New research from Mercer shows Australia’s after-tax retirement benefits are among the least generous when compared globally. The paper, Tax and Superannuation: Benchmarking Australia against the World’s Best Retirement Systems, also revealed that Australia’s concessional contribution caps, which Mercer says encourage long-term saving, are relatively low by global standards.
The study, conducted from December 2012 to January 2013, compared Australia’s superannuation system to the retirement systems of eight other countries considered the best in pension schemes, according to the 2012 Melbourne Mercer Global Pension Index. It concluded that Australia ranks low in terms of its “generosity” in tax concessions on superannuation.
David Knox, senior partner in Mercer’s consulting business, believes it’s the first time the tax systems of superannuation or pension arrangements globally have been placed under a microscope.
“…We tend to often look in our own backyard without actually comparing ourselves internationally. And I think it’s important that we have a bit of global perspective,” he says. “[In] fact, all countries with which we like to compare ourselves – developed economies – they all provide incentives for savings or pensions, because governments recognise that without such incentives, people won’t save.”
The lower third
Knox says the results showed that Australia, Denmark and Sweden, the three countries at the bottom of the nine, tax investment income.
“If you think about people investing long term and we kept the economic assumptions the same for everybody so we were fair there… compound interest is a really powerful component as to how much you will get in retirement,” he says.
“Now if you start to tax that compound interest or that investment income, then you will get less in retirement. It’s that simple.”
The other six countries in the comparison were found not to tax investment income.
For the study, Mercer created a model to measure how countries fare in terms of tax concessions, by applying the tax rules of each country to a universal sample – an individual on the average wage, for 40 years, in full-time work. The employer provides a 9 per cent contribution, and after 40 years, the individual draws down an income stream.
The net retirement benefits for an average British worker would be 16.4 per cent, or $43,534, higher, while American workers would be 11 per cent, or $29,273, higher than an Australian in the same situation.
“The two countries that do worse than us are Denmark and Sweden. In both cases, they tax investment income and they have taxes on benefits, but you’ve also got to recognise that [in both countries], they have fairly generous social security arrangements.”
Knox says Australia doesn’t offer generous social security arrangements, noting that accruing more super means individuals get less age pension.
“Even what we have done in looking at tax doesn’t necessarily tell the whole story, but I think what we have shown is that the Australian tax arrangements for superannuation are not generous on a world scale.”’
The paper shows Australia has the lowest concessional contribution caps of any of the countries included in the survey. Australia is currently capped at $25,000, which is 35 per cent of average earnings, while Denmark has no cap, and Sweden’s cap is two-and-a-half times the average wage. The UK has 127 per cent of the average earnings.
“We’re saying that Australia’s cap is too low, particularly for older workers.”
Knox says Mercer intends to continue research in this area, updating figures in future studies.