Sorry Malcolm, Super Tax Concession Reform Won’t be Fair

saving for retirement

The government’s war on Aussie taxpayers is gaining momentum. With budget deficits rising, the pressure for tax reform is mounting. At the heart of these proposals is a winding back of superannuation tax concessions.

Try as the Turnbull government might, ensuring super tax reforms are fair for everyone is impractical. Super taxes aren’t like GST. One is a tax on what you earn; the other on what you spend. Yet when we’re talking about super, every taxpayer is unique. And it means that it’s impossible to deal with it in a fair manner.

As usual, it’s the wealthy that stand to lose the most.

As the government is wont to do, it thinks savers have it too good. It’s not enough that it prevents you from drawing down your super whenever you like. Now it wants a larger share of your savings.

Just what these super tax reforms will look like remains unclear. But you can be sure that changes are afoot. The government faces years of budgetary shortfalls without new revenue streams. The cost of funding welfare commitments is rising as Australia ages.

While cutting government spending is an option, it’s always easier to tax people instead. And, as is so often the case, they target those that have the most money.

Your view on any super reform will depend on one of two things. If you’re well off, you’ll see it as just another government wealth grab. And you wouldn’t be far off the mark. If you’re less well off though, you’ll support it as long as it doesn’t affect your super. Both views are valid.

But you probably already know what the government will do. The wealthy are a minority, and as such are open to attacks by the government. Is that fair? No. But it’s never stopped them before.

Moreover, this issue strikes at the heart of what super is supposed to represent. Should it just be a substitute for pensions? Or should it be seen as a nest egg that can truly enhance your retirement?

Since its inception, most Aussies have assumed the latter. Why would we give up 10% of our wages at 25 if there’s no incentive for doing so? Why would we keep this up for 40 years? That money could cover four deposits on some very decent homes. If super ends up no different to a pension scheme, what’s the point of it all?

There are many within Canberra’s hallways that believe super should provide for an adequate retirement. Nothing more, nothing less. Here’s what Treasure Scott Morrison had to say on the matter:

‘[Super] shouldn’t be seen as an open-ended savings vehicle for wealthy Australians to accumulate large balances in a tax-preferred environment, well in excess of what is required for an adequate retirement.

When Australians see the government supporting the accumulation of enormous superannuation fund balances in a tax preferred, and in retirement, a tax-free environment, the confidence in the system is significantly undermined.

This idea that wealth creation undermines public confidence in super is questionable. I’ve come across a number of pre-retirees who think the complete opposite. These aren’t people with large super balances either. And yet their only regret is that their balances aren’t as big as they’d like.

For those that don’t own property, super takes on even greater importance. They see it as an escape route from a retirement of underwhelming pensions.

Most Aussies realise that living off pensions alone isn’t easy. But will the government use every penny on super tax reform to fund more generous pensions? I wouldn’t bet on it.

Changes to super tax concessions

One of the proposals to super concessions involves indexing replacement rates to 70%. Think of the replacement rate as a ratio of your income prior to, and after, retirement. So if you earn $100,000, a replacement rate in retirement would be $70,000. Under existing rules, a median wage of $52,000 has a replacement rate of 80%.

In this way, your retirement remains of a similar standard to your working life.

Other suggested reforms include voluntary top ups to super balances. Or taxing super contributions at margin rates minus 0.15%. That would see taxes for low income earners cut by 6%. Whereas high income earners would see their taxes double to 34%.

According to estimates, this would raise $6 billion in 2016–17 alone.

Other proposals are to cap pre-tax contributions to $11,000 a year. There’s even suggestions of placing a 15% tax on earnings during retirement.

Regardless of what the changes look like, they’ll end up skewed.

There’s no way to make super tax equitable. Not when the government must rely on the wealthy to do most of the leg work. Politically, it makes more sense to hurt as few people as possible. Otherwise the government risks backlash at the polls.

Yet Prime Minister Turnbull maintains a fair outcome is possible:

I’m not saying this is our policy but, for example, many people have advocated that there should be some changes to superannuation so that, if you like, the tax concession is less generous for people on very high incomes or high incomes. I suppose that would be seen by many people as fair.

But I suppose if you’re one of the people who’s getting less of a concession, you might, or might not, feel that it was unfair.

The question is whether the whole outcome is seen to be equitable — and that is our absolute objective — it will be a fair set of reforms because if it’s not fair, it won’t get the public’s support that it needs to be successful, so fairness is absolutely critical.

That might be true if any proposed reforms affected most Aussies. But there’s nothing equitable about super tax concessions.

GST is equitable. It applies the same rate on everyone, and it taxes spending habits. But unlike GST, super tax reform will hurt wealthier Australians more than any other group. When push comes to shove, the government will have few options in this matter. Even if it means upsetting an important, albeit small, voting bloc.

Super industry lobby groups take aim at proposals

The super industry won’t take tax reform lying down. It’s already attacked recent proposals from the Grattan Institute. But it has offered an olive branch to the government.

It would accept some tax on pre-retirement contributions. But it will oppose changes to concessions based on money spent in retirement. The government hasn’t yet ruled out taxing super in retirement. But at least there’s some consensus among both parties.

A bigger issue instead might be figuring out a starting point for tax reforms. What age group makes the cut? People have been saving for retirement on rules that were created decades ago. Is it fair to change them now? And how do we decide what this cut off point is?

There are lots of questions that need answering, and few obvious solutions.

The only certainty is that super tax concessions for the wealthy will pare back. Reforms will be as ‘fair’ as possible, but in a divided system, it’s the wealthy that stand to lose the most.

Mat Spasic,

Contributor, The Daily Reckoning

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