Inequity of super generosity
Australia boasts what is perhaps the most generous middle-class welfare system in the world, a system where taxpayers shower benefits on executives that are not available to the average worker.
Research conducted for Fairfax Media by actuary Geoff Dunsford has identified at least four ways in which middle-class retirees obtain a benefit from taxpayers; a benefit which is proportionately more generous than the benefit enjoyed by - and he uses this example - a clerk.
Super tax concessions cost the taxpayer about $32 billion a year, according to Treasury. The bulk of this, says Dunsford, goes to middle- and upper-income earners.
Many of these have structured their self-managed super in such a way as to pay very little tax and some actually win a large cheque from the government each year by way of rebate on their excess dividend franking credits.
One such superannuant, who will remain anonymous for obvious reasons, routinely gets a cheque in the order of $400,000 from the government each year as share dividends constitute his only income and there is no other income to offset it against. And so it is, those with $10 million self-managed super funds are underwritten by those without $10 million self-managed super funds. The average taxpayer, in other words, picks up the tab.
This also explains why special dividends are so fashionable. There is a small and sophisticated army of high-net-worthers plundering the system for franking credits, albeit quite legally.
It is via such loopholes, built up over a generation, and created by both major parties, that a large tax leakage accrues to government coffers.
Yet it is the superannuation industry, ironically spawned by government in the first place, which is now pulling its masters' strings.
Frankenstein's monster has been unleashed. So powerful is this lobby that meaningful reform is unlikely for some time, even as funding requirements for the retiring baby boomers swell to stupefying levels.
What the research from Geoff Dunsford highlights, however, is not the immensity of this middle-class welfare but the inequity of it. Simply, it favours the wealthy not merely in size but in proportionality.
Dunsford illustrates four ways in which middle-class retirees gain taxpayer benefits that are relatively more generous than those for average workers.
He uses the examples of a clerk and an executive in the final year of their employment and the first year of their retirement, assuming an age of 65.
Via concessional super contributions, concessions on super fund fixed interest earnings, pension credits on investment earnings and the income tax scale on pension earnings, the executive does proportionately better than the clerk.
Fifty years ago, says Dunsford, normal income tax was paid on super fund pension payments.
This was the quid pro quo for having all contributions and investment earnings tax-free. "Since such pensions represented much lower income than that enjoyed while working, this still provided a significant benefit as they were taxed at lower marginal rates."
Since then, the rules have been changed many times "enabling the tax on fund withdrawals to be reduced in ever more complex ways", he says.
The piece de resistance was Peter Costello's move in 2007 to scrap the tax on super withdrawals taken after the age of 60.
It all makes for a super generous system, so generous though that Dunsford, and those few with the principle to speak against the compelling interest of their own hip pockets, reckon it won't last for too long.
MIDDLE CLASS WELFARE–CASE STUDIES
1. Concessional contributions.
While these are equivalent to earned income, which would be taxed at marginal rates, they are only taxed at 15% when paid into a super fund:
Annual salary $250k, contribution $25k. TML saved (46.5%-15%) = $7875 = 3.15% of salary
Annual salary $50,000, contribution $5,000. TML saved (34% – 15%) = $950 = 1.9% of salary
2. Superfund fixed interest investment earnings. Concessionally
taxed at 15%
Assume accumulated fund $1m, 50% in fixed interest, 5% earnings net of expenses. TML saved = $25k x (46.5% 15%) = $7875 =3.15% of salary
Assume accumulated fund $200,000 and same rate of investment earnings. TML saved = $5000 x (34% –15%) = $950 = 1.9% of salary (A proportional advantage to the executiveaccrues also from equity investment earnings).
3. Superfund investment earnings after retirement (pension mode). These are not taxed.
Assume for simplicity fund is still $1m, total fund income (including franking credits of $5000) is $50k and executive has no income from other sources, tml saved = $6,519.
With $200k fund, and fund income (including $1000 franking credits) of $10k.
Would pay no tax, so no TML saving.
4. No tax is paid on the pension payments from the fund. The normal income tax scale ensures that this benefits the Executive proportionally more than our Clerk.
SOURCE: Geoff Dunsford
(TML = tax and medicare levy )