Superannuation tinkering could kill the goose that lays the golden egg

Given the A$2 trillion tied up in superannuation, it is perhaps no surprise that Australian governments could be tempted to use it as a cash cow to address growing budget shortfalls.

Rumours of further changes to superannuation are gathering momentum ahead of the next federal election. While the Coalition government has ruled out making direct changes to superannuation taxation, it has reportedly left open the option of addressing what it calls “super integrity issues” and “loopholes” in the system. The Labor opposition has promised it will cut superannuation tax concessions for high-income earners.

The retirement income system in Australia consists of three pillars: the age pension (provided by the Commonwealth government); compulsory superannuation contributions made under the superannuation guarantee regime; and voluntary superannuation contributions.

Superannuation has always been a preferentially taxed savings vehicle designed to encourage Australian taxpayers to invest in and save for their own retirement. This is designed to reduce the burden on the government to provide pensions for taxpayers when they retire.

Cash cow ripe for the picking?

The taxation of superannuation can broadly occur when contributions are made to a superannuation fund; on the investment earnings of a superannuation fund; and on end benefits (for example lump sums on retirement).

Australia has operated on what is commonly known as a “TTE” basis (where T denotes a taxed superannuation point and E denotes a tax exempt point). This means taxes are applied on assessable contributions (which include those made by an employer, as well as personal contributions for which the contributor is entitled to a deduction) and investment earnings. End benefits are tax-exempt for those aged 60 and above.

By contrast, many countries including Canada, Chile, the Netherlands, the UK and the USA have adopted an “EET” system, where contributions and investment earnings are exempt from tax, while benefits are normally subject to full taxation when received. Some fear the Australian government could follow the trend of these countries and remove the exemption for end benefits, especially if budgetary pressures continue.

Other areas open to change include the 15% concessional tax rate on assessable superannuation contributions and the 15% tax on investment earnings, which some believe favours the wealthy. Increasing these taxes may be the easiest expedient for the government, especially given that the bulk of what would be taxed is already there (a “sitting duck”).

In terms of future contributions, these are largely compulsory and are now rising to 12% of earnings. The government could receive a “double-whammy” if it increased taxes on contributions as well.

Already a cash cow

It’s worth being reminded that taxes on superannuation are already budgeted to be one of the fastest-growing revenue sources over the coming years. According to the 2015-16 budget papers, receipts from superannuation funds are expected to grow by 0.6% in 2014-15 and 47.9% in 2015-16. In light of this, the government needs to be careful not to kill the goose that lays the golden egg by trying to squeeze even more tax revenue from something already being squeezed very hard. It should therefore resist targeting superannuation – which is a long-term investment – in order to meet short-term needs.

Constantly changing the rules relating to superannuation affects the confidence of people in superannuation as a long-term investment and creates uncertainty and confusion. A Mercer study showed that,in June 2008, 34% of working Australians considered super to be tax-effective. By June 2010, this had dropped to 20% and is likely to be even lower now. One in five weren’t sure about its tax-effectiveness.

Changing super is also problematic due to the “lock-in effect” – once you contribute money you cannot get it out until you retire or die. It’s unfair to change the rules when people cannot then reverse the decision to contribute.

Superannuation is already overly complex. If one were to print a chronology – and then limited it only to changes that have occurred since 1983 when lump-sum taxes were introduced – it would run to several pages. While these changes are too numerous to detail here, some of the “highlights” include the introduction of lump-sum taxes in 1983, the imposition of a 15% tax on superannuation contributions by employers and on superannuation earnings in 1988, through to my favourite – the so-called “Simpler Super” reforms of 2006, which some would regard as an oxymoron.

The tax expenditures argument

Treasury’s annual Tax Expenditure Statement shows that the largest tax expenditures are for superannuation, Capital Gains Tax main residence exemptions and tax exemptions relating to the Goods and Services Tax (which include food, health and education).

Some in government might take the view that this rising trend in revenue forgone means the current superannuation system is too generous. But is it?

A 2013 study by Mercer found current tax concessions on superannuation in Australia are not generous when compared to the retirement systems in eight other countries – Canada, Chile, Denmark, the Netherlands, Sweden, Switzerland, the United Kingdom and the USA – which are considered to have world-class retirement systems. The research revealed that net retirement benefits in Australia are lower than five of the eight countries included in the research. For example, an average British worker would be 16.4%, or A$43,534, better off, while an American worker would be 11%, or A$29,273, better off than their Australian counterpart.

Making trade-offs

Superannuation involves a trade-off. Taxpayers are encouraged and induced to put away their savings until retirement and forgo consumption today in return for concessional tax treatment. The benefit for the government is the financial independence of taxpayers once they retire, and reductions in demand on the government-funded Age Pension. It is important to appreciate this trade-off and understand the delicate policy context in which superannuation exists.

It also could be argued that imposing higher rates of taxation on superannuation contributions could have detrimental impacts on the labour market, including discouraging and reducing labour market participation and decreasing output. In turn, instead of rising, the tax take could paradoxically reduce.

It must be remembered that superannuation’s sole purpose is to provide a lifetime savings vehicle. As such, it should continue to receive preferential income tax treatment compared to other savings.

Dale Pinto is affiliated with the Tax Institute, CPA Australia, The Australian Academy of Law, The Australasian Law Teachers Association, The Australasian Tax Teachers Association as well as being Fellow of the Tax Policy and Research Group (Monash University). None of these affiliations put me in a position of conflict in relation to the views expressed in this article.