Half-truths obscure the debate over superannuation tax breaks

by John Daley and Brendan Coates

Published by The Age, Tuesday 13 October

The superannuation debate is plagued by myths. This month, the super industry lobby group the Australian Superannuation Fund Association issued a report to bust these myths and defend the existing tax breaks for superannuation. Unfortunately, the report replaces many of the myths with half-truths – which can be even more dangerous.

The most blatant half-truth is the ASFA’s claim that three-quarters of the benefits of superannuation tax breaks go to middle-income earners. The ASFA defines middle-income earners as those earning between $37,000 and $180,000 a year. That enormous spread includes those just outside the top 3 per cent. Those people who earn more than 19 in 20 Australians may be surprised to find themselves described as “middle-income earners”.

And then the ASFA glosses over the bottom 40 per cent of income earners, with incomes less than $37,000, who benefit very little from super tax breaks.

A more sensible definition of “middle-income” would start with those who are actually in the middle. In 2012-13, the median taxable income in Australia was $41,561. If we include, say, the 30 per cent of taxpayers on either side of this figure, the share of super tax breaks going to “middle-income” earners drops to less than half – nowhere near the three-quarters claimed by the ASFA.

Instead, well over half of the tax breaks go to the top 20 per cent of taxpayers. Looking over the fences at their neighbours, people in this group may not all think of themselves as above-average. But they are all doing better than four in five Australians.

Next, the ASFA claims that “over a half a million Australians earning between $40,000 and $80,000 a year make salary sacrifice contributions”. The implication is that middle-income earners are responding to super tax concessions by saving more for retirement and that therefore, the tax breaks must be a good thing.

But only a small proportion of Australians make salary sacrifice contributions, and those on middle incomes contribute relatively little. Big contributions are predominantly made by those who are older or on high incomes – usually both. Less than 10 per cent of Australians earning between $37,000 and $80,000 make salary sacrifice contributions. In this income bracket, those aged between 30 and 49 sacrifice an average of $209. But almost half of those in the top tax bracket (earning more than $180,000 a year) make salary sacrifice contributions. Those aged between 60 and 64 with this income sacrifice an average of more than $9500.

Worse, these salary sacrifice arrangements don’t necessarily increase savings for retirement. Those aged over 60 are generally entitled to take their money out of superannuation the next day. Many of their “voluntary contributions” are simply savings funnelled into super so they pay less tax.

The full truth is that voluntary contributions to super overwhelmingly come from people who are older, or on high incomes, and do very little to increase savings for retirement that will reduce age pensions.

Next, the ASFA claims that assistance for retirement provided by the government is broadly comparable across the personal income tax brackets. By this logic, super tax breaks are fair because they provide a similar level of lifetime support to high-income earners as low-income earners receive via the age pension.

However, this comparison muddles a welfare payment with a tax break. In Australia, welfare payments are made to those who otherwise lack resources.

Consider by comparison unemployment benefits. Those who do not claim an unemployment benefit don’t get a tax break. Similarly, those who claim less age pension shouldn’t expect to see their income tax bill reduced accordingly.

Finally, the ASFA report truthfully points out that superannuation reduces pressure on the age pension. But compulsory contributions, not the voluntary contributions induced by tax breaks, do most to reduce pensions.

The ASFA certainly doesn’t point out that its own estimate of pension savings from super of $7 billion a year pales in comparison with the $20 billion of revenue foregone each year because of super tax breaks.

The best way to reform super tax breaks would be to limit pre-tax contributions to a maximum of $11,000 a year. This change would target super tax breaks to those who need them and so reduce or replace their age pension. It would improve the budget bottom line by about $4 billion a year. Reforms to the rules around after-tax voluntary contributions and the taxation of earnings in retirement could easily yield several more billions a year.

Australians are famously egalitarian. Our political culture supports one of the most tightly targeted tax-transfer systems in the world. Perhaps that’s why the ASFA provides half-truths about super breaks tax helping “middle” Australia when they primarily benefit those on high incomes. The need to fix Australia’s system of superannuation tax breaks is no myth. The sooner the Turnbull government embraces the full truth, the better.