Eliminating tax breaks for investing in pensions ignores the ‘bigger picture’ and would ultimately cost taxpayers more than they yield, an expert warned.
Supermanager Mercer has spoken out against claims by the Treasury Department that supertax breaks were worth $50 billion a year, claiming that in the long run they save the budget up to $120,000 for each employee because they mean retirees are less dependent on the government.
Mercer senior partner David Knox called the $50 billion estimate, prepared in February by the Treasury Department after the Albanian government announced a tax increase on high super-dollars, a “fictitious number.”
Prime Minister and Treasurer Jim Chalmers is going into the next election with a plan to double the concession rate for those with $3 million or more in retirement savings.
Should Labor win re-election, the wealthiest 0.5 per cent of the population would see their favorable tax rate on super-contributions doubled to 30 per cent – from 15 per cent from 1 July 2025.
Former Liberal treasurer Peter Costello had introduced generous tax breaks for super-contributions in 2006, which meant that everyone, regardless of wealth, would pay just 15 percent tax for putting money into their retirement savings.
The Australia Institute think tank estimated that the total super tax breaks cost the budget $52.6 billion a year, almost as much as the $55.3 billion spent on old age pensions.
A study by Mercer models what would happen if tax breaks were eliminated on the super balance of a $65,000 middle-income worker who contributes 12 percent of his annual salary to a nest egg over a 40-year span.
A row has erupted over Treasury estimates that the super tax breaks cost the government $50 billion a year
Assuming a long-term inflation rate of 2.5 percent, the model shows that eliminating tax breaks increases government income by $215,000 over an employee’s lifetime.
However, because the worker gets a much smaller super amount to retire, they need additional government assistance of $336,000, which is $121,000 more than under current tax arrangements.
Dr. Knox said the Albanian government should “recognize that super is working to rein in public pension costs.”
“What we’re trying to say here is, let’s look at the bigger picture, not just the concessions per se, but the consequences of having a good supersystem; one of the consequences is a much lower retirement pension,” said Dr Knox The Australian.
Dr. Knox said the $50 billion estimate, which Treasurer Jim Chalmers said will exceed the cost of the retirement pension, doesn’t account for the fact that middle and high income earners are finding other ways to minimize the tax.
Dr. However, Knox admitted that the current super-rules meant high-income earners “got a good deal” and he supported the government’s plan to double the tax rate on super balances over $3 million.
He also called for limits on the amount that could be added to employer contributions.
After the Albanian government broke its election promise not to interfere with super tax breaks by announcing the plan to double the rate on high balances, they were accused of discouraging saving for retirement.
“Another consequence will be that those affected by the change will do their best to avoid it by reducing their total super balances to less than $3 million — or even getting out of super altogether,” the conservative think tank said. Institute of Public Affairs.
Dr. However, Chalmers said the change was “modest” and in line with “the Government’s proposed purpose for pensions, to generate income for a dignified retirement in an equitable and sustainable manner.”
The federal government argued that the proposal would only affect 80,000 Australians, but the Financial Services Council, which represents retail superfunds, argued that it would harm 500,000 people over the coming decades.
Mercer senior partner David Knox says estimates of lost revenue due to super-tax breaks ignore the bigger picture
Treasurer Jim Chalmers has argued that Australia’s super needs to be done in a more equitable and sustainable way
They said those numbers included 204,000 people now under 30 unless the exchangers were indexed for inflation.
The rate of mandatory employer contributions increased by half a percentage point to 11 percent on July 1, rising annually in steps of half a percentage point until reaching 12 percent in July 2025.
The superindustry has an estimated $3.5 trillion in assets accrued as a result of the mandatory supercontribution laws and that amount is growing by $1 billion every week.
Former Liberal treasurer Peter Costello introduced generous super-contribution tax breaks in 2006, which meant that everyone, regardless of wealth, would pay just 15 percent in taxes for putting money into their retirement savings.
An increase in supercontribution tax rates would represent the most punitive rule change since the 1992 mandatory supercontribution under Labor Prime Minister Paul Keating.