IT’S a key plank of every Aussie’s financial security, but it has become a “broken system†that seriously favours the rich at the expense of everyone else.
Superannuation is something that most younger people barely consider. The money is paid into a fund (somewhere) without you having to do anything, and is left to accumulate.
But our mandatory retirement saving scheme has come to the average Australian’s attention since Treasurer Joe Hockey and Prime Minister Tony Abbott kicked off a national conversation about whether younger people should be allowed to dip into their super to pay for their first home.
But an expert on the system, Richard Denniss from progressive think tank the Australia Institute, says both sides of government have failed to address loopholes in the system that cost the Federal Budget about $30 billion a year in lost revenue.
Dr Denniss, the institute’s executive director, told news.com.au that the key issue with Australia’s superannuation system was that it gave lucrative tax concessions to rich people that were not offered to low-income earners.
“There’s a very clear problem at the moment: tax concessions go disproportionately to the wealthy. We could fix that and we could save the Budget a lot of money,†Dr Denniss said.
While our income tax system is proportional, meaning you pay more if you make more, superannuation is taxed at a flat rate.
High-income earners pay over 45 per cent tax on every dollar they earn above $180,000. But if that income comes from a superannuation account, the tax rate drops to 15 per cent.
Meanwhile, a low-income earner who makes $10,000 a year would pay no income tax but is still obliged to pay the same flat rate — 15 per cent — on their super.
As a consequence, the benefits of super tax concessions flow largely to Australia’s super rich.
“High-income earners get a tax break, while low-income earners pay more tax on their super than their income. It’s ridiculous,†Dr Denniss said.
He said the worst part of the scheme was that any income from superannuation was entirely tax-free if you were over 65.
“If people understood this there would be riots,†Dr Denniss said. “It’s legal money-laundering.
“If you can sink $100 million into your super fund and you are over 65, you will never pay tax. It’s obscene.
“The system is broken. It’s unaffordable and there is no chance it will last for the next 40 years.â€
Dr Denniss said this was something the average Australian should be concerned about “if they would like to see more money spent on their kids’ education, if they would like to avoid a co-payment for health and if they would like to get the Budget into surplusâ€.
“A government that decides that high-income earners don’t have to pay tax is costing itself a lot of money,†he said.
He said both sides of politics had failed to adequately address this problem because they wanted to win the votes of rich and influential Australians.
“They are both chasing the same demographic,†Dr Denniss said.
“They both want to appeal to older, high-income earners and the superannuation industry, which generates $20 billion in fees.â€
Opposition Leader Bill Shorten will argue today that Australians will be almost $1 trillion worse off within four decades due to the Abbott Government’s superannuation decisions.
A Labor analysis has found that the government’s decision to delay the scheduled mandatory increases to super contributions and to scrap the super rebate for low-income earners would make our collective savings pool $983 billion weaker by 2055.
The Abbott government has frozen the super contribution at 9.5 per cent until mid-2021, after which it will gradually rise to 12 per cent by mid-2025.
“An average income earner, aged 25, will retire with $100,000 less in retirement savings,†Mr Shorten will say in a speech at Monash University today.
“The Liberals’ attack on Australia’s world-class compulsory superannuation scheme will undermine retirement savings by nearly one trillion dollars and put greater pressure on the age pension.â€
Labor has argued the super contribution level should rise to 10 per cent in mid-2015 and hit 12 per cent by mid-2019.
But Dr Denniss said Mr Shorten’s argument about the rate of super contributions was “not what the debate is currently about†and was “dodging the main issueâ€.
He said the Coalition had set up the generous super concessions, but Labor governments had done little to fix them.
Labor did establish a super tax rebate for low-income earners, but the Abbott Government scrapped this.
“Labor did very little to rein in the loopholes for the rich,†Dr Denniss said.
“(Both sides of politics) are guilty of not trying to fix the big picture.â€
A spokesman for Mr Shorten said Labor had made changes in their area that were later unwound by the Abbott Government.
He said Labor’s reforms meant people earning more than $100,000 from their super would have to pay 15 per cent tax on amounts over $100,000.
Assistant Treasurer Josh Frydenberg told news.com.au that the delay in increases to superannuation payments was necessary for the government to deliver on its election commitment to repeal the mining tax without imposing additional costs on the Budget.
“Individuals are free to make voluntary contributions in place of the increase,†Mr Frydenberg said. “They are therefore no worse off as a result of delaying the Superannuation Guarantee increase.â€
He said the Coalition was “sticking to its election commitment not to make any unexpected detrimental changes to superannuation†and pointed to an upcoming tax white paper, which will examine super.
“The government will not pre-emptively rule anything in or out as part of this process to ensure a proper debate can be held around superannuation and retirement income tax settings,†he said.
Mr Denniss said Australians were paying $20 billion a year in fees to superannuation funds. “We are being robbed blind by the industry,†he said.
The Intergenerational Report released last week showed Australia’s ageing population would put enormous pressure on pensions, health and aged care over the next four decades.
