Australia’s A$3.3 trillion pension system should boost people’s retirement income. That’s what the government says proposed legal objective for retirement pension. The system is backed by billions of dollars in tax breaks each year, supposedly for that purpose.
But there’s just one problem: much of what is saved is increasingly never spent.
Our new report, Super savings: practical policies for a fairer pension and a stronger budgetpoints out that super-tax breaks without revision will do little more than push up the legacies of Australians with well-to-do parents.
Super premiums and super earnings are both taxed more lightly than other income. These tax breaks cost the budget about $45 billion (2% of Australia’s gross domestic product or GDP) each year.
The Treasury predicts that this figure will reach 3% of GDP by 2060 and that the cost of super-tax breaks will exceed the cost of the old-age pension as early as 2036.
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Super-tax breaks are also unfair: about two-thirds go to the top 20% of earners.
This means that the tax breaks are the biggest boost to the super-accounts of high-income earners, who will almost all have comfortable retirements anyway and who tend to save the same regardless of the tax rate imposed.
The richest 10% of Australians get a bigger boost to their retirement savings from super tax breaks than poorer Australians get from old age pensions.
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But much of what is saved for retirement is never spent during retirement.
Previous research Grattan Institute and the Pension income assessment 2020 found that spending during retirement drops significantly for several reasons. Retirees often leave a large part of their nest egg untouched and leave it to their children.
This means that billions of dollars in super tax breaks only increase the inheritances the children of wealthy parents receive. It makes super a taxpayer-funded inheritance scheme.
This problem will get worse. Now that the mandatory pension rate has been legally increased from 10.5% of wages to 12% in 2025, future generations of retirees will retire with even bigger nest eggs that they will never spend.
Treasury expects that by 2059, one in three dollars paid out of the supersystem will be a bequest, up from one in five today.
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Large legacies increase the jackpot of the birth lottery. They help richer kids get richer. Among Australians who received an inheritance in the past ten years, the richest received an average fifth three times as much as the poorest fifth.
To help reverse this, the government needs to curb super tax breaks.
How to make super fairer
government policy, announced in Februaryof taxing earnings on balances greater than $3 million at 30% instead of 15% will help.
But the threshold should be lowered to $2 million. It is highly unlikely that balances between $2 million and $3 million will be spent in retirement, so reversing income tax breaks on balances greater than $2 million would further reverse taxpayer-funded legacies.
And there’s more. Currently, many wealthier Australians receive a larger tax break per dollar contributed to super than many low-income earners.
Still, low earners have more to compensate. Putting money into their super will reduce their retirement pension and shorten their lives, meaning they will have less time to enjoy their super when they retire.
Read more: The super giveaway that allows the rich to amass even more tax-free
The pre-tax contributions of people who make more than $220,000 a year should be taxed at 35%, instead of the 30% charged for those who currently earn more than $250,000. That would still provide a 10% tax break on super contributions for high earners (given the top marginal rate of 45%) and a tax break of at least 15% on low and middle earner contributions.
And the annual pre-tax contribution limit should be reduced from $27,500 to $20,000. Contributions above this level are usually paid by people nearing retirement who already have a large balance.
Tax income at retirement the same as while working
On the income side, retirees’ tax-free earnings on their first $1.7 million ($1.9 million as of July 1 this year) should disappear from their super.
The pension income at retirement should be taxed at 15%, the same as the pension income before retirement. This would save the budget at least $5.3 billion a year, and much more in the future, and make taxing super simple.
More than 70% of this income would come from the top 20% of retirees. The top 10% would pay an average of $7,000 to $7,500 extra per year, while the poorest half would each pay no more than $200 more.
Both sides of politics say they agree that super shouldn’t be a taxpayer-funded inheritance scheme. But there is still a long way to go before that vision becomes a reality.
The new report from the Grattan Institute, Super savings: practical policies for a fairer pension and a stronger budget. was released on Monday
