Debunking the myths around superannuation tax concessions

In light of current discussions between the government and key stakeholders on a broad range of possible reforms, including reforms to the taxation of superannuation, the Association of Superannuation Funds of Australia (ASFA) has issued an updated paper debunking common myths about superannuation.

“A discussion around the equity and sustainability of superannuation tax concessions is both welcome and necessary, but it is also crucial that conversations and decision-making take place in the context of accurate information,” said Pauline Vamos, CEO, ASFA.

“There have been a number of incorrect claims made regarding the cost and distribution of superannuation tax concessions. In reality, superannuation is boosting incomes and lifestyle standards in retirement at a relatively low cost to government expenditure. When both super tax concessions and availability of the Age Pension are taken into account, government assistance for retirement income is broadly equitable across the range of incomes in the community.”

“Australia faces an ageing population with escalating pension, health and aged-care expenditure. Governments will face challenges in setting a tax framework policy that will help accommodate the costs of supporting older generations throughout their retirement years.”

“An informed debate will allow government and the broader community to reach a consensus on ways to adjust the current superannuation system to ensure it remains sustainable and equitable,” Ms Vamos concluded.

Summary: Superannuation tax concession myths busted

MYTH: Superannuation is not helping reduce the government’s spending on the Age Pension FACT: Super saves the government $7 billion in Age Pension expenditure annually, and these savings will only increase as the system matures

Superannuation is boosting incomes and providing a lifestyle in retirement that is better than that which can be sustained on the Age Pension alone. Around 32 per cent of those aged 65 in 2013 were fully self-funded in retirement, up from 22 per cent in 2000. We project this number will rise to 40 per cent by 2023.

MYTH: Superannuation tax concessions cost the budget $30 billion annually – more than the total spending on the Age Pension FACT: The actual cost of tax concessions is around $16 billion a year

When you take into account the savings the government makes on the Age Pension as a result of super, and the impact of behavioural change (people shifting money from one tax-effective vehicle to another) that would occur if super tax concessions were removed, a more accurate estimate would be around $16 billion a year.

MYTH: The majority of government support for retirement goes to high-income earners FACT: Financial assistance for retirement provided by the government is broadly comparable across the personal income tax brackets

When both the Age Pension and tax assistance are added up across a lifetime, the average taxpayer benefit is around $300,000 across all tax brackets as a contribution by the government to their retirement. The main difference between is the timing and vehicle through which it is delivered. For example, the full Age Pension for a single person currently is $22,365 a year, while tax concessions for super are for smaller annual amounts but accrue to individuals prior to age 65.

MYTH: The bulk of tax concessions for superannuation contributions go to high-income earners FACT: The bulk of tax concessions for superannuation concessional contributions go to middle-income earners

Tax concessions applied to superannuation concessional contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement. ASFA analysis of data from 2011/12 found that around 75 per cent of the tax concessions applied to contributions went to those paying either of the (then) middle income marginal tax rates of 30 per cent or 38 per cent: those earning between $37,000 and $180,000 a year.

MYTH: The most important tax concessions received by high-income earners relate to superannuation FACT: High-income earners get the most benefit from concessional capital gains tax treatment, negative gearing and exemptions for the family home

The bulk of the wealth of high-net-worth individuals is in the form of shareholdings or property, both residential investment properties and commercial real estate. Around $360 billion is held in superannuation by those with more than $1 million in super. This is just over 20 per cent of the $1.6 trillion investable assets held by high-net-worth individuals.

For most high-net-worth individuals, tax arrangements relating to capital gains, negative gearing and the family home are likely to have more impact on the achievement and maintenance of wealth than superannuation tax concessions.

MYTH: Only high-income earners make salary sacrifice contributions FACT: Many middle-income individuals make salary sacrifice contributions

Only around 35 per cent of employees with incomes above $150,000 a year make salary sacrifice contributions. Around 85 per cent of salary sacrifice contributions relate to employees with incomes below $150,000 a year. Over half a million Australians earning between $40,000 and $80,000 a year make salary sacrifice contributions.

MYTH: Most people take a lump sum from their super when they retire, spend it all on a big holiday or to pay off debt, then end up on the Age Pension FACT: The majority of superannuation assets end up in income stream products when people retire

There is no evidence that the majority of retirees are using their super to pay off debt or using a lump sum to fund the purchase of boats, cars and overseas trips before going on the full Age Pension.

The vast majority of Australians are very sensible with what they do with their retirement savings. The great bulk of larger balances are retained in the superannuation system in order to generate ongoing income in retirement. In 2013/14, around $46 billion in superannuation assets were invested in phased drawdown income-stream products, compared to just $9 billion taken as lump sums. Many individuals taking a lump sum also established an income stream with only around $5 billion taken as a full lump sum payment of superannuation savings.

MYTH: Compulsory superannuation has not increased household or national savings FACT: National and household savings have been substantially lifted by compulsory super

The household savings rate has increased by around five percentage points from five per cent in 1992, when compulsory superannuation was first introduced, to around ten per cent in 2013/14.

MYTH: Government funds spent on superannuation tax concessions would be better directed at helping other areas of the economy FACT: Superannuation provides broad economic benefits that are the foundation for growth and prosperity

Superannuation plays, and will continue to play, an important role in providing the foundations for economic activity and prosperity. It currently lifts household savings by around 2 percentage points of GDP or nearly $40 billion a year and, with the increase in the compulsory Superannuation Guarantee from 9.5 per cent to 12 per cent, this is expected to rise to 2.5 percentage points of GDP. Higher levels of domestic savings reduce the cost of capital in Australia, increasing investment by Australian businesses, which drives stronger economic growth.

MYTH: Private superannuation savings could be confiscated and that process has already started FACT: Superannuation entitlements and account balances are strongly protected by law including constitutional requirements that property can only be acquired on just terms

No political party in Australia has a policy that would involve the nationalisation of superannuation savings.

For further information, download the full report here.

ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation, which aims to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice.