Big superannuation balances of $5 million or more will be in the sights of the Albanese government next year as new figures highlight the massive inequality of the current super system.
Research from the Association of Superannuation Funds of Australia (ASFA) found “projections indicate that 50 per cent of all Australian retirees will be at the ASFA “comfortable” retirement standard, or more, by 2050,” an ASFA spokesperson said.
That measure requires a balance of $640,000 for a couple or $545,000 for a single in current dollars.
It is a benchmark many don’t reach today with the median balance before retirement sitting at only $285,450.
Only half of working Australians are expected to reach that benchmark in 28 years’ time, but more than 300,000 people today have super balances of $1 million or more, while 11,000 have $5 million or more in super.
In the high balance world of self-managed superannuation funds there are 27 funds with balances of $100 million or more, including one with $544 million set aside for “retirement”.
Call for cap
Those figures have caused ASFA and a number of industry super funds to call for a maximum $5 million cap on superannuation balances.
Brendan Coates, economic policy program director with the Grattan Institute, says even a $5 million cap is far too generous.
“It implies tax concessions on superannuation earnings of up to $300,000 per year,” Mr Coates said.
“So a cap of somewhere between $2 million and $2.5 million would be far more appropriate.”
Under the current system, retirees can have up to $1.7 million in a fund in pension mode that is not taxed on either earnings or the money that is paid out as a pension.
However, they can have unlimited amounts in accumulation mode in their super fund which only pays tax at 15 cents in the dollar on earnings.
Lump sums from those accumulation balances can be paid out to retirees over 60 tax-free.
As a point of comparison the top marginal tax rate this year is 45 per cent plus the 2 per cent Medicare levy.
So there are a lot of tax deductions that go into supporting those big super balances.
Treasurer Jim Chalmers will be gunning for them as he seeks ways to rein in the ballooning deficit in years to come.
Super reforms have been a constant politically since 2016, and that is unlikely to stop next year.
Inequality increasing
They will be hard for the government to avoid given that the system is becoming increasingly unequal.
By 2060, the Retirement Income Review found “that one in three dollars paid out of the super system will go to a bequest and most of that won’t have paid tax on the earnings for 20 to 40 years,” Mr Coates said.
So, that means that wealthy people will be building up massive, untaxed super balances and handing them to their children or grandchildren.
That reality means that the government needs to look closely at super benefits.
“They need to decide what is a reasonable retirement nest egg and say we will give you concessions up to that point but beyond that, no, we won’t,” said Angela Jackson, lead economist with Impact Economics.
The government will have the chance to develop its super policy when it reviews and legislates the purpose of superannuation early next year.
That will allow political cover for changing the super system that Labor in opposition did not have back in the 2019 election when then leader Bill Shorten tried to introduce measures that were seen as targeting retirees.
Three steps to reform
Government insiders say change will be a three-step process.
The first will be legislating the objective of superannuation, which Chant West research director Ian Fryer says will be something like “providing retirement income or supplementing retirement income to the age pension”.
The second will be determining what is an appropriate level of taxpayer-supported super.
The third will be taking that to the industry and community for discussion before any change to super is legislated.
The difficulty for the average person of building up multimillion-dollar balances is demonstrated by the chart above.
For a man to work full time and uninterrupted from age 21 to 67 on a salary of $100,000 in today’s dollars would result in a super balance of $800,000, if no extra contributions were made.
For a woman who had three years out of the workforce bringing up children the figure would be $744,451.
As the table shows lesser incomes would result in significantly smaller balances.
So those with multimillion-dollar balances would have had to be on high incomes and to have made large personal contributions, perhaps during the period when former treasurer Peter Costello allowed contributions of up to $1 million.
“I guess the question is: Should the taxpayer be subsidising the savings of people who have been able to put together those large balances?” Dr Jackson said.
Industry Super Australia CEO Bernie Dean said: “A precondition for any debate about improving the equity and targeting of tax concessions is a legislated objective of super – an objective which should state that super is preserved to solely provide income in retirement.
“Any future super changes, including tax concessions, should then only be made if they meet that objective.”
The New Daily is owned by Industry Super Holdings
