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Opportunity lost: a quick-fix on superannuation delays the inevitable

For a while it looked like the government would seriously tackle tax issues around superannuation, but that hope has been quashed.

 Is that it? As reports emerge that the government may have reduced its super reform agenda from a desperately needed makeover to a trim around the edges, policy wonks should be rightly aghast and the public should be too.

We all know that we have an ageing population and increasing pressure on government budgets. Remember all those graphs? We also know that one of the biggest strains on the budget is funding adequate incomes for people in later life, as well as paying for essentials like health, education, aged care and our safety net.

The government needs  to get superannuation and retirement incomes policy right for the long term.
The government needs to get superannuation and retirement incomes policy right for the long term. Photo: Jessica Shapiro

It is therefore unfathomable that the government would reduce superannuation reform to a mere tinkering at the edges, and do nothing to change the overall design of the system. Its mooted proposal is to shave tax breaks at the highest end in order to fund tax breaks for people who are on higher incomes. Can't see the logic? You are not alone. But sadly, this appears to be where we are heading.

The government appears to have scaled back its super reform ambition to tweaking the annual contributions "caps" that attract generous tax breaks from $30,000 to $20,000. This is the extra amount that people on higher incomes can put into their super and take advantage of churning their income to get it back tax-free in the transition phase.  Yes, it's a start but nowhere near what is required and cannot be called reform.  

In addition, if the government uses the savings to cut income taxes by raising the $80,000 tax threshold, as rumoured, then it would be giving the tax breaks back to largely the same group: the top 20 per cent of taxpayers who earn that much or more. That's right: 80 per cent of tax payers earn less than $80,000 and would not benefit at all.

Reducing the additional amounts people can contribute to super with a tax break will do nothing to improve retirement incomes for the vast majority of people who receive little or no benefit from the present system. Superannuation is taxed at a flat rate of 15 per cent, saving most people on the top tax rate 34 cents per dollar invested and costing everyone below the tax-free threshold 15 cents per dollar invested. Under the present system many women in low paid part-time jobs pay more in tax on their super than they do on their wages. Small wonder women retire with half the level of retirement savings of men.

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For a time there, we had hope. The government appeared to be seriously considering a proposal to change the current flat 15 per cent on super contributions to link it to an individual's marginal tax rate. This would make superannuation tax rates more progressive, and make the system work better for people on lower and middle incomes – precisely the people who need greater support now, to ease pressure on the national budget later.

It would also ensure that higher income earners don't get unnecessary tax breaks on their super when they would be fine in later life without them.

Such a makeover of the super system would make it fit for purpose and pass the fairness test.  It would ensure everyone receives the same tax break per dollar invested in super.

This reform has broad support, from Australian Council of Social Service, the Henry Report, the Financial Services Council, Industry Superannuation Australia, the ACTU, and Deloitte Access Economics. To fail to act on this level of broad consensus is a wasted opportunity.  

ACOSS has been arguing for reform for a long time. Our goal is to ensure that the incentives in the system, tax concessions, are serving a legitimate purpose.  That purpose should be to secure all of our retirement futures, not just to make wealthy people wealthier. In ACOSS's proposal, contributions up to $20,000 would attract a tax rebate of 20 cents in the dollar. That would leave almost everyone earning less than $80,000 better off in retirement. We also propose that the first $500 of contributions be matched dollar for dollar, to make superannuation really work for people on low incomes.

To pay for future health and aged-care services, public finance experts almost universally agree that the federal and state governments will need more revenue. We propose that some of that revenue could come from superannuation reform. Funding health and aged care services is a much better use of this extra revenue than election year income tax cuts which predominantly benefit higher income earners.

Everyone should be assured that they will have access to a doctor and hospital, in-home or nursing home care when they need it, not just when they can afford to pay hefty fees. In return, everyone should pay income tax according to their ability to do so. At the least, the earnings of super funds after retirement (interest, dividends and capital gains on investments) should be taxed at the same rate (15 per cent) as they are before retirement. In return, the government should restore the $80 billion removed from health funding for the states and curb user charges in health and aged care.

We need to get superannuation and retirement incomes policy right for the long term. A quick, politically inspired fix to pay for another round of income tax cuts on the eve of a federal election will only defer the reform challenge for another day. None of us can afford that.

Cassandra Goldie is chief executive of the Australian Council of Social Service.

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