Statistical analysis of the Budget changes to super show the Government has cut back on overall fairness to all Australians in terms of tax concessions. Ton Garcia, chief executive of the Australian Institute of Superannuation Trustees explains why.
Last month this column examined the issue of fairness – or to be more precise – a lack of fairness in our retirement income system. Since then, the proposed changes to the Age Pension asset test – announced in the May Federal Budget – have significantly shifted the retirement income goal posts and, with it, the political debate.
The AIST-Mercer Super Tracker assigns Australia’s retirement income system a ‘fairness’ score based on the cost to government of the Super Guarantee tax concessions and the cost to government of the Age Pension. A perfect score of 10 out of 10 would represent a level playing field of government support across all income percentiles, either in the form of super tax concessions (during a person’s working life) or Age Pension (during their retirement) or from a combination of both (as is the case for most part-pensioners and most retirees). For example, such a level playing field might be each Australian receiving around $300,000 – $400,000 in government support towards their retirement income over a lifetime.
Currently, the playing field is far from level.
Prior to the Budget, the Tracker’s fairness score was a worrying 3.3 out of 10. Budget changes reduce this score to a measly 0.3 out of 10, effectively blowing fairness off the table.
What the Super Tracker clearly demonstrates is the brutal impact of reducing government support for median income earners (via the proposed changes to the asset test) while leaving higher income earners untouched (by ignoring super).
As discussed last month, high income earners already have it pretty good compared to ordinary wage earners in terms of retirement income support. Currently, those in the top 10% bracket receive around $489,000 in government support on their SG contributions over their working lifetime. This is about $150,000 more than the support received by a median income earner.
The Budget changes would see this gap in government support double to nearly $300,000 over a lifetime. And it’s worth keeping in mind that these comparisons do not include the tax concessions available on salary sacrifice/voluntary contributions – they relate only to the tax concessions on SG contributions. For those individuals who are able to take full advantage of their concessional caps over a working lifetime, the ‘inequity gap’ could be as high as $600,000.
This widening of the inequity gap means it is now more important than ever for super to be a priority issue in the Tax Review, for which the first round of submissions has just closed. (A second round is due later this year).
The interplay between superannuation and the Age Pension means changes to one ‘pillar’ often impacts on the other. If the proposed asset test changes go ahead, many of those affected will need to drawdown their super much faster than previously.
The tax review is an opportunity to review the Age pension and superannuation at same time, with the fairness lens applied across the entire system.
And if the next Federal election is going to be fought on super – as some political commentators have gone so far to suggest – both sides of politics must give serious thought as to how they can best explain and communicate to the Australian public why their super policy is fair and reasonable.
Few people in the community understand how the age pension interacts with super, let alone the value of super tax concessions and how they work in practice. This makes it easy for politicians to dismiss new proposals no matter how economically sensible.
Super is deferred wages and not ‘government money’ as such. But the government forgoes tax revenue to give super tax-advantaged status. Super is a ‘deduction’ – as opposed to the Age Pension being an ‘expense’ – but the costs to government come from the same pot, with the former set to outstrip the latter within four years.
The fairness message doesn’t have to be about class warfare, with talk of ‘super fat cats’ ripping off the system. Rather, the message should be evidenced-based with the focus on the legitimate need for policy change – a change that will benefit the vast majority of current and future taxpayers and make our system more sustainable.
Arguably, many high income earners would be quite surprised or even shocked to learn that the total amount they are likely to receive in super tax concessions is worth more than a full-age pension in retirement.
The way our retirement income system works – the way government support is distributed across the system – is complex. But that doesn’t remove the responsibility of any government – as well as super industry stakeholders – to ensure that the system is not only fair, but that the public understands the need for change.