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Super tax concessions no longer fit for purpose, warns think tank

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By Rhea Nath
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4 minute read

The Australia Institute’s latest report suggests the concessions come at a huge cost in foregone revenue and will soon become more expensive than the Age Pension.

Although the primary objective of Australia’s superannuation system is to provide income in retirement to substitute or supplement the Age Pension, new research suggests super tax concessions in their current form are proving to be a “complete reversal” of what super is designed to do.

Instead, the concessions “help high income earners avoid tax, exacerbate income and gender inequality and come at a huge cost in foregone revenue”, according to the Australia Institute.

In its latest report, the think tank found high-income earners gain much more from super tax concessions than low-income earners, with the top 20 per cent of income earners benefiting the most over the course of a lifetime.

“Rather than provide incentives for saving, these super tax concessions are incentivising high income earners with high super balances to avoid paying tax,” it said.

“People with such large super balances do not need to put away ever more money for their retirement. But they are enabled to take advantage of the concessions to lower their income tax rates for both superannuation contributions and earnings.”

This has led to a situation in which those with large super balances are also the ones most likely to make personal contributions, the report elaborated. It noted just 2.5 per cent of Australian workers hold over $1 million in super, although they comprised 20.1 per cent of all personal super contributions in 2020–21.

“When we focus on people aged 55–69, the story is the same: people with higher super balances contribute more to their super account,” the report elaborated.

“Just 7 per cent of those aged 55–69 have a super balance above $1 million. But these people account for 23 per cent of total personal super contributions made among this age group. By contrast, 34.8 per cent of Australians aged 55 to 69 have super balances of less than $100,000, but those people made only 4.2 per cent of voluntary contributions.

It added: “Super concessions appear to be encouraging wealthier people to put money into their super fund to reduce their taxable income.”

Particularly, the research found a huge economic cost arising from the concessions, which cost $54.56 billion in foregone revenue during 2022–23. In contrast, Commonwealth funding for assistance to the aged, which is made up almost entirely by the Age Pension, cost $54.873 billion in the same time period.

“Although Treasury forecasts show that revenue lost to super tax concession will remain lower than the Age Pension in the near term (2023–27), the gap will start to narrow in the 2030s.

“By 2045–46, tax concessions on super contributions and earnings, which make up almost entirely the super tax concessions, are projected to cost the Commonwealth budget more than the Age Pension,” the report stated.

According to the Australia Institute, concessions are not reducing spending on retirement as they were supposed to. Rather, in the future, “the ‘solution’ will become worse than the problem super was supposed to fix”.

Additionally, it pointed out that super tax concessions exacerbate gender inequality, with women receiving only 42 per cent of total concessional tax benefits from super contributions, and 39 per cent of total concessional tax benefits from super earnings, despite comprising just under half the workforce.

Consequently, women retire with substantially less super than men, with a median balance of $137,050 for those aged 60 to 64, compared to $178,800 for men in the same age bracket.

“While super tax concessions are designed to help all Australian workers saving for retirement, the distribution of these benefits is incredibly unequal,” observed Dr Minh Ngoc Le, report author and a postdoctoral research fellow at the Australia Institute.

“Treasury estimates show that, dollar for dollar, high income earners actually receive more government support than those on middle and low incomes because of our current superannuation system.”

To combat this issue, the think tank has recommended ending or limiting super tax concessions for the top 10 per cent of earners and those whose high super balances do not meet the asset criteria for the part pension.

“Reform is needed to ensure these concessions are limited to those who really need them.

“The income level or super balance at which tax concessions cut out should be lowered. This would lead to significant savings in forgone revenue, reduce inequality, and significantly increase the ability of the Commonwealth government to properly fund the Age Pension system,” the report suggested.