Who is affected by the Turnbull government’s proposed superannuation changes
by John Daley
Published by the Australian Financial Review, Monday 18 July
Coalition members meet today in Canberra to consider proposed changes to superannuation. A few facts may help them decide.
The proposed $25,000 cap on pre-tax super contributions will have most effect on older men with higher incomes. Nearly four in five of those making pre-tax contributions of more than $25,000 a year are aged 50 or over. Of these, more than half have already accumulated super balances of more than $500,000. Few of these people will ever qualify for an age pension.
Some argue the $25,000 cap will make it harder for those with broken work histories – including women and carers – to make catch-up super contributions. But in fact it’s hard to find many people on even middle incomes who make large voluntary contributions to super.
Instead, high annual caps mainly create tax-planning opportunities for people who already have enough resources to fund their own retirement. Just 51,000 women earning less than $79,000 a year make pre-tax contributions of more than $25,000, compared to 153,000 men earning more than $79,000 a year.
Indeed, the proposed $25,000 cap doesn’t target super hard enough. Our Super Tax Targeting report shows that people contributing “just” $11,000 a year to super, together with other savings, are likely to enjoy a comfortable retirement without an age pension. The report also shows that very few will ever come close to breaching the new $25,000 cap.
A $500,000 lifetime cap on post-tax contributions would also help to align super tax breaks with the Government’s stated objective for superannuation: to supplement or substitute for the age pension. In reality, after-tax contributions do little to increase retirement savings. Instead, most people who make them already have large balances and typically contribute from existing pools of savings in order to minimise their tax.
Of all post-tax contributions, about half are made by just 200,000 people who already have at least $500,000 in their superannuation. Only 1.2 per cent of taxpayers have total super account balances of more than $1 million, yet this tiny cohort accounts for a quarter of all post-tax contributions. By contrast, the 70 per cent of taxpayers with super balances of less than $100,000 make just 9 per cent of total post-tax contributions.
The lifetime cap
Critics who say the $500,000 lifetime cap is too low usually neglect to mention that someone who has already made post-tax contributions of more than $500,000, are so well off they are very unlikely to qualify for an age pension. $500,000 is more than 95 per cent of taxpayers have in super right now. Even in a mature super system, where workers contribute at least 9 per cent for their working lives, most people will retire with less than $500,000 in super.
Accounting for post-tax contributions made in the past – in this case since 2007 when reliable records are available – helps to target the reforms. The alternative of grandfathering the $500,000 cap so it applies only to new contributions would lock in the excessive generosity of the former Howard Government’s 2006 super changes. Younger generations, on the wrong side of the drawbridge , would lose out having paid higher taxes to fund benefits for older generations .
Coalition MPs opposing parts of the Government’s super package have few alternatives.
One option would be to further lower the $1.6 million cap on tax-free super earnings in retirement. For example, the Association of Superannuation Funds of Australia suggests that single retirees need super assets of only $545,000, or $640,000 for a couple, in order to achieve a comfortable retirement. Taxing all earnings in retirement at 15 per cent (rather than just earnings on balances over $1.6 million) could save a further $2 billion a year.
Alternatively, taxing contributions at 30 per cent for everyone earning more than $180,000, rather than $250,000 as proposed in the Budget, could save an extra $1 billion a year.
Yet these options are unlikely to mollify unhappy Coalition MPs, or their donors.
The government could make alternative cuts. Not proceeding with the “carry forward” measure would save $250 million a year by 2019-20 and more in future years. Abandoning the Low Income Superannuation Tax Offset for low-income earners would save $700 million a year, but is unlikely to be popular with the broader electorate.
It is hard to see how the Coalition party room can oppose the proposed reforms if it accepts that the purpose of superannuation is to supplement or substitute the age pension, and that the country must live within its means.