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May 16, 2014

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very difficult for a government to justify introducing a new tax on money already locked in the system and unable to be withdrawn.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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