Super tax breaks save taxpayers money, Mercer says

A top industry expert has savaged Treasury’s estimate that superannuation tax breaks cost the government $50bn a year, labelling it a ‘fictitious number’.

Wholesale changes to superannuation tax breaks could leave older Australians more reliant on the age pension, an industry study finds.

Calls for wholesale changes to superannuation tax breaks are shortsighted and could end up costing taxpayers as much as $120,000 over the life of an average worker as lower retirement savings leave older Australians more reliant on the age pension, an industry study finds.

Mercer senior partner David Knox savaged Treasury estimates that super tax breaks were worth $50bn a year as a “fictitious number” that risked misleading the public and policymakers about the value of super concessions.

Jim Chalmers has used these estimates to warn that “the cost of these concessions is projected to exceed the cost of the age pension by 2050”, suggesting that the sustainability of the super system was at risk.

The Treasurer then reneged on Labor’s pre-election promise not to raise taxes on retirement savings after announcing in late February a plan to claw back $2bn a year in revenue by doubling tax on earnings on balances above $3m.

Research by Mercer finds the estimated tens of billions of dollars in annual tax breaks on retirement savings cost taxpayers less money over the long term.

The paper models two scenarios for a median-income worker earning $65,000 who saves 12 per cent of their annual salary for their retirement over a 40-year working career. The first assumes the super tax breaks as they stand now, while the second removes entirely all concessions.

The model estimates that using a long-term inflation rate of 2.5 per cent, the value of the super tax in today’s dollars amounts to just under $115,000 over the worker’s lifetime, against a tax take of under $330,000 on the retirement savings in the “non-super” scenario.

The super tax breaks leave the model worker with a much larger savings pool in retirement, and so a much lower reliance on government payments.

The Mercer analysis shows that age pension expenditure in the “super” scenario totals $531,000 – far below the $867,000 in pension payments required to support a worker who receives no super tax concessions.

This leaves a net gain to the government under the super scenario of $123,000, the research shows. (Using a higher 5 per cent bond interest rate to translate the future earnings into today’s dollars leaves a much smaller – but still positive – net gain to the government of $7200.)

“We have groups like the Grattan Institute arguing super tax concessions are too generous. What we are trying to say here is, let’s look at the bigger picture, not just the concessions in isolation but the consequences of having a good super system; one of the consequences is a much lower aged pension,” Dr Knox said.

Mercer senior partner David Knox says Treasury’s $50bn estimated value of super tax breaks is ‘fictitious’. Picture: Supplied

The country’s compulsory super system has swelled the nation’s retirement savings balance to $3.3 trillion, one of the largest in the world. Thanks to this pool of money, the OECD projects that by 2050 Australia’s public pension cost will be the lowest of any of its 38 member countries.

This has allowed governments to avoid the type of hard choices that have roiled politics and societies in other advanced economies.

“You can see the problem (President Emmanuel) Macron in France had when he tried to adjust the pension system”, Dr Knox said, referring to months of mass protests that preceded the much-needed reforms.

“We need to recognise super is working to rein in the public pension cost and will continue to reduce (it),” he said.

Putting aside the implications for aged-care expenditure, Dr Knox said Treasury’s estimate of some $50bn in estimated lost taxpayer revenue as a result of super tax concessions was “a fictitious number”, and should not be used as a reference point for policymaking or rhetoric.

Treasury’s calculations did not account for behavioural changes by middle and high-income earners to find ways to minimise tax associated with investing their savings, most obviously through wealthier Australians directing investments through partners and family members with lower incomes and therefore lower marginal tax rates.

“On the other hand, the age pension is actual expenditure,” Dr Knox said.

He said, however, that the current rules meant high-income earners did “get a good deal” out of the retirement system and there was room to tweak it to make it more equitable and avoid savers using superannuation for estate planning rather than retirement income.

He backed the government’s plan to double the tax rate on ­investment earnings on super balances over $3m, and also recom­mended restricting the amount that could be put into superannuation beyond employer contributions.