Research shows folly of view that tax on super is too low
Whenever decisions are made based on half-truths and political spin, which are often influenced by economic and ideological beliefs, mistakes will be made. Those who want to increase taxes on superannuation and impose arbitrary limits on benefits label the current system as overgenerous, but nothing could be further from the truth.
Thankfully, the results of research conducted by Mercer (Australia) were released this week that benchmarked the Australian retirement income system against that of eight other countries including the US, Britain and Canada.
In conducting the research, Mercer compared the types of retirement incomes provided by each country, the taxation of funded pensions and contribution caps. The final result of the survey, after applying the same facts and assumptions to each country, was a benchmarking of the nine different retirement systems.
The types of retirement income systems included government pension schemes, such as Australia's age pension, and pensions provided by individuals. Included in the pensions provided by individuals were mandated systems, like our superannuation guarantee system, and voluntary systems.
When it comes to the taxation treatment of retirement systems, the generosity of Australia's system can seriously be called into question. Australia is the only country that taxes employer and self-employed contributions, and it is also the only country where employees don't receive a tax deduction for contributions.
Australia is also one of only three countries that taxes income earned by pension and superannuation funds. The other two are Denmark and Sweden. Australia is, however, one of only two countries that does not tax retirement income.
In addition to taxes levied on superannuation, a major influence on how much a person will have when they retire are the limits placed on contributions. In this instance, Australia firmly comes in last place.
The current concessional contribution cap of $25,000 is 34.6 per cent of average earnings. This compares with Denmark, which has no limits, Switzerland, which has a contribution cap of 255.2 per cent, and Sweden, which has a cap of 124.6 per cent of average earnings.
To measure the impact of the different tax systems, Mercer modelled the projected value of an employee's superannuation on an average salary of $72,177, receiving the 9 per cent employer contribution, over a 40-year period. Mercer applied the same economic assumptions used by the OECD. These were an annual price inflation of 2.5 per cent, real earnings growth of 2 per cent and a real rate of investment return after costs of 3.5 per cent a year.
The results of this modelling resulted in Australia coming third last. After taking into account the various taxes levied on super for 40 years, an Australian ends up with $265,672. Coming in at No.1 is a resident of Britain with a retirement benefit of $309,206, followed by a Canadian with $298,329.
One of the main reasons Australia rates so badly is that our taxes are applied on contributions and super income.
The only two countries that also tax income are Denmark and Sweden, which came last and second last in the benchmarking. In the other countries that were benchmarked, 100 per cent of contributions and investment income compounds. In Australia, because contributions and earning are reduced by taxes over a person's working life, they end up with much less.
The Gillard government, as a result of this study, cannot justify increases in the taxation of superannuation because the tax rate has been overgenerous. This one-sided interpretation has nothing to do with facts and is all about an ideological view and trying to raise tax revenue.