Super changes raise questions of equity and fairness

Equity and fairness are two words used to justify the government’s super changes, but are they fair and equitable?

Equity and fairness are two words used to justify the government’s super changes.

Before we get to this we need to consider some background.

The Murray Financial System Inquiry came up with two particular recommendations about superannuation — it referred to Treasury research that said most of the tax concessions attaching to superannuation were skewed to higher-income earners and secondly that the objective for the superannuation system should be to “provide income in retirement to substitute or supplement the age pension”

It’s important to notice some key attributes about this objective. First, the age pension is broadly set at 27 per cent of male average earnings. In June 1992 the Keating government set a “replacement rate” for retirees — that is, what retirement income needs to be to ensure your living standards don’t decline once you have stopped work — at 40 per cent of pre-retirement income.

It’s difficult to know precisely what replacement rate this Murray objective is aiming to achieve — on one reading it would appear to be aiming at the current age pension rate plus not much more. From my experience, many people approaching retirement don’t know how much they spend and therefore don’t really know what replacement rate they personally need. You can only do this by preparing an accurate expense and cash-flow budget.

I think this Murray objective is primarily about the government and saving it money. But the super system’s objective should be about each individual. If super can enable us to be self-sufficient in retirement then the net result will presumably be savings in government outlays.

In its recent federal budget the government more or less accepted both of these Murray inquiry recommendations, including various reductions in the tax concessions the top 10-20 per cent of income earners get from super.

But is this fair and equitable?

From time to time, The Australian publishes articles about limiting access to the age pension. Regular responses in online subscriber “comments” for these articles will often say, “When I was younger, I was told that once retired I would receive the age pension in compensation for my lifetime of hard work and the taxes I paid”.

Given how often this comment is made there is no doubt that a few politicians from two or three generations ago must have said this.

Now we come to a controversial aspect about these recent government changes. The latest ATO tax statistics for the financial 2014 show that about 600,000 Australians earn at least $150,000 in income. In total they earned about $170 billion income and paid $60bn of this in income tax, or an average 35 per cent tax rate. Good many will think, “well, they can afford it”.

In contrast there are about 8.1 million taxpayers who earn less than $100,000. They earned $441bn and paid net tax of $72bn or an average 16 per cent tax rate.

Last year, the federal government released research that showed about half of households receive more in government handouts than they pay in tax.

A sizeable proportion of these households are working families and whatever tax is paid is returned as various different tax offsets and other assistance such as Family Tax Benefit and Childcare Rebates and Benefits and other tax transfers. .

The majority of those earning less than $100,000 each year during their working life will be eligible for the age pension.

I think this raises three questions about fairness and equity:

• If the age pension represents, in part, a refund of taxes paid while working, then should someone be eligible for the age pension if they haven’t paid any net tax?

• As higher-income earners contribute net tax and will be predominantly ineligible for the age pension, then shouldn’t they receive the majority of the tax concessions in the super system?

• As lower-income earners will end up on the age pension why do they have to compulsorily save for retirement and why do they receive any superannuation tax concessions?

Tony Negline is author of The Essential SMSF Guide.