‘catch up’ super contributions: a tax break for rich (old men)

It’s no secret that our superannuation system is unfair. Over half the value of the tax breaks goes to the top 20% of income earners, people who already have enough resources to fund their

own retirement. As shown in our new report for Grattan Institute, _Super tax targeting_, the system provides overly generous opportunities to contribute to super. These opportunities are

usually defended on the grounds that people with broken work histories, especially women returning to work, can “catch up” before retirement. Super lobby groups make a lot of noise about

middle-income people scrambling to build a decent nest egg for retirement, and our super system bends over backwards to help them. But it’s hard to find many middle-income earners in real

life who make large voluntary contributions to super. Instead the system mainly creates large tax-planning opportunities for many more people who already have enough resources to fund their

own retirement. The plight of catch-up contributors is the tail that wags the super dog. Superannuation tax breaks allow people to pay less tax on their super savings than is paid on other

forms of income. Annual caps on super contributions act as a brake on the system’s generosity, and its cost. If set at the right levels, these caps prevent high-income earners from abusing

generous super tax breaks to lower their tax bills. Yet Australia permits larger voluntary contributions to superannuation than many other countries. The flat 15% tax rate is applied to

contributions made from pre-tax income - delivering enormous tax breaks to high-income earners on high marginal rates of income tax. Even where superannuation contributions are made from

post-tax income, savers then benefit from generous tax breaks on super fund earnings, only taxed at 15%, or zero in retirement. CATCH-UP CONTRIBUTORS ARE A MYTH All the evidence shows that

very few middle-income earners, and even fewer women, make large catch-up contributions to their super funds. Only 12% of taxpayers, or about 1.6 million people, make large pre-tax

contributions of more than $10,000 a year, and that includes compulsory super paid by their employer. Just 164,000 women earning less than $77,000 make such large pre-tax contributions.

However 935,000 men earning more than $77,000 do so. These high-income savers get a tax break on the way in, and then pay little or no tax on their super earnings. Why do so few

middle-income earners make large catch-up contributions? Put simply, they can’t afford to. In 2012-13, the median taxable income in Australia was $41,561. Gross incomes (before any

deductions) are not much higher. More saving boosts incomes in retirement, but it reduces living standards today. This fundamental trade-off is rarely discussed in the superannuation debate.

BENEFITS FLOW TO HIGH-INCOME EARNERS Not surprisingly it is mainly high-income earners who have the disposable income to put more than $10,000 a year into their super. They get large tax

breaks, even though they are likely to retire with enough assets to be ineligible for an Age Pension. The cap on post-tax contributions is even more generous. It allows people to contribute

up to $180,000 per year. People under age 65 can also bring forward an extra two years’ contributions, so they can put in up to $540,000 during a single year, and that’s on top of up to

$35,000 in contributions from pre-tax income. These post-tax contributions total $33 billion a year – about three times the size of voluntary pre-tax contributions. Many post-tax super

contributions appear to represent tax-planning rather than any genuine increase in retirement savings. Of all post-tax contributions, around half are made by just 200,000 people who already

have at least $500,000 in their superannuation. Only 1.2% of taxpayers have total super account balances of more than $1 million, yet this tiny cohort accounts for 26% of all post-tax

contributions. By contrast, the 70% of taxpayers with super balances of less than $100,000 make just 9 per cent of total post-tax contributions. Lifetime caps would likely make things worse,

unless set at very low levels. To maximise their superannuation tax breaks, taxpayers who have not used up their lifetime pre-tax cap could sacrifice the entirety of their earnings into

super. Such tax planning is likely given how super tax breaks are used already. COUNTING THE COST Whatever the benefits of superannuation tax breaks, they must be balanced against the costs.

Superannuation tax breaks cost a lot – over $25 billion in foregone revenue, or well over 10% of income tax collections – and the cost is growing fast. Lower-income earners and younger

people have to pay more in other taxes – both now and in the future - to pay for the tax-free status of so many retirees. THE WAY FORWARD Caps on super contributions need to strike a better

balance between allowing those with broken work histories to contribute towards a reasonable superannuation balance, and restricting the opportunities for tax minimisation by those unlikely

to qualify for an Age Pension. That means being realistic about the level of catch-up contributions that are likely from those who are genuinely making up for broken work histories. Grattan

Institute’s new report, _Super tax targeting_, recommends three reforms to better align tax breaks with the goals of superannuation. One, annual contributions from pre-tax income should be

limited to $11,000 a year. This change would improve budget balances by $3.9 billion a year. There would be little increase in future Age Pension payments since the reductions in tax breaks

would mainly affect those unlikely to receive an Age Pension anyway. Two, lifetime contributions from post-tax income should be limited to $250,000. It won’t save the budget much in the

short term, but in the longer term it will plug a large hole in the income tax system. Three, earnings in retirement – currently untaxed – should be taxed at 15%, the same as superannuation

earnings before retirement. A 15% tax on all super earnings would improve budget balances by $2.7 billion a year today, and much more in future. Previous repeated changes to superannuation

have been too timid. Decisive reforms must target super tax breaks at those who need them most, and limit the benefits for those who don’t need them. Until then the system will keep chasing

its own tail.