Lift retiree taxes for the sake of young Australians: Actuaries Institute report

An ambitious plan to rebalance the pension system in favour of younger Australians hinges on getting those in retirement to pay more tax.

Treasurer Jim Chalmers and Financial Services Minister Stephen Jones. The government's plan to create a new tax on super has hit a brick wall in parliament. Picture: NewsWire / Martin Ollman

Retirees would pay more tax under a landmark proposal from the influential Actuaries Institute, which seeks to rebalance the pension system in favour of younger Australians.

In a fresh proposal that is being launched into an area with very few policy initiatives, the ambitious plan from the actuaries suggests a flat 10 per cent tax on earnings in super at any age.

The concept would represent a major break in super arrangements where retirement money would be kept in a single account for an individual throughout their life.

As it stands, retirees do not pay tax on their income until they reach earnings on amounts over $1.9m per person. The government also has a plan to add a new 15 per cent tax on earnings on amounts over $3m, which has hit a brick wall in parliament.

But rich retirees would still be caught under the blueprint plan through a new earnings tax where anyone earning more than $150,000 a year in super would be hit with extra tax beyond the uniform 10 per cent tax plan.

Such a move would effectively sustain the current threshold for wealth taxes in super.

Usefully, the report also aims to scrap some of the system’s more notorious loopholes such as the “recontribution strategy” where savers can cut future tax bills by taking money out of super before putting it back in again.

As a non-partisan report, the paper is certainly provocative – in particular its plans to introduce higher tax for retirees, a political hot potato.

However, the report authors suggest: “We note that existing retirees would pay more tax; however, the dollar value would be low for those with low- to medium-sized balances and compensation could be provided by, for example, adjusting the age pension.”

In a similarly controversial move the report also says that there should be a penalty imposed on super lump sums above $250,000 – despite a large amount of lump sum money now going into paying down home mortgages.

Richard Dunn, one of the report authors, told The Australian: “Our aim is to get these issues on the table.”

A close reading of the report finds several of the key concepts are not set in stone. For example, the uniform tax concept is estimated at close to 10 per cent – the working paper on the proposed reform models the concept at 11 per cent.

The Actuaries Institute makes it clear the report is the view of its authors – four well-regarded industry names – Richard Dunn, Michael Rice, Jennifer Shaw and Alun Stevens.

At best these proposals would simplify super. At an individual level it would improve the transition between pre and post retirement arrangements, cut out the nonsense game of recontribution strategies and allow younger Australians to build wealth in super more rapidly through paying less tax.

From a policy perspective it also has the advantage of levelling the playing field from a system that favours the retired over those who are saving to retire – also it would do so on a cost-neutral basis.

With the government having put its so-called Division 296 plan (to add a new 15 per cent tax on earnings above $3m) back on the shelf after failing to find sufficient support in parliament, there is every chance the Albanese government may cherry pick this plan next year when it returns to super reforms.