Let's be honest. While most of us reckon saving for retirement is a good idea, if we had our druthers we would probably be more inclined to keep the money for now.
That's the thing about superannuation. Your money isn't just set aside for retirement it's locked away. Unlike other "long-term savings", we can't get at it if things go belly-up or our desires change. And if we were hit by the proverbial bus tomorrow, we would naturally feel cheated for worrying about having a good time when we were old and grey, rather than making merry today.
No, this isn't an argument to say, "To hell with super, let's all just punt on the age pension." But it does explain why the super industry isn't totally self-interested in arguing for tax concessions on super contributions. Despite what critics say, super isn't merely another form of middle-class welfare. It's an incentive to save today for a better retirement in the future and, not coincidentally, reducing the burden of future welfare costs.
Spurred by the coming round-table consultations on super, not one but two papers on equity in the super system have been released this week. The industry is obviously taking very seriously calls by the ACTU, welfare groups and the Greens for super tax concessions to be wound back, especially for higher income earners.
The papers, by the consulting group Mercer and the Association of Superannuation Funds of Australia (ASFA), make interesting reading.
They both argue that you can't look at super tax concessions in isolation, as critics tend to do. Australia's retirement system is built on "three pillars" - compulsory contributions, voluntary savings and the age pension - so any cost analysis must look at all three.
They also argue that super isn't a one-year proposition. Women, in particular, often have broken working lives and while they might be high income earners in some years, they earn little or no income in others. So it can be misleading to assume all the tax benefits go to a constant group of fat cats. And they argue that recent super changes, such as reduced contributions caps and a new contributions tax rebate for lower earners due to come in from July 1, have removed many of the inequities from super already.
The statistics commonly touted simply haven't caught up with that.
In its analysis, ASFA pointed out that the figures most often quoted are from 2005-06, when higher earners were allowed to claim much more than they can now and for the over 50s, more than double.
Under the new caps, it found more than 80 per cent of employer contributions (which attract most of the tax breaks) were paid for those on the 30 per cent and 38 per cent marginal tax rates in 2009-10.
Those earning $180,000 or more received less than 17 per cent of the total tax concessions on total employer contributions and less than 15 per cent of tax concessions on employer contributions and the popular co-contribution combined.
The co-contribution, of course, is means tested and that means test will get even tougher next year.
ASFA analysed what difference the coming changes to the super rules - the lifting of compulsory super contributions from 9 per cent to 12 per cent, the low income earner rebate and the new co-contribution - would have made to the 2009-10 figures. The share of tax concessions received by those earning $6000 to $80,000 would have risen, with those earning $6000 to $37,000 getting the biggest benefit, while the share of tax concessions received by those earning more than $80,000 would have fallen. Those top income earners, under the new policy settings, would have got less than 13 per cent of the total tax breaks.
Mercer examined the benefits provided to eight individuals on various incomes, assuming a 40-year working life and average life expectancy. While higher earners received more in tax concessions, it found the low income earner refund would improve the position for lower earners and they would also be the big beneficiaries of the age pension. Many higher earners will not receive a full age pension until well after 65, if at all. It gets a bit complex but take the two extreme cases: a low income worker earning about half the average wage (currently $34,000) for their working life and a high-flyer who starts on a salary of $68,000, gets 12 per cent salary hikes for the first 20 years and 4 per cent after that, which results in an annual income for the second 20 years of work of about $278,000 in today's dollars. The analysis looks purely at employer contributions (at 12 per cent) and the age pension.
Not surprisingly, the higher earner does better, getting almost $500,000 in tax concessions during his (or her) working life, even though he or she will be entitled to only $3705 of age pension. The low earner gets a mere $15,017 in tax concessions but $367,173 of age pension entitlements, resulting in total government support of $382,000 for the low earner and $502,000 for the higher earner.
But here's the rub. At current rates, the lower earner's benefits amount to 207 per cent of the total tax they will pay during their working lives the higher earners' benefits are a much more modest 17 per cent. Under most of the other scenarios modelled, the benefits are fairly consistent, about $400,000 in total value.
As with the ASFA analysis, Mercer notes coming changes (including the revised tax brackets from July this year) will improve the benefits offered to those lower earners.
The low income contribution refund will increase the lower earner's total benefit to almost $397,000 and the tax changes will lift it to $410,000.
Only a marginal benefit will accrue to higher earners.
It is glib to say that super should be "equitable". Of course it should.
The real challenge for the round table is not to target those supposed fat cats but to balance the need to provide for those who most need it against ensuring those who can afford to save becoming more self-sufficient in their old age. Provided they make it past that bus.
Frequently Asked Questions about this Article…
What is the current debate about fairness in Australia’s superannuation system?
The debate focuses on whether tax concessions and rules around superannuation are equitable. Critics say concessions favour higher earners, while industry papers from ASFA and Mercer argue you must look at the whole retirement system — compulsory contributions, voluntary savings and the age pension — and recent policy changes that already reduce some inequities.
How does the 'three pillars' framework change how we judge superannuation tax concessions?
Australia’s retirement system is built on three pillars — compulsory employer contributions, voluntary savings (including super top-ups) and the age pension. ASFA and Mercer say you can’t assess super tax concessions in isolation because the age pension and compulsory contributions interact with tax settings to shape overall retirement outcomes.
Which recent and upcoming policy changes aim to improve equity in superannuation?
Key changes mentioned in the article include reduced contribution caps, a new contributions tax rebate or low‑income earner refund due from July 1, lifting compulsory super from 9% to 12%, and a revised co‑contribution that is means‑tested (and becoming tighter). These measures are intended to shift more benefits toward lower earners.
Who receives most of the employer contribution tax concessions under the older rules?
According to ASFA’s analysis of 2009–10, more than 80% of employer contributions (which attract most tax breaks) were paid to people on the 30% and 38% marginal tax rates. Those earning $180,000 or more received less than 17% of total tax concessions on employer contributions and under 15% when combined with the co‑contribution.
How do super and pension benefits compare for a low‑income worker versus a high earner, according to Mercer’s modelling?
Mercer modelled two extremes over a 40‑year working life: a low‑income worker received about $15,017 in tax concessions but $367,173 in age‑pension entitlements (total government support ~$382,000). A high earner received roughly $500,000 in tax concessions but only about $3,705 in age‑pension, for total government support of about $502,000.
Do low‑income earners get a bigger improvement from the planned changes?
Yes. Mercer found that the low‑income contribution refund and upcoming tax changes would increase a low earner’s total benefit to almost $397,000 and then to about $410,000 after revised tax brackets, while higher earners would see only marginal additional benefit.
Why do analysts say it’s misleading to assume super tax breaks always go to the same high‑income people?
ASFA and Mercer point out that superannuation isn’t a one‑year proposition. People — especially women — can have broken or intermittent working lives, earning high income in some years and little or none in others. Looking at a single year’s data can misrepresent who benefits over a lifetime.
What should policymakers focus on to make the retirement system more equitable?
The article argues the round‑table challenge is to balance helping those who most need government support (low and interrupted earners) while ensuring people who can afford to save become more self‑sufficient in old age. In short: target support where it’s needed without undermining incentives to save.
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