The Conversation
13 Aug 2020, 12:09 GMT+10
Many economists think that earnings in super funds should be taxed at a relatively low rate, compared to labour earnings and other types of earnings such as interest and dividends.
This is reflected in tax policy around the world. Among members of the Organisation for Economic Co-operation and Development, private pension plans (what we call super) have among the lowest tax rates of any savings instrument.
The Australian tax treatment of super aligns with this trend. But the Australian system is much more generous than other countries and very expensive.
In the past financial year the tax concessions on super fund earnings cost the government an estimated A$17.8 billion. The tax concession on employer super contributions cost $19.6 billion.
Do the benefits of these generous tax concessions justify their costs?
Our recent report on savings taxes suggests that they don't, in large measure because they are poorly aimed at their intended objectives.
In order to understand just how poorly they are aimed, it is necessary to identify the arguments typically used to justify their existence.
Justification 1. The impact of tax compounds over time
The first (and by far most convincing) justification is that superannuation is typically held for a long period of time. Since income from superannuation is taxed annually, the impact of the tax compounds over time, similar to compound interest.
Lower tax rates can offset the increase in effective tax rates over time.
But in practice they are applied poorly because they apply equally, irrespective of whether the asset is held for a short or a long time.
Read more: Progressive in theory, regressive in practice: that's how we tax income from savings
Ideally the concession would be the greatest for workers at the start of their careers.
They are the ones who hold super for the longest time, but the system actually awards the highest concessions to the high earners, who tend to be the oldest and closest to retirement.
Justification 2. Super tax concessions encourage saving
A second rationale for superannuation tax concessions is that they help ensure people save enough money for retirement.
This argument is less convincing, because there is relatively strong evidence suggesting that it is the compulsory nature of superannuation, rather than how it is taxed, that drives retirement savings.
In other words, if people are not saving enough for retirement, superannuation concessions are the wrong tool - increasing the compulsory percentage would be better.
Read more: Early access to super doesn't justify higher compulsory contributions
Moreover, if increasing retirement savings is a goal of tax policy, it would be best achieved by charging the least to the people most likely to respond to tax rates.
Existing research suggests that low income people are among those most likely to respond to tax concessions. Yet at the moment the concessions are directed to high earners.
Justification 3. Super concessions take weight off the pension
A third argument is that super tax concessions reduce dependence on the age pension.
But super tax concessions only improve the government's financial position if savings on the age pension are greater than the cost of the concessions.
It is a far from decided question.
There is a good deal of evidence suggesting that the amount placed in super has only a modest impact on the likelihood that the superannuant will claim a pension, and a relatively modest impact on the amount claimed.
Increased savings of almost any form will reduce dependence on the age pension to some extent because most savings, other than owner-occupied housing, are counted in the means test.
If the government wanted a stronger effect it could tighten the means test.
Alternatively, it could direct concessions toward those Australians most likely to receive an age pension.
At the moment the biggest concessions are directed to the Australians wealthy enough to be unlikely to receive the pension.
So how should we tax super?
In the long-run there's a case for taxing the earnings from all types of savings at the same rate.
Short-run, super tax could be reformed by
making all superannuation contributions out of post-tax income (potentially with an upfront subsidy, but a smaller one than currently exists)
taxing earnings in the retirement phase in addition to the pre-retirement phase and using the resulting revenue to reduce the tax rate on all super earnings
taxing super earnings at a lower annual rate for younger Australians to account for the fact that they hold super assets for a longer
Removing "catch-up provisions" that allow older Australians to put in more at lower tax rates and lowering the annual concessional contributions cap
The savings made could help fund a reduction in personal income tax rates, greater government support payments, or a combination of both.
The government's retirement income review has examined some of these questions. It was delivered to the treasurer late last month.
Authors: Peter Varela - Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University | Kristen Sobeck - Senior Research Officer, Crawford School of Public Policy, Australian National University | Robert Breunig - Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University
Get a daily dose of Perth Herald news through our daily email, its complimentary and keeps you fully up to date with world and business news as well.
Publish news of your business, community or sports group, personnel appointments, major event and more by submitting a news release to Perth Herald.
More InformationGENEVA, Switzerland: A new United Nations report alleges that dozens of global corporations are profiting from and helping sustain...
LONDON/STOCKHOLM: The Persson family is ramping up its investment in the H&M fashion empire, fueling renewed speculation about a potential...
LONDON, U.K.: British oil giant Shell has denied reports that it is in talks to acquire rival oil company BP. The Wall Street Journal...
SYDNEY, Australia: Australia will not ease its strict biosecurity rules during trade talks with the United States, Prime Minister Anthony...
BEIJING, July 5 (Xinhua) -- No dull rows of chairs and tables, no endless slides of charts and numbers -- instead, a gleaming statue...
KHARTOUM, July 5 (Xinhua) -- After more than two years of devastating conflict, Sudan's capital Khartoum is slowly emerging from the...
Nearly three months after a devastating earthquake struck Myanmar, the country remains trapped in a deepening crisis, compounded by...
MELBOURNE, Australia: A second embryo mix-up in just two months has pushed one of Australia's largest IVF providers back into the spotlight,...
SYDNEY, Australia: Australia will not ease its strict biosecurity rules during trade talks with the United States, Prime Minister Anthony...
Birmingham [UK], July 6 (ANI): Indian bowling coach Morne Morkel hailed skipper Shubman Gill after a record-breaking outing at Birmingham,...
Washington [US], July 5 (ANI): Australian actor Julian McMahon, best known for his roles in 'Charmed', 'Nip/Tuck', and the 'Fantastic...
Washington [US], July 5 (ANI): Actor Regina Hall recently weighed in regarding Kate Winslet and Leonardo DiCaprio's characters in the...