The myth of the self-funded retiree: Why we need urgent tax reform

A few months back, I wrote about how inheritances and parental gifts are turbocharging inequality. I suggested we introduce a modest inheritance and gifts tax, which would raise money to invest in younger Australians and ensure a good start in life for all.

While I received some great support, there was significant pushback. One common complaint from people with wealth was some variation of, “I have worked hard and built my own wealth while paying lots of tax. Why should I pay more? It’s unfair”.

Older generations naturally control much of our nation’s wealth and political power.Credit: Dominic Lorrimer

However, what many wealthy Australians don’t seem to realise is that their wealth has grown with considerable taxpayer support. In recent decades, both major political parties have introduced or maintained tax concessions for private wealth accumulation, including the capital gains tax discount, preferential treatment of superannuation, and deductions for property investors.

These concessions together cost the budget over $100 billion annually and continue to grow. That’s nearly double what the federal government spends on education.

Treasury’s own reports indicate that the benefits overwhelmingly go to wealthier Australians. For instance, 82 per cent of the benefits from the capital gains tax discount go to the top 10 per cent of income earners.

Our leaders have set up our tax system so that superannuation and housing effectively take money from workers and younger people without assets and hand it to those who are already wealthy. It means that a nurse, mechanic, teacher, or someone who raised children or cared for a loved one might miss out on a secure retirement.

Older Australians have done a good job of stitching up younger generations and denying a secure retirement for many in their own age cohort.

Not because they didn’t work hard enough, but because outcomes are being determined by who the best rent-seeker and accumulator is, not by who contributed the most to our society.

Ironically, many of the tax breaks for wealth accumulation were supposedly introduced or strengthened to reduce pressure on future government budgets from an ageing population. But we now spend more on superannuation tax breaks than on pensions.

In fact, someone retiring with a superannuation balance large enough not to get the pension will receive far more assistance from the government than an individual on a full pension does.

This is the myth of the “self-funded” retiree. They simply do not exist.

Governments attempted to shift the cost of pensions off younger taxpayers. Yet, we find ourselves bearing the cost regardless. We face higher tax rates than those who are much wealthier, we compete with property speculators to buy a home and pay off their investment loans through our rents, and we miss out on investments in our future because we are told there is no money in the budget.

Our political leaders’ actions and the vested interests that support the status quo contribute to a decaying national culture that’s obsessed with individual wealth accumulation rather than collective wellbeing.

To rebalance our tax system, we need to reduce or remove tax concessions on passive income from wealth. We should also replace the flat 15 per cent tax rate for superannuation contributions with a progressive system that ties superannuation taxation to individual marginal tax rates with a discount.

Such a reform would maintain incentives for retirement saving while reducing the use of superannuation as a tax minimisation strategy for the wealthy.

Older Australians control much of the country’s wealth.Credit: Getty

As intergenerational wealth inequality has grown so much, we also need to think about the stock of wealth. This includes an inheritance and gifts tax to recover some of the taxpayer funds that were spent to support individual wealth accumulation and won’t be spent in retirement.

The funds from the tax and the savings from the winding back of the concessions can then be invested in both the priorities of younger generations, like public housing, affordable university education and climate action, and to increase the rate of the pension.

Despite the need, though, tax reform remains too toxic for our political leaders to take on. The already wealthy poison the debate and deny the truth that much of our government spending is actually welfare for the wealthy.

Older generations naturally control much of our nation’s wealth and political power, but as custodians, they have a responsibility to share capital and opportunity with those who follow.

Instead, they’ve done a good job of stitching up younger generations for their own benefit and denying a secure retirement for many in their own age cohort. The myth of the self-funded retiree isn’t just misleading – it’s robbing many Australians of their own shot at economic security.

Thomas Walker is the chief executive of Think Forward, an economics think tank run by younger Australians.

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