Super nest eggs have emerged as the first major policy battle ground of the election and neither side of politics is covering itself in glory. The Opposition, while promising no “unexpected and detrimental” changes to super, has confirmed plans to axe a tax concession on the super balances of 3.6 million low income earners.
Meanwhile, in its search for budget savings, Labor is running the ruler over the super balances of high income earners.
After hinting it may tax withdrawals from million dollar super accounts, the government last week backed down and guaranteed the tax free status of all super withdrawals after age 60. That’s only fair. It’s one thing to tax new contributions to super at a higher level, but quite another to retrospectively tax someone who has been saving for years.
The government has earned the ire of the super industry which earns a crust managing the nation’s $1.5 trillion in retirement savings. It’s trial by media as the government floats and then rules out potential changes.
To get a handle on the super stoush, it helps to know a little of the history of super and how it is taxed.
Australia’s superannuation system turns 21 this year. In 1992, the Keating government decided to force workers to put aside 9 per cent of their income into savings for retirement to head off a blow out in the cost of the aged pension as the population ages. By forcing people to save for their own retirement, fewer would need to claim the aged pension.
So out of every pack packet you earn, your employer is forced by law to put aside 9 per cent into a super account on your behalf.
Without compulsory super, that money would instead come to you as income and you would pay tax on it at your marginal rate.
Instead, the portion of your salary paid into your super account is taxed at a flat rate for everyone of 15 per cent.
If you have extra money to save, you can also make voluntary contributions up to $25,000 a year and get this concessional rate of taxation. As that money grows and is invested for you by your super fund, those earnings are also taxed at 15 per cent.
What is immediately clear about the way we tax super today is that it is regressive – providing the biggest benefit to people on high incomes.
If you’d ordinarily pay 37 per cent tax on your earnings, but you pay only 15 per cent when it goes into super, that’s a pretty sweet deal.
Conversely, if you are below the tax free threshold or only pay 15 per cent tax anyway, there’s not much of an incentive. Indeed, for people below the tax threshold who would pay no tax ordinarily, there is a penalty.
To fix this, the Gillard government introduced, as part of mining tax package, a low income superannuation contribution whereby the government effectively rebates the tax paid by low income earners on their super contributions.
The Opposition proposes to scrap this rebate if elected because the mining tax is not raising enough revenue to cover the cost. But the Opposition’s policy would make an already regressive system even more so.
Indeed, most people agree that the super system is too favourable to high income earners.
The Ken Henry tax review concluded as much, recommending that super contributions be taxed at a person’s marginal rate.
Ultimately, the taxation of super is a moral issue. Is it fair that high income people should receive a disproportionate tax break on each dollar of savings?
Some sort of tax concession for everyone on compulsory super seems only fair, given that you don’t have any say in whether to contribute.
And super tax breaks also encourage people to save more for retirement than they would otherwise.
But arguably, high income savers are not the sort of people who would end up being a drain on the public purse through the aged pension anyway.
Treasury estimates the value of all super tax concessions is now worth $30 billion a year to taxpayers. And this is predicted to rise to $45 billion by 2015-16 as the money in our national super kitty grows. Tightening tax concessions on higher income earners would help restore the budget to surplus.
But most people also agree there has already been too much tinkering with super in recent years.
Super has become a political play thing – undesirable for a financial product with such a long time horizon.
Both sides of politics should commit to leave super alone and, if elected, conduct a comprehensive review of the system to address concerns that it is inequitable and unsustainable.
The eve of elections is not the time to be redesigning such an important pillar of Australia’s retirement system.
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