Super tinkering bodes ill for those building nest egg
THIS year is shaping up to be an annus horribilis for superannuation. As usual in times of budget deficits, the government cannot resist going back to the reliable cash cow that super has become.
Before the sweeping changes to super introduced on July 1, 2007, super in Australia was one of the most taxed in the world. Unlike other countries, such as the US that only taxed benefits paid or Britain that taxed benefits and income earned by super funds, Australia was one of the few that taxed all three components including contributions.
After those changes, at least super payments to people aged more than 60 became tax-free. Since gaining office, Labor has almost constantly been making changes to super, with many reducing benefits and increasing taxes.
The last time super taxes were increased to the same extent was during the Hawke/Keating era. Options considered by the Gillard government include taxing payouts on super accounts with more than $1 million and increasing taxes on the income of super for the wealthy.
This increase in taxation of income earned by super accounts of the wealthy, if introduced, would come hard on the heels of an increase in the tax on super contributions for anyone earning more than $300,000.
Prime Minister Julia Gillard told Parliament that Labor "will never remove tax-free superannuation payments for the over-60s". The faith in such a promise must be measured against previous promises made such as, "There will be no carbon tax under the government I lead".
At the heart of the current headless-chook activity by the Labor Party is its fear of the expected cost of super tax concessions of $45 billion a year by 2015-16. As is often the case when decisions are made concentrating on only the cost of something, mistakes are made.
Research conducted by Mercer titled Tax, Super & the Age Pension found that the benefit of the reduction in age pensions paid offset the cost of the super tax concessions.
Dr David Knox, a senior partner in Mercer's Retirement, Risk and Finance business, said "to put it simply, the rich are not getting a better deal from the government when it comes to retirement funding. It's swings and roundabouts: what low-income earners miss in tax concessions, is made up for in age pension payments."
Concentrating on only the cost of super tax concessions, without taking account of the savings received by reducing the amount of government retirement benefits paid, will inevitably lead to policy mistakes being made. Not least of which will be irreparable damage to super's reputation as being the preferred retirement saving vehicle.
Unfortunately the coalition is not exactly leaping to the defence of super. Tony Abbott's promise that there would be no changes made to super in the first year if he became prime minister provides little comfort. Mr Abbott's promise on super must also be put into context given that, as spelt out in his book Battlelines, his preference would be to scrap all taxation savings related to super and have everyone on the age pension.
Thankfully there is one promise by Mr Abbott in his book that does provide some certainty for Australians.
That is, "any changes to the superannuation regime would need to be 'grandfathered' so people wouldn't lose existing access to what's already theirs".
Unfortunately, the Gillard government has not been prepared to make the same commitment to "grandfathering". If taxes are increased and/or benefits decreased at any time in the future, without existing benefits being protected, the decrease in Australians' retirement savings inflicted by the GFC will seem minor.