over $100,000 on super. Your super savings would have to be worth over $2million to be eligible to pay tax only on the earnings in excess of $100,000. (I’m using a return of 5% for this illustration).
    I understand the average person has less than $100,000 in their super and women half that so they have a long way to go to reach $1m.
    The baby boomers who have lots more than $2m are by definition in the top earners groups. Currently they pay 15% on the money going into the fund and nothing when it comes out. In fact they don’t even have to declare it as income if they fill in a tax form.
    Now that under 30 ‘youth”, single parents and age pensioners are doing the heavy lifting, I am of the opinion that the 15% on earnings over $100,000 in the fund should be taxed to make for a more equitable society. If not even those well off boomers may have no hospitals to go to, no schools for their grandchildren and no NBN to scype them.
    The premise in the article that super funds could not tell who had earnings in excess of $100,000 is either rubbish or an indictment of our trillion dollar super funds business. After all they do the most complex calculations to tell us the returns on our investment in that inComprehensible statement they send us each year. Managing our own super fund, I need to be aware of our earnings each year to see how successful my management is. It is the first order question of any fund manager.

  • 7
    Mary Henderson
    Posted Saturday, 17 May 2014 at 7:53 pm | Permalink

    I can understand why the author claims anonymity. I have worked for many years in the financial advising industry and the mere suggestion that super pension recipients are enjoying a free ride risks being painted as a socialist. When Howard introduced his reforms it was clear that they wouldn’t be sustainable and now, as
    their true costs balloon, it would be nice to think that the recipients would be grateful for the tax break they have enjoyed rather protest at any change.

  • 8
    David Sanderson
    Posted Saturday, 17 May 2014 at 11:34 pm | Permalink

    The entire Superannuation system needs a drastic review.
    It is obviously not reducing the pressure on the public purse, and is probably not serving many Superannuants well either.
    The new sustainable model should be as follows:
    All contributions up to a level which provides a sustainable income should be tax free. So if the average income is

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