Super tax concessions not so super

To all the baby boomers out there nursing wounded retirement nest eggs and having to work into your dotage, my sympathies. But spare a thought for future generations. Looks like we’ll be working even longer, not to mention paying higher taxes, to generate the government revenue needed to pay for all your hip replacements.

Forget being in surplus by 2012-13, Treasury in its most recent intergenerational report predicts the budget will be in deficit by 2.75 per cent of gross domestic product by 2050, thanks to rising health costs and a shrinking base of working-age taxpayers.

And it is unlikely generations X, Y and Z will get to enjoy the tax breaks on superannuation as their boomer forebears as they near retirement.

Today, all super contributions made by employers out of their employees’ salary are taxed at a flat rate of just 15¢ in the dollar. Income earned while this money sits in the fund is also taxed at a flat rate of 15 per cent. Until, of course, you reach 60 and it’s not taxed at all.

Salary sacrificing arrangements mean some clever Nellies have been pouring money into super at the discounted tax rate and drawing down a benefit from their super fund of equivalent value. Tricky.

The very idea of a flat rate of tax on super is entirely at odds with the progressive nature of our personal income tax system in which you get taxed more heavily the more you earn.
Australians on the top income tax rate pay 45¢ in the dollar for every dollar they earn above $180,000. But when they set aside some of that income into super, they pay only 15¢ in the dollar. Indeed, everyone earning more than $37,000 a year and paying the 30¢ tax rate gets a benefit of at least 15¢ in the dollar when they contribute to super. Those paying only the 15¢ rate get no benefit. And those paying no tax get even less.

Put simply, the current way of taxing super is inequitable, regressive and unfair to boot. As a tax minimisation vehicle, it ranks second only to owning property.

The Ken Henry led review of the tax system acknowledged this last year, recommending the flat tax rate on super contributions be axed and super fund members instead be charged at their full marginal tax rate. In its place, a uniform tax rebate would be granted to all workers, up to a certain capped amount.

Removing this tax break for high-income earners would raise enough revenue to boost annual after-tax contributions for workers on average wages, or less, by at least 3 per cent of their wages, an analysis by the Australian Council of Social Service for next week’s tax forum showed.

When invested prudently, superannuation provides a valuable nest egg for individuals in retirement, reducing the cost to government of the aged pension.

But to be effective in encouraging saving that would have happened otherwise, tax breaks need to be targeted at those most receptive.

High-income earners don’t need tax breaks to encourage them to save as they will probably do so anyway – they have more income to save.

It is those on lower incomes and with interrupted careers, such as women, who have less means to save and therefore require the greatest help to put a little aside.


$1.3 trillion
Total value of Australian’s savings invested in superannuation — coincidentally also the same size as total economic output each year.

Proportion of all household wealth held by people aged over 65 in 2001.

Proportion of all household wealth projected to be held by people aged over 65 in 2031.

$15 billion
Total value of the tax break on super contributions in 2008.

Percentage of the tax break on super contributions thatwent to the top 12 per cent of income earners.

Percentage of the tax break on super contributions that went to the bottom 36 per cent of super fund members by income.

$30.9 billion
Total value of all tax breaks on superannuation for this financial year, including contributions and earnings’ discount tax rates.

$42.5 billion
Value of tax breaks on housing this financial year, as counted by Treasury, mostly due to the exemption of the family home fromcapital gains tax.

Projected federal budget shortfall in 2049-50 as a percentage of GDP, thanks to escalating health costs and shrinking proportion of working-age Australians.

Sources: Australian Council of Social Service paper A fairer and more efficient tax and social security system prepared for the National Tax Forum, October 2011; Australian Treasury Tax Expenditure Statement 2010; The 2010 Intergenerational Report by Treasury.

This entry was posted in Budget, Employment, Irvine Index, Tax. Bookmark the permalink.

3 Responses to Super tax concessions not so super

  1. It would be interesting, but not possible for me at least, to see if you have these views when you get to my age, Jessica. Many of the babyboomers for up to half a century paid their taxes faithfully, paid health insurance for decades when those with good health took virtually nothing out of it, worked hard and paid hundreds of thousands of dollars for your schools and your education, yet you seem to be asking them to do more. Many of them need those hip and knee replacements because they worked on farms with hard manual productive labour so our descendants could have a better life. They deserve the medical treatment now that they saved all their lives to cover.

    Maybe you know some who have taken more than their fair share out of the system. It’s a characteristic of all generations that some will benefit unfairly. Not most of the people I know. But please don’t add to the growing insulting myths that we are your burden and should feel guilty about it when we have given you the platform for what you have, and when we planned as best we could not to be a burden on our children.

    Not everyone is a “Salary sacrificing clever Nellie”. Give us a break. The Super we paid was money we were prevented from using in our youth (which was a good thing) but which financed Governments and services as well.

    If you want to use your skills as an economist, persuade Governments to tax the giant companies and banks that take vast profits off-shore and not fall for their blackmail.

    Pardon me for being a bit bolshie but I am so tired of being made to feel guilty for financial problems not of my making.

  2. ps Jessica: after getting that off my chest I see I’ve been scattergun here, as it’s clear you were targeting a particular group, so what I said was unfair on you. Cancel the posting if you like, or please add this to it. It may at least remind some who are resenting baby-boomers that we also have our pride, and are tired of and offended by the ‘burden’ image. Apologies if I’ve misrepresented your piece.

  3. bb says:

    $1.3 trillion
    Total value of Australian’s savings invested in superannuation — coincidentally also the same size as total economic output each year.
    Too right – so how much return do you think Super will deliver over the next generation when GDP grows at 5-6% per annum real (half of which goes to other factors of production – like labour)? This system is too big (as opposed to the consensus view that it is too small). It needs to be dismantle to protect citizens from relying on something that simply will not be there when they retire.

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