Finance Your Super Fast-growing super system builds inequality with a govt subsidy
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Fast-growing super system builds inequality with a govt subsidy

A more equal retirement system would allow more support for retirees with less. Photo: Getty
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Australia’s retirement system is building inequality at breakneck speed, with the superannuation system ballooning at a huge cost to the budget bottom line.

Over the next three years, the cost super tax concessions impose on the budget will grow by a massive 69 per cent, from $30.55 billion to $51.65 billion.

Meanwhile, the cost to the budget of the age pension will rise only 13.3 per cent – from $38.3 billion to $54.7 billion – mainly driven by the ageing population.

That superannuation growth is not of itself a bad thing as it is enabling more Australians to enjoy a secure retirement – what the creators of compulsory superannuation back in 1992 had in mind when they developed the system.As Martin Fahy, CEO of the Association of Superannuation Funds of Australia, points out, the system is well designed in that it is providing growing retirement balances without blowing out the government budget, as is happening in some OECD countries.

“The cost of Australia’s retirement income system is affordable now and into the future and remains the most affordable of the OECD countries.”

The ballooning growth of superannuation will increase its cost to the government but Dr Fahy says the system will balance out.

“Modest growth in government assistance in terms of percentage of GDP for superannuation, in the form of tax concessions, will be offset in the coming years by reduced age pension expenditure due to higher superannuation account balances as the system moves to 12 per cent superannuation guarantee”.  

But the current superannuation system is so slanted to the benefit of high income earners that its supercharged growth is inequitable and therefore gives big state-funded benefits to people who don’t need the help.

During the current year, 50 to 60 per cent of all superannuation tax concessions (about $16.8 billion) will go to the top 20 per cent of income earners. The bottom 50 per cent, or half the workforce, will only get perhaps 15 per cent – or $4.58 billion – in super tax concessions.

The drivers behind high-income earners’ dominance within the system are high contribution caps.

They allow those with the wherewithal to put up to $25,000 a year into their superannuation on a discounted tax rate of only 15 per cent.

Non-concessional amounts of up to $100,000 a year can also be dropped in till an overall balance of $1.6 million is reached.

Matt Grundoff, an economist with the Australia Institute, says the system needs rebalancing towards people needing further assistance.

“If you look at the projections [in the chart above] you see that the age pension will reduce as a percentage of GDP while superannuation will increase,” Mr Grudnoff said.

“That means the assistance to the highly paid grows while assistance to those with the least relatively declines. If you add together the costs of super and the age pension we will soon get to $100 billion.

“We should take some of the money we splash on the very wealthy –who don’t use the age pension and are capable of giving themselves a comfortable retirement – and use it to increase the base rate of the age pension and relax the rules of the income test.

“That could solve the problem of poverty in retirement and make a real difference for a lot of people. We need to give the system a radical overhaul and stop tinkering at the edges – Australia has the 5th highest rate of pension poverty in the developed world,” he said.

Improving equity in the system cannot just be achieved by cutting super contribution limits as the there are gender gaps that need addressing.

Analysis provided by Industry Super Australia found that:

  • Men are 51.4 per cent of taxpayers, but  get 59.4 per cent of the super contributions tax concessions and 60 per cent of concessions on fund earnings
  • Women are 48.6 per cent of taxpayers, but get only 40.6 per cent of contributions tax concessions and 39.8 of earnings concessions

Mr Grudnorfff said a significant rise in the age pension could address those inequalities.

“We could give people a comfortable retirement now without spending more but we are not doing it.”

ISA in its submission to the Retirement Incomes Review (currently under way) made recommendations to improve women’s access to super.

These included removing the $450 minimum monthly pay threshold before super is paid because it denies access to super to part time workers, including many women.

Super should also be paid while workers are using the Commonwealth Paid Parental Leave so that parents taking leave, most commonly women, continue to build their superannuation balances.

The New Daily is owned by Industry Super Holdings

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