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Issue #1735      June 15, 2016

Workers’ retirement funds

Rich tax grab

The Treasurer Scott Morrison dropped a bombshell upsetting many Coalition supporters and some in government in the 2016-17 budget. Concerned about the burgeoning budget deficit and public opinion he proposed a number of measures to curb some of the excesses of the wealthy in superannuation.

These included:

  • a $1.6 million cap on the total amount of super than can be transferred into retirement phase accounts
  • increasing the tax to 30 cents on concessional* contributions for people on incomes over $300,000
  • a lifetime cap of $500,000 on non-concessional contributions
  • lowering the concessional contribution caps so that individuals can contribute up to $25,000 per annum pre-tax to superannuation.

These could be described as a move in the right direction, but in reality only tinker at the edges and fail to address the real, underlying issues and inequalities.

The superannuation system is seriously flawed in many respects. Apart from the tax rorting (see below) there are other inequalities. Workers on low incomes, women in particular, people with a disability or chronic illness and people who have had long periods out of the workforce are seriously discriminated against in outcomes.

There are no guarantees of what funds there will be at the point of retirement. Workers take all the risks as many found out during the global financial crisis.

The average account balance in industry funds at June 30, 2015 was $36,000, with a gap between males and females of as much as $20,000 in some age groups.

In summary in the present situation:

We have a super system that rewards the rich and has little to offer those on low incomes.

We have an age pension system which punishes through means and assets testing those who save or have saved and want to improve their quality of life. The government’s answer to live off the assets in your family home!

The Turnbull government also has plans to make it more difficult to qualify for the age pension by including savings in super funds as assets and part of the family home above a certain threshold.

It will do this by “improving the targeting of Australian Government payments by increasing the assets test thresholds and the withdrawal rate at which pensions are reduced once the threshold is exceeded …”

According to budget estimates it would rob retirees of $2.4 billion over the five years to 2018-19.

One of the main aims of compulsory superannuation contributions is to wind back the age pension and replace it with self-funded retirement. In terms of this aim, the system has so far been an abject failure. It is just not working in this regard, nor does it look set to in the foreseeable future.

But it has proved to be a highly successful vehicle for tax avoidance by the wealthy, one usually recommended by financial advisers.

Tax rorts

Former Treasurer Joe Hockey commissioned a report into the financial system by David Murray, former CEO of the Commonwealth Bank of Australia, who headed the inquiry.

He noted that “the large number of individuals with very large superannuation balances suggests the superannuation system is being used for purposes other than providing retirement incomes. He was right.

Murray showed that two percent of accounts accounted for 30 percent of super assets, and 10 percent of accounts for 60 percent. Self-managed super funds (SMSFs) now control a third of all super assets (that is, $650 million out of a total of $2.1 billion).

These tax concessions include income paid into funds at a concessional tax rate of 15 cents or in some circumstances 30 cents in the dollar instead of at a marginal rate of 49 cents in the dollar.

The profit on investments within the fund is taxed at 15 cents instead of a marginal rate of 49 cents in the dollar. On retirement or during the transition to retirement (working part-time), funds are tax-free when withdrawn.

The government is foregoing tens of billions of dollars in taxation every year under a system that is skewed in favour of the rich.

Deregulation gone mad

The extent of the tax rorts is mind-boggling. They were accelerated by the former Coalition Howard government when then Treasurer Peter Costello largely deregulated the sector.

It was unashamed largesse for the rich. He abolished a tax surcharge on large contributions to super funds, so that all contributions were taxed at 15 cents in the dollar. He abolished taxation of savings when people over 60 withdrew their savings and retained a provision that the earnings on savings are not taxed when retirees turn 60.

He lifted the cap on the size of lump sum payouts and abolished reasonable benefits limits – the amount that could be taken out free of tax.

Economists raised concerns over the loss of future income. Labor backed the changes whereas the Australian Greens and social welfare organisations opposed them on equity grounds. Within the Coalition’s ranks there were strong differences over the impact on the budget bottom line.

The Association of Superannuation Funds of Australia, the lobby group for the super industry, says Costello went too far with his tax concessions. According to the ASFA, around 24,000 retirees receive an average payout from their super fund of $216,000 a year tax-free.

Non-retirees and many other retirees on a fraction of that income pay taxation, some even at the higher marginal rate of 49 cents in the dollar.

Since then there have been some caps imposed on contributions and taxation of earnings on savings. Labor also introduced a Low Income Superannuation Contribution (LISC) – a government payment to those on low incomes to compensate for the fact that they were paying a tax on income in the fund which was higher than their marginal rate.

Universal Age Pension

The cost of the super tax concessions is $38.1 billion and that of the age pension $42.1 billion. Combined this amounts to $80 billion.

The cost of the age pension, which the government repeatedly tells us is unsustainable, is rising by 3-4 percent per annum. The super concessions are growing at about 13 percent per annum. (This will be reduced slightly by the impact of the 2016-17 budget.)

Whereas the age pension appears in the budget papers as an item of expenditure the super tax rorts do not. They appear in a lesser-known Treasury document called Tax Expenditures. Tax concessions are not budget items, but they are just as important. They are money forgone.

If the government abolished the super concessions and combined the additional income that flowed with the money spent on the age pension, that would give it around $80 billion to spend on retirement incomes.

According to The Australia Institute, it would cost $55 billion to pay the age pension to everyone over 65. It would also be possible to increase the pension by 25 percent. It estimates about 80 percent of retirees would be better off.

There would initially be a huge outcry. We would be told that it is unfair to give the Rineharts and Packers the age pension. Workers would be told “they are destroying your super”. But where is the huge outcry over giving multi-millionaires and even billionaires far larger sums in tax concessions?

The former Whitlam Labor government began phasing in a universal pension. In 1973, Whitlam abolished all means and assets testing for people aged 75 and over. The next year it was extended to people aged 70 to 74.

A universal age pension, as was being phased in under Whitlam, where all retirees receive the same amount, regardless of their income during their working life would provide security and be far more equitable.

Those who wish to make additional savings for their retirement would be free to do so. But they would no longer be entitled to tax concessions and in the case of the rich, government largesse at the expense of taxpayers would cease.

A universal age pension should be centrally funded by a progressive tax system where those on higher incomes pay at a higher rate.

* Concessional contributions are before tax contributions. They include the compulsory 9.5 percent, any additional amount an employer might pay or any salary sacrifice contributions. Non-concessional is where the contributor has already paid tax on the contribution. There are caps on concessional and non-concessional contributions.

Next article – Editorial – CSIRO cuts – capitalist vandalism

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