The Albanese government has declared that they will increase the earnings tax rate on super accounts with a balance of over $3 million, much to the chagrin of the wealthy.
While this has made prime fodder for comedians to mock the rich, there are more serious issues at play here. Super tax breaks need reform and budget deficits need to be repaired.
Economic Policy Program Director Brendan Coates, Senior Associate Joey Moloney, and host Kat Clay, discuss whether the government should be cutting tax breaks on multi-million dollar super balances.
Read the Money in Retirement report
Transcript
Kat Clay: The Albanese government has declared that they will increase the earnings tax rate on super accounts with a balance of over three million dollars, much to the chagrin of the wealthy. While this has made prime fodder for comedians to mock the rich, there’s a more serious issue at play here. Super tax breaks need reform and budget deficits need to be repaired.
With me to discuss whether the government should be cutting tax breaks and multi million dollar super balances are Economic Policy Program Director Brendan Coates and Senior Associate Joey Maloney. Brendan, I mean, you’ve been in the media a lot this week. Before we get to that, Talking about those 3 million super balances, I think it’s helpful to actually take a step back and clarify the issue given all the talk about it.
What is actually the purpose of superannuation?
Brendan Coates: Thanks Kat. It’s, it’s funny cause it’s been two weeks since we first had the treasurer stand up and launch a paper about what the purpose of or objective for superannuation should be. And that has led us down the path over the course of the last couple of weeks.
to an intense discussion around tax and ultimately the policy that the government’s announced this past week. I think what’s ironic about super is the system’s worth 3. 3 trillion. You know, we’re paying fees of 35 billion a year or more. You know, these, these tax breaks in the system are worth nearly 50 billion a year, but the system has never had a legislative name.
The system has basically existed. Without a clear policy purpose. Now, what the government put forward in the last week is that the objective of the system should be to deliver income for a dignified retirement. While also being, sys, sustainable and equitable. That follows the, the fact that the previous government tried to, to put forward an objective for super that it was about providing an incoming retirement supplement or substitute for the aged pension.
Now, that’s led to a really intense debate. What’s clear though is while both sides can’t quite agree on what super, with each other, what super should be about. It’s become really clear what super shouldn’t be about and that is essentially a taxpayer funded inheritance scheme and the trouble is that that’s what it’s become so we’ve kind of got these really generous tax concessions they’re worth close to 50 billion dollars a year no matter how you really measure them they are very generous compared to how we treat other taxpayers.
The taxation of other savings. And a lot of that money is essentially going as concessions to the wealthiest 20 percent of Australians, about two thirds of the value. And, you know, we’re, we’re not interested in that for, for its own sake, because it’s going to wealthier Australians. It’s because the concessions that are going to particularly wealthy Australians are the ones that don’t appear consistent with any sensible purpose of super.
You know, it’s concessions that are boosting the value of balances going to those that are clearly already saving enough for a dignified retirement, which is how the Labor Party thinks about the policy of the government, or people who are clearly not otherwise going to end up on the age pension, which is kind of the objective that’s previously been put forward by the coalition.
And so when we have these tax breaks, we should really only be offering when they fulfill a policy aim. and certainly a lot of the value in money in the system that’s going in to boost the value of those, those, balances doesn’t appear to have a really strong policy rationale. And in fact, what we see is a lot of it actually gets saved.
So we’re giving money, we’re providing concessional tax treatment in super at the expense of other taxpayers that otherwise have to pay more or forego other services that are important in order to boost the super balances of those that have quite large balances when we know that the money tends not to be spent because the typical retiree is a net saver and in fact the treasury is forecast projected that from by 2060 one in three dollars that’s paid out of the super system is going to be in the form of a bequest.
up from about one in five dollars today. And if the money is from these tax concessions is by definition not being used to support a retirement income, it is by definition being used to subsidize inheritances. And that’s clearly a really big problem.
Kat Clay: And I mean, a lot of the research that’s informed this position from Grattan is in our report, Money in Retirement, available on our website at grattan.
edu. au, if you’d like to read more in depth into that background. Joey, I want to turn to you. What has the Albanese government proposed and why?
Joey Moloney: What the government has proposed is, is pretty simple at a high level. It says, if you have a balance of 3 million, The earnings on the money in excess of that 3 million is going to be taxed at 30%.
If people just bear with me while I go through the arcane details of the supertax landscape. When you make your contributions, the fund invests them. They get taxed at 15%. If you’re a retiree, they’re tax free up to 1. 7 million. going up to 1. 9 by the middle of this year. So what the government is saying is that, okay, there’s going to be a new rate for the earnings on the money that’s above 3 million dollars of 30%. Now, like Brendan said, it’s doing this for the variety of reasons explaining why super tax breaks desperately need reform. But another reason why it’s doing it is, to repair the budget. We’ve got a 50 million deficit, structural deficit of about 2 percent of GDP. And we’ve got these spending pressures that are long term in nature. They’re about the ageing population, so things like paying for aged care, paying for health. They’re also about paying for the NDIS and we’ve also got increased defence spending needs. So these are structural long term spending pressures and in most cases, desirable spending as well.
So it’s really, really important that the government look for ways to improve that budget bottom line to make sure we can get the budget on a strong footing long term.
Kat Clay: Joey, there’s been a few numbers bandied about in the media, but I mean, how many people will this impact and how will it impact them?
Joey Moloney: Treasury very helpfully put out some estimates of how many people the policy should impact and how much money it’s expected to raise. So Treasury thinks that by the time the policy starts, which is, one July, 2025. So the government has said, That the policy is not actually going to take effect until after the next election.
it should impact about 80, 000 people at that point in time. Now, just to put that in perspective, you know, most Australian adults have a super account, not all, but most about 11 million Australians have less than 100, 000 in their super. So we’re talking about 80, 000 here, the top 80, 000 people who are lucky enough to have 3 million in their super accounts.
And Treasury has estimated that this extra tax should raise about 2 billion a year. So in the scheme of super tax breaks, that cost up to 50 billion a year, it’s not everything, but it’s still something.
Kat Clay: But why are they legislating it for 2025 and not next year?
Brendan Coates: You know, the politics that sit around this are the fact that the government went to the last election making a series of commitments that it wouldn’t touch superannuation.
And, you know, by legislating it for after 2025, they’re, they’re basically saying, well, look, we’ll legislate it now, but, you know, there will be an election before it takes effect if. So the Australian people will have their say about what they think about the policy. Irrespective of the politics, it’s clear that these tax concessions will need to change.
This is the start of probably a bigger conversation that we’re going to have to have if we want to be able to, you know, support budget repair. and meet the expending, needs that we have in areas like health care, age care, disability, and increasingly in our defense, a lot of which that Australians increasingly expect and which are sort of related to and aid the aging of the Australian population.
The longer we leave this, the harder that conversation is going to be to have. And so, you know, what they’ve done is basically try to balance those commit those pressures with the commitments they made. by making sure that it doesn’t take place after the next election. There are some similarities between what the government’s doing and what John Howard did with the GST, where he essentially went to the 1998 election proposing a GST after having said prior to the 1996 election, when the coalition government was first elected saying never, ever would they introduce a GST.
I suppose the main difference is our Labor plans to legislate the policy in this term of Parliament and take effect just afterwards. But either way, you know, there is the pro democratic process for what will take place. before the policy takes effect.
Kat Clay: I think this look to the future is actually a good segue into my next question for you, Brendan, which is about indexing.
And I mean, there’s been a lot of talk in the media about how there will be more and more people over this 3 million threshold in the future. What does that mean? for this policy and should it be indexed?
Brendan Coates: So the big public debate this week, or the later part of this week, has so far been about whether the particular threshold should be indexed.
Now, the government has proposed a threshold of 3 million where this higher tax on the earnings above balances of 3 million would apply. And they’re proposing not to index that. Now, you know, we first of all think that that threshold is too high. It should be 2 million, because that’s a point in which people are getting very generous tax concessions.
you know, worth at least one and a half times the age pension just on that first 2 million. And that’s more than enough support to go to that cohort that are clearly saving enough to have a dignified or comfortable retirement. And so when we’re thinking of this group with 3 million, we think it’s fine to not index the amount because, you know, it’ll gradually come down towards the level that we think is in fact appropriate in the first place.
Now it has led to claims that’s going to lead to many more people being affected in future. And certainly the longer that you leave it unindexed at 3 million, the more people it would affect. But what we do see is that even, you know, in some of the modeling we’ve done, if you project out someone who’s, You know, in the wealthiest, highest income 10 percent of workers today, and that they work all the way through and they retire in, say, the early 2050s, it’s only the top 10 percent of income earners that will start retiring with balances sufficiently high that they’d be affected by a 3 million cap.
You know, in three decades time, there’ll be 10 federal elections between now and then, and with plenty of time for our future government to think about, changing the indexation or changing the, the, the level of the cap. You know, what the government’s doing is they’re basically taking the same treatment for this cap as they take with the personal income tax scales, which are not indexed.
So the government can essentially say that’s a decision for a future government that may choose at some point to change how the personal income tax system is structured. This is just something else that applies. Now, if it was at a 2 million level, we think you’d probably start to index it there, which is kind of roughly the point.
You know, where we think it should be, should be applying. So no, this is not a policy that’s going to affect Middle Australia any time in the next few decades. You’re only talking about even the top 10 percent of earners by 2050. In fact, if you had a 2 million cap and you indexed that, that wouldn’t hit 3 million until about 2040.
So there’s plenty of time for the government to leave it unindexed. and it still be bringing down the value of concessions in line with what we see should happen in the system.
Joey Moloney: Yeah, I think that’s right. I mean, even putting aside the fact that it’s always a decision for a future government, whether they want to lift that threshold or not, and then also acknowledging that even if the threshold isn’t lifted.
It’s going to take decades for it to even affect people, you know, most of the top 10 percent of income earners. The thing you want to circle back to is the proposed objective of super, which is about making sure that people have income for a dignified retirement. And that’s done in an equitable and sustainable way.
So simply because the threshold might capture a few more people over time. Doesn’t necessarily mean that that’s working against that objective. In fact, it might even still be consistent with that objective, given that even if a government doesn’t move on it for three decades, it’s still really only impacting the top 10 percent of income.
Brendan Coates: You know, this is a policy that will raise 2 billion out of essentially a set of tax breaks in super that are worth close to 50 billion a year. It’s certainly not going to be the end of the conversation on super tax breaks. You know, if the government wants to seriously balance the budget and deal with some of the spending pressures elsewhere, or even if it’s simply looking at what the superannuation system should try to achieve and what tax breaks should achieve relative to what they offer at the moment, then there’s going to have to be another conversation about super tax, whether it’s in this term of parliament or in the next.
Kat Clay: So Brendan, what about claims that these changes will be applied retrospectively?
Brendan Coates: It’s something that comes up so often in super because of the framing people had, that this is a set of rules that are helping people plan for their long term retirement. Trying to keep consistency in those rules is, is important.
But, you know, these claims that, that the change that is being put forward by the government is retrospective are off the mark because, you know, lots of changes affect investments that were made in the past and no one suggests. You know, a retrospective. So if I bought shares in the company and then the government changes the personal income tax rates that apply on the earnings of those of that investment, we don’t claim that that’s retrospective and it’s no different here.
What the government is doing is changing for those with balances above 3 million. They are changing the tax rate to the earnings that will apply in future on the investment that has potentially already been made and that may be subject to change in future. And so no, they certainly don’t think that they’re retrospective.
What is often sitting behind this claim is actually the argument that this is unfair, right? You’re changing the rules on me. And you know, I have sympathy for people that if you change the rules, people don’t like being taxed more. That’s certainly true. That’s no different of anyone regardless of where you sit on the wealth distribution.
And I think that, you know, the clear response here is, well look, it’s probably not fair and it’s not reasonable to continue to offer such generous tax concessions to those with such large balances where it doesn’t get spent. particularly if it means that taxes have to be higher and younger, often typically poorer people, in order to fund the services that we all enjoy.
This is part of a fair redistribution, a fair change to the superannuation tax system to reorient it with its purposes. And it’s certainly in no way retrospective. Thank you, Brendan.
Kat Clay: I think that’s a good place to end this short and sweet conversation on super tax breaks. I’m sure we’ll be talking more about tax and budget repair in the months to come.
If you’d like to catch up on our research on this particular topic, you can find it at grattan. edu. au. I’ll also put a link to our previous report. on superannuation in the show notes. If you’d like to follow us on social media, find us on Twitter at Grattaninst and all other social media channels at Grattan Institute.
As always, please do take care and thanks for listening.