Superannuation can be baffling. Many don’t understand how it works or how it’s taxed. All some of us know is that we have 15 different accounts and can’t work out where they are.

Things became even more complicated recently with hints the Gillard government may be considering changes to superannuation, to shore up the budget and fund reforms like the NDIS and Gonski. The opposition leapt on the rumours, claiming the government would carve into people’s retirement savings. The opposition was assisted by the superannuation industry and, in an own goal for the government, Labor backbenchers Simon Crean and Joel Fitzgibbon, who warned against changes to super.

Crikey spoke to economists and the superannuation industry to help you understand super. Deep breaths, everyone …

How much tax do I currently pay on what I put into my super?

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All payments into super accounts across all income brackets are taxed at 15% (up to a limit, which we will go into later). All earnings, including interest, from your super accounts are taxed at a 15% rate.

Super payments are split into two categories which are handled differently: let’s call them before-tax and after-tax. Before-tax payments primarily include your compulsory employer payments and have a $25,000 limit. They’re taxed at 15%. After-tax payments, which is mostly what you put in personally, have a $150,000 limit and are free of tax, because you’ve already paid it. However once you go over that limit, on either category, you are taxed at a much higher rate of 46.5%.

Simple, right?

Now, the Gillard government intends to lift the tax rate on before-tax payments to 30% for people earning over $300,000 pa. That was announced during last year’s budget, but so far legislation has not been tabled. A government source told Crikey the legislation would be tabled in the next few weeks.

So unlike income tax, which is taxed at different rates depending on what you earn, super has been initially taxed at a flat rate. The idea was this would encourage contributions from all income brackets. Superannuation is a multi-billion dollar industry and the low tax rates are particularly appealing to high-income earners. This is why the government is considering changing the super tax rates.

The current fuss is all about the tax in the contributions phase of super. There’s tax when you put it in (contributions phase), and there’s tax on the investments made by whoever is managing your super. (When you retire and take it out, you don’t get taxed.) There’s a good Treasury explainer of the different phases of super tax here.

Why would the government target high-income earners’ superannuation?

Currently the super contributions of high-income earners are taxed at 15%, which is a discount compared to their income tax rate which stands at 45%. This would still be a discount, even if the super tax increased to 30%.

Dr Michael Rafferty from the University of Sydney Business School calls the current system a family trust for high-income earners. “It’s very attractive for people over 50 who have large income and no kids. And if you have a partner who has a lower income than you, you can load up their super as well. [Changing these laws] is not going to make a huge difference [to the budget bottom line], it’s just something to be cleaned up,” he told Crikey.

How has the current government already changed superannuation?

So far the Gillard government has made three significant changes to superannuation.

Firstly, it bumped up the compulsory super contributions by employers from 9% to 12%, which will be phased in over the next eight years. Secondly, it introduced the “Low Income Superannuation Contribution”. From last July the government contributes to low-income earners’ super payments, up to $500 for workers earning less than $37,000 pa (read about the scheme here). This is effectively a super top-up. Pay attention to this scheme; we’ll explain why in the next section. (These first two measures were dependent on revenue from the government’s mining tax.) Thirdly, as mentioned already, Labor promised to bump up the tax which high-income earners pay on their contributions from 15% to 30%.

What is Labor going to do to super in this budget?

We don’t know yet, as the government hasn’t announced anything specific. Some commentators are suggesting the next step for Labor would be to increase the tax on contributions by those earning over $180,000 pa.

Treasurer Wayne Swan hinted yesterday at some potential upcoming changes: “Everyone understands that the [superannuation] system must be sustainable for the long term, that tax concessions for those at the very top are excessively generous and to make it sustainable over time the concessions need to be sustainable over time.”

Former Reserve Bank board member Warwick McKibbin, who was quoted at length yesterday in News Limited papers, told Crikey that his criticism wasn’t about Labor’s potential changes to superannuation, it was more about the process Labor was using.

“The system could need an overhaul. If there are flaws with it, let’s consult,” he told Crikey. “If they are going to change superannuation, they should have a proper process in place and not just change it. I’m happy for there to be some sort of change how the system should work, but [it shouldn’t be used] as a way to raise revenue. That will cause uncertainty.”

What is the Coalition going to do to super, if they win government?

The Coalition has pledged to rescind the Gillard government’s Low Income Superannuation Contribution. This is what Swan is talking about when he says “Mr Abbott … has a proposal to increase the tax on the superannuation of over 3 million workers”.

The Coalition has also said it would stick with Labor’s increase of employer contributions to super of 12% (much to the relief of the superannuation industry) and has agreed to look at concessions for low-income earners “once the budget is back in a strong enough position“. Apart from that, Joe Hockey has promised no unexpected changes to superannuation.