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Super tax breaks don’t cost $45 billion a year and won’t cost more than retirement – WhatsNew2Day


You may have read this week that Australia’s super tax breaks are excessively generous (“well above any plausible target”) and that their costs are unsustainable.

The claim came from a report by the Grattan Institute, Super savings. But is it realistic?

The figures quoted – A$45 billion a year or 2% of GDP “and will exceed the cost of the old-age pension” – are taken from Treasury’s Statement of Tax Expenses and 2021 from the government Pension income assessment.

The benchmark for these estimates is the rate of income tax applied to it just income. Yet there are very few countries Actually taxing pension savings on something similar.

$45 billion a year, but compared to what?

Grattan himself is not suggesting that employers’ super contributions and super fund income should be taxed like ordinary income.

If all of its recommendations for scaling back “tax breaks” were accepted, the interruptions it claims are concerned would still exceed $30 billion a year and still be on track to cost more than old age pensions.

A better measure would be the regulation in most Member States of the Organization for Economic Co-operation and Development in which savings are taxed at standard marginal rates upon entering or exiting the system and become untaxed as they grow in the system, known technically as a TEE or EET regimen.

In most cases, tax is only levied on exit from the system, an “EET” regime.

The report of the Grattan Institute

In 2017, the Treasury issued a parallel calculation of pension tax expenditures using a TEE benchmark, which means that contributions are taxed at full marginal rates, with both earnings and withdrawals untaxed.

It found that instead of the employer contribution tax break costing $16.9 billion a year and the low rate on fund income costing $19.25 billion, the first costs $16.9 billion and the second costs $16.9 billion. minus $9.45 billion (because Australia taxes fund income at 15% instead of zero), reducing total costs by $30 billion.

If the Treasury had used the EET benchmark, which exempts premiums and revenues and only tax withdrawals, the measure of total tax expenditures for super would almost certainly have been negative (largely because our super system is not yet mature and we don’t have any major pension income to tax).

In fact, our current system has a similar impact to the EET system common in OECD countries, even if it is achieved in a different way.

This makes it more difficult for high earners to save

Without providing a clear benchmark, it is impossible to properly assess the specific proposals of the Grattan Institute.

Two would probably not divert the current regime too far from the EET benchmark common in the OECD, although neither is essential. One is a more progressive tax on contributions.

The other is the extension of the 15% tax on pre-retirement fund income to currently exempt income at retirement (although this should probably be offset by a reduction in the rate).

But another, tightening the annual pre-tax contribution limit from $27,500 to $20,000 and the after-tax contribution limit from $110,000 to $50,000, has the potential to expand super’s role in spreading lifetime incomes for the middle class. – and undermine high incomes.

The government’s review that, for all low-income workers, a retirement income of 65-75% of pre-retirement income was necessary to ensure a reasonable balance between living standards during working life and retirement.

Read more: Super has become a taxpayer-funded inheritance scheme for the wealthy. Here’s how to fix it and save billions

The average mandatory contribution rate in the 35 OECD countries with specific pension contributions that provide this level of income maintenance is 18.2%.

For those who don’t qualify for any old-age pension (probably about 40% of retirees in the future), in one form or another, that’s probably the level of savings they should be setting aside, although, as the evaluation of the government noted, many retirees have significant savings from outside retirement.

That means the $20,000 limit proposed by the Grattan Institute may be lowered too soon, to about $100,000 a year, which is hardly a top income among people in their 50s, especially among civil servants and academics (many of whom already contribute 15-20%) . .

The things Grattan missed

By continuing to focus on super taxation, Grattan fails to focus on the desperate need to put in place the last piece of Australia’s pension income system – to help people turn their accumulated savings into a secure income that maintain living standards and cover the risks of old age.

The Institute rightly emphasizes that too much retirement savings is passed down through legacies rather than being used in retirement, with the real risk of exacerbating inequality between future generations.

Too many retirees are cutting back on retirement and leaving more legacies than they want for fear of future risks, including longevity and health and elder care costs.

Read more: Yes, women are retiring with less, but boosting mandatory super isn’t helping

Sensible proposals are being developed for a ‘covenant’ requiring funds to offer products that are in the interest of retirees, including products that help them manage risk. But they have yet to be implemented.

I suspect implementation of the covenant will reveal major challenges, including market failures that make it difficult for funds to offer value-for-money indexed annuities and determine what is in the best interest of their participants given the complexity of old-age pension income and assets testing.

It is very likely that the government will have to simplify means testing and consider ways to encourage the provision of indexed annuities, including the ability to sell government-created annuities.

Now there is an agenda that Grattan could usefully focus on.

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