Overview

Winding back superannuation tax breaks will be an acid test of our political system. Not because our major political parties are at loggerheads, but because they largely agree on both ends and means. If we cannot get reform in this situation, then there is little hope for either budget repair or wider economic reform.

Better targeting of superannuation tax breaks should be one of the first items of business in the new Federal Parliament. The government proposes to legislate that the aim of the $2 trillion superannuation system is to encourage savings to supplement or substitute for the Age Pension. Tax breaks should only be available when they serve this policy aim. Yet as our 2015 Super Tax Targeting report shows, current super tax breaks go well beyond this purpose and their costs are unsustainable.

This paper analyses the impact of proposed changes to super tax breaks announced in the May Budget by the Coalition Government, and the ALP’s subsequent policy response. They largely agree on a new 15 per cent tax on super earnings in retirement for those with super account balances of more than $1.6 million; a lower annual cap of $25,000 on pre-tax contributions; a lower income threshold of $250,000 at which tax on super contributions will rise from 15 to 30 per cent; a $500,000 lifetime cap on post-tax contributions; taxing earnings while in transition to retirement; and removing tax breaks on inheritance.

These would be big steps towards aligning super tax breaks more closely with their purpose. They would trim the generous super tax breaks enjoyed by the top 20 per cent of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension.

Claims that the Budget changes will affect many low- and middleincome earners are wrong. The changes will affect about 4 per cent of superannuants, nearly all of them high-income earners who are unlikely to access the Age Pension. Nor are the proposed changes retrospective. Many reforms affect investments made in the past, and no-one suggests they are retrospective. Rather, the changes will affect taxes paid on future super earnings, and entitlements to make future contributions to super.

The major parties disagree about relatively little in this reform debate. The ALP would not count post-tax contributions between 2007 and the present. On the other hand it would adopt a number of other policies that would contribute even more to budget repair. Any combination of the packages on offer would improve the current system overall.

The changes are electorally popular. Electorates more likely to be adversely affected by the super changes – that is, those with more old and wealthy voters – tended to swing less to the ALP at the last election than other electorates. A survey before the election showed that the proposals had more support amongst those most likely to be adversely affected.

The proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties. If common ground cannot be found in this situation, then our system of government is irredeemably flawed.

Even after the reforms, super tax breaks will still mostly flow to high-income earners who do not need them. The budgetary costs of super tax breaks will remain unsustainable in the long term. Further changes to super tax breaks will be needed in the future.