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Apr 4, 2013

How our super steals from the poor to give to the rich

Super tax concessions are rich people's welfare, and those protesting against reform are just protecting their own interests. When will a government have the guts to rein in these subsidies for the wealthy?

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.

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.

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8 thoughts on “How our super steals from the poor to give to the rich

  1. Phil L

    “Unfortunately, the better-off are very resistant to paying more tax”

    Yes I am very resistant to paying any more tax – I consider a contribution to the government of over $200k a year more than adequate.

    Anyone have a problem with that?

  2. Dogs breakfast

    Yes, I do Phil. The tax system works on the basis of paying a percentage of what you earn, not a flat amount. If you are earning $10m p.a. for your $200k contribution, then you are ripping off the system, ripping off your fellow tax payer, paying a lower tax rate than the lowest paid members of society, and sponging!

    Be careful getting down off that high horse, it’s a long way.

    Yes, Eva, that super system is far and away the most egregious systemic rip-off in the tax system, followed for inequity and stupidity and lack of social need by negative gearing for housing.

    I hope Phil isn’t making his millions from negative gearing! Of course not, he claims to be paying tax.

  3. Phil L

    Thanks for your concern dogs breakfast. Not sure how you ascertained my income to be in the $m’s (it’s not). In fact as an employee my tax is deducted at source so the opportunity to rout you so readily assume I’m doing is alas not a real option.

    I don’t think I’m ‘ripping off’ any of my fellow tax payers, in fact a large percentage of them either take more from the system than they pay in, or for the bulk of the middle income earners take out what they pay in. Based on that fact I actually see myself as a net contributor to the system.


    I agree with Eva. But what really concerns me is that whilst everyone keeps talking about the high cost of Aged Pensions, why is it that people with a large superannuation fund can still get some of the Aged Pension, by tucking away the principal amount and receiving interest to live on so they can receive the Aged Pension. Some never touch the principal which often leaves a nest egg for their children.
    Whilst tax breaks are received on these funds why doesn’t the government insist the self funded retirees use their own funds until this runs out and then they can use the Aged Pension.

  5. Warren Joffe

    How is it that those of us who don’t pay much tax feel morally entitled to encourage vote-seeking politicians to pander to us by taking more than a third of productive people’s earnings (often when they are still paying a lot for mortgage repayments and school fees) – in fact a lot more in some cases?

    Easy to see why a highly qualified executive or professional who can go off to a Gulf State or other place where he/she will pay little tax shouldn’t do just that and say that he/she prefers to give their spare cash to fellow religionists in wherever, family planning in India or whatever than to a whole lot of lucky people he/she will never meet (unless he/she shares their passion for sinking their pensions into pokies at the local pub) who happen to enjoy the benefits of being Australian citizens.

  6. David Hand

    Come on Eva,
    You cannot point to a single dollar that comes out of a poor person’s wallet that ends up in a rich person’s wallet.

    Your diatribe is absurd. Left wing self-serving absurdity, but absurd none the less.

  7. Henry

    Warren you are no doubt referring to a Gulf State as in a gulf between the rich and poor. You are welcome to go there. Please, go I will pass round a hat at the local pub where the minions will forgo some of their pokie money to see you off. Congrats for being quite possibly one of the biggest tools in the universe. Who paid your Crikey subscription for you?

  8. Warren Joffe

    Ah, Henry, you don’t have much imagination. I was just giving mine a little stretch (in fact I know a few people who have worked or are working in Gulf states but none of them I think earning $1 million a year or anything like it, though, come to think of it, I suppose that some are just trying to build up a bit of a nest egg which they may be able to keep out of the hands of vote-buying self-serving politicians. (I can think of a couple who look back on the way ill-designed death duties destroyed their family’s wealth, such as it was).

    And I was just trying to make some of the sanctimonious – well represented in Crikey commentary – think a bit about our morality when we make such innocuous, indeed virtuous, claims that we would be willing to pay more tax for X or Y, or, more honestly that we would raise taxes to pay for X or Y. And what about using our votes to take from some (perhaps paying some politician to use words like “obscenely rich”) for our own advantage.

    Doesn’t the great slogan “no taxation without representation” suggest “no taxation without proportionate representation” in other words relying on the sense of right and wrong and of what gives worthwhile prestige to get the rich and high earners to consider what contribution they should make? At least that would be to start with principle rather than mere numbers of votes and self-interest. Of course a deficiency of imagination in all of us could be counted on to stop the rich giving as much as we all now try to take from them but, come to think of it, isn’t it odd in this day of highly publicised fund raising for starving children in Africa that we leave the burden of looking after the disabled here in Australia so much with the family? (And we express shock at Peter Singer’s rational case for euthanasing totally disabled new-borns…..).

    Life ain’t simple but let’s curb our enthusiasm for humbug.