Rein in super tax breaks to give the young a fair go

The Albanese government should do more to rein in excessively generous super tax breaks, so the burden of an ageing population can be shared more fairly between young and old.

The number of working-age Australians for every Australian aged 65 or older has fallen from 7.4 in the mid-1970s to 4.4 in 2015, and could be as low as 2.7 by 2060. We should celebrate people living longer lives, but there’s a price tag attached.

It means more people needing more health and aged care for longer, funded out of a federal budget already struggling with a structural deficit of $50 billion a year, or 2 per cent of GDP.

At the same time, a series of policy decisions – from more generous pensions to tax-free superannuation withdrawals in retirement and special tax offsets for seniors – has substantially increased the amount of money being transferred by government from younger generations to older retirees.

Consider that a “self-funded” retiree couple can have, from July 1 this year, $3.8 million in super, unlimited home equity, and income outside super of up to about $66,000 a year, and still pay zero income tax. In fact, only one in six over-65s pay any income tax in Australia today.

All while most older Australians continue to draw heavily on the public purse via government-subsidised healthcare, aged care and other services.

Indeed, the notion of the “self-funded” retiree is largely a myth. All but the wealthiest 10 per cent of older Australians draw more on the public purse via government-subsidised healthcare, aged care and other services, than they pay in taxes each year.

Winding back excessively generous super tax breaks can help re-establish balance.

Super tax breaks arise because both super contributions and earnings are taxed more lightly than money outside super. These super tax breaks cost the government about $45 billion a year, and they’re growing fast – soon they will cost more than the age pension.

They’re also unfair. Two-thirds of them go to the top 20 per cent of income earners, who are likely to save enough for a comfortable retirement regardless. The top 20 per cent of households by income have usually already acquired household net wealth of at least $3 million by the time they approach retirement.

The government’s plan, announced in February, to tax the earnings on super balances above $3 million at 30 per cent is a good first step – although it should start from balances of $2 million.

But more needs to be done.

Currently, many wealthier Australians receive a larger tax break per dollar contributed to superannuation than many low-income earners. The pre-tax contributions of people earning more than $220,000 a year should be taxed at 35 per cent, instead of the 30 per cent charged to those earning more than $250,000 currently.

And the annual pre-tax contributions cap should be lowered from $27,500 to $20,000. Contributions above this level tend to be made by people close to retirement with already-high super balances.

Tax-free super earnings in retirement is the elephant in the room when it comes to intergenerational fairness in Australia.

Currently, retirees get tax-free earnings – on dividends, interest, and capital gains – on the first $1.7 million ($1.9 million from 1 July this year) of their super. This is unfair and unsustainable.

About 90 per cent of the benefits flow to the top 20 per cent of retirees. A well-off retiree with a balance of $1.7 million can easily get earnings tax breaks more valuable than the age pension. And with more and more super moving into the retirement phase, tax-free retirement earnings are set to punch an even bigger hole in the budget in years to come.

Superannuation earnings in retirement should be taxed at 15 per cent, the same as superannuation earnings before retirement. This would save the budget at least $5.3 billion a year, and much more in future.

More than 70 per cent of this revenue would come from the top 20 per cent of retirees. The top 10 per cent would pay an extra $7000-to-$7500 a year on average. Whereas the poorest half of all retirees would pay no more than $200 each, and would stand to benefit much more from the increase in health and aged care spending these revenues could fund.

These changes are fair. Retirees would pay some tax on the earnings from their super – the same as people who are working today – and much less than younger workers pay on their wages. Taxing super earnings in retirement isn’t retrospective because it applies only to future earnings.

It’s inevitable – and desirable – that our governments will spend more supporting older Australians. Reining in excessively generous tax breaks on super would ensure both the young and the old help pay for it.