The latest superannuation tax report from Mercer has found using Commonwealth Treasury’s tax expenditure figures to shape superannuation policy, without taking into consideration the age pension savings, is flawed and misleading.
Mercer Senior Partner and author of the report, Tax & Superannuation: The shortcomings of the superannuation taxation expenditures, Dr David Knox, said, “Using Treasury’s tax expenditure figures to shape superannuation policy, is short-sighted and defective.
"Last week’s announced superannuation changes are primarily at the margin. The tax expenditure debate will not go away if the tax expenditure figures are relied upon as the proof point for future reforms.”
Dr Knox pointed out the potential revenue gain for Government is much lower than the quoted value of the superannuation tax expenditure due to several shortcomings within the Commonwealth Treasury approach.
“Firstly, it ignores future age pension costs which will inevitably increase if super benefits were reduced due to higher tax on contributions, earnings or benefits. Secondly, it ignores any redirection of contributions to other tax effective investments that would occur if the super rules became less favourable.
“The cost of super tax concessions to Government is therefore only part of our retirement savings story. Concentrating only on one part is a flawed approach to setting long-term policy that will affect Australians and the Australian economy.
“Continuous tinkering to super will drive Australians to choose alternative tax-effective investments for their voluntary super contributions and this is a not a good long-term outcome,” Dr Knox said.
Mercer’s report: Tax & Superannuation: The shortcomings of the superannuation taxation expenditures, reveals the cost of super tax concessions to the Government increases by 187% from an average wage earner to someone who earns double the average wage. However, the age pension savings for the Government increase by 310% between the two.
The net cost to Government, accounting for future age pension savings, for an average wage earner is 63% of the tax concessions and reduces to 45% for an individual on double the average wage. The cost reduces as a percentage of the concessions as income rises, which means there is a direct relationship between tax concessions and age pension costs.
Therefore, increasing the taxation of superannuation would reduce future superannuation benefits and thereby increase future age pension payments.
Mercer’s Managing Director & Market Leader for the Pacific, David Anderson, warned continuous speculation threatened sustainable policy outcomes.
“Australia has the third best retirement savings and income system in the world according to the Melbourne Mercer Global Pension Index, but we seem to find new ways to undermine consumer confidence in our superannuation system. The recent speculation around tax concessions has understandably shaken confidence,” said Mr Anderson.
“It is not true that super tax concessions are overly generous in this country. Of the top eight retirement savings and income systems in the world, Australia only ranks sixth for the generosity of tax concessions.
“If the short-term debate continues based on Commonwealth Treasury’s tax expenditure figures as the proof point for change then we are putting a secure and dignified retirement at risk for many Australians.
“There are much better long-term solutions to ensure Australia’s retirement savings system is sustainable, including better integration between super and the age pension.
“Mercer supports long-term policy settings that include each of the three pillars of compulsory super, voluntary contributions to super and the age pension. An inclusive and holistic approach to policy for the long-term will result in better outcomes for all Australians and will constantly build confidence in superannuation.
“A debate about superannuation policy alone without considering age pension savings, and based on current overstated tax concession figures, is flawed and short-sighted,” said Mr Anderson.
Mercer has previously modeled the equity and fairness of superannuation tax concessions relative to the cost of the age pension to Government . This modelling has proven the value of support the Government provides for retirement income is remarkably level across the income spectrum, irrespective of a person’s lifetime income.
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