Australia’s superannuation system functions as “rich people’s welfare”, effectively taking money from the poor and redistributing it to the well-off. But it’s hard to get the word out in the media about just how unfair this system is.
Superannuation tax concessions are a rip-off, as they give the largest benefits to higher income earners and little or nothing to low-income groups. Be aware that those opposed to super changes are protecting their own benefits or jobs, not the common good.
The government is toying with making changes to super tax concessions, and there’s been the predictable protests from those opposed. The finance and super industries, which manage the $1.5 trillion so far collected in super funds, have co-opted good union people who believe super is a bonus from the bosses — not a cut in wages, which is what super really is. This coalition scares average workers and savers who really don’t understand the super system. There may be benefits from investing in these super funds, but the concession costs are unfair and unaffordable.
The super tax concessions now cost as much ($31 billion) as we spend on the age pension, and will grow as compulsory super moves to 12%, a problem noted by the Henry Tax Review and Treasury secretary Martin Parkinson. On the release of his Treasury’s 2012 tax expenditures statement, Parkinson stated:
“Tax revenue foregone on superannuation ($31.8 billion) compares with $30 billion forgone on housing tax concessions such as capital gains tax and negative gearing. By 2015-16, projected concessions will rise $44.8 billion foregone.”
The superannuation concessions do further damage as they redistribute from the poor to the rich. Around half of subsidies for super saving go to the top 20% of earners, while the bottom 20% score less than 2%.
So our superannuation system is not middle-class welfare but rich people’s welfare. How does it happen? There is a 15% flat tax on contributions and earnings that otherwise would be taxed at their marginal rate. This means top income brackets earners (over $180,000) get a 30c rebate on 45c tax. At 37c tax, the rebate is 22%, but under $37,000 (over 3 million people), there is little or no benefit but a rebate if they pay tax.
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Most people don’t understand their super. It’s sold as some mystical accumulation of funds that through the generosity of your employer and the magic of compound interest will fund your dreams of a generous retirement. Maybe you had some shocks in the GFC if your magic cash mountain was reduced. And now, just when your savings look better, all those nice fund managers are telling you the government will raid it!
There is ample evidence changes are needed and could create substantial savings, with the government indicating changes would likely apply to 1% of contributors (91,000 people). This would make limited savings, but I estimate cancelling the public subsidy for our top 5% of income earners would save about $7.5 billion, enough to fund Gonski education reforms. Cutting the top 10% would cover the National Disability Insurance Scheme, too!
Unfortunately, the better-off are very resistant to paying more tax. The recent Per Capita survey shows the top 5% of income earners have difficulty in acknowledging they are high-income earners. Although Labor MP Joel Fitzgibbon shares their views, this “modesty” is problematic, as we are a relatively low-tax country. This quote from the survey reinforces the unrealistic view many take of their finances:
“In 2012, over one-third of high-income respondents who believe they personally pay too much tax or about the right amount also say that high-income earners pay too little tax. Clearly, despite enjoying incomes in the top 5% of all Australian households, these people believe that they are not in fact wealthy — if they did not, they could not reasonably argue that the wealthy should pay more tax while they themselves already pay more than enough.”
The media exacerbates the difficulties by convincing high-income earners they are hard done by, while being quick to criticise “welfare” payments. Richard Denniss addresses this irrationality in a recent article in The Canberra Times:
“While we take for granted that today’s pensioners can make do with the age pension of $18,512 a year, both the government and opposition are at pains to agree that the next generation of retirees expects to live far more comfortably than did their parents. Taxpayers now contribute $30 billion a year to the so-called ‘self-funded’ retirement of those with super, yet the political debate more typically focuses on the unaffordability of the age pension or unemployment benefits. Millions of people think they benefit from this largesse, but 30 per cent of the benefits go to the wealthiest 10 per cent.”
There is a disappointing lack of clarity about the Coalition’s policies. They decided to support the rise in contributions to 12%, despite its $4 billion budget cost, but they want to wipe out the low-income rebate of up to $500 per year for those earning under $37,000 — and therefore return to overtaxing the poor.
It’s hard to get coverage on how unfair the system is. The Australia Institute has done some excellent work, a few journalists tackle the story, GetUp has made a brief foray to try to inform people, but it’s really hard to counter the almost hysterical language of “raiding savings”. In the meanwhile, the super-rich will continue to drain the relatively fragile tax take till some political party in government has the guts to reduce public subsidies for the wealthy.