Australian super tax and caps not so generous on global stage

Australian super tax and caps not so generous on global stage

Australian super tax and caps not so generous on global stage

  • 12 February 2013
  • Australia, Melbourne

The size of tax concessions provided to superannuation in Australia has been hotly debated recently, but the argument that superannuation fund members receive unfair tax advantages has been defused by Mercer’s latest research.


Mercer’s research confirms that current tax concessions on superannuation in Australia are not generous when compared to retirement systems in eight other countries, which are considered to have the best pension systems in the world.


Mercer’s paper – Tax & Superannuation: Benchmarking Australia against the world’s best retirement savings systems - tests the validity of the argument that Australians' superannuation is treated too generously and concludes that on a global stage, this is not the case. 


“Our research reveals when the Australian approach is compared to countries with world-class retirement income systems, the after tax retirement benefits provided to Australians are lower than five of the eight countries,” said Dr David Knox, Mercer Senior Partner and author of the research.


The research models the effect of different tax systems showing the present value of the after-tax retirement benefit for an individual on average earnings, with a 9% employer contribution over 40 years, and benchmarks these results against Australia.


It shows the net retirement benefits for an average British worker would be 16.4%, or $43,534, higher while an American worker would be 11%, or $29,273, higher than their Australian counterpart.


“The taxation treatment of superannuation may be controversial, as the greatest benefits are inevitably received by those who participate to the greatest extent: primarily the higher income earners.  However, it’s also important to look at our retirement savings system in its entirety and the impact altering the tax model could have on the future costs of funding the age pension,” Dr Knox said.


Mercer’s Managing Director and Pacific Market Leader, Mr David Anderson, said, “Taxation of super in Australia is not so generous on a global scale and limiting how much people can take tax-free would discourage super contributions and diminish confidence in the entire system.  We are relieved the Federal Government has ruled out taxing withdrawals on super for people over 60”.


“Our research into superannuation members tells us there is significant confusion around tax on super and the last thing Australians need is more tinkering,” Mr Anderson said.

Perceptions of the tax effectiveness of super have declined over time according to Mercer research.


“In June 2008, 34% of working Australians considered super to be tax effective.  By June 2010, this had dropped to 20% and is likely to be even lower now.  One in five weren’t even sure about the tax effectiveness,” Mr Anderson said.


Based on Mercer’s most recent modeling, the countries with the lowest net retirement benefit all had a tax on investment income.  It is not surprising that retirement benefits rely heavily on the investment income earned and the power of compound interest.  If the investment return is reduced, then the benefits are also reduced. 


“The taxation of investment income, a relatively rare arrangement on the international scene, has a direct impact on the final benefit received by retirees, which in many cases will increase their likelihood of receiving an age pension,” Mr Anderson said.


Mercer’s research also compares contribution caps across countries and highlights their benefit in encouraging long term saving for retirement, without the Government having to provide excessive taxation concessions to the wealthy. 


Australia has the lowest caps of all nine countries studied.  The existing cap of $25,000 per annum falls significantly short of any country when expressed as a percentage of average earnings.


“We believe increasing concessional caps, particularly for those aged over 45 should be a priority for government, rather than reducing super tax concessions.

“Higher superannuation benefits due to increased contributions, improved investment returns or lower taxation will lead to less pressure from the ageing population in future budgets,” Mr Anderson said.


Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights