The debate about what tax concessions should be applied to super is a welcome and necessary conversation. Indeed, governments now and into the future, faced with the challenges of an ageing population, will need to take a holistic, long-term view when it comes to retirement income policy. However, it’s crucial that this debate is not based on incorrect figures and assumptions.
In his opinion piece yesterday, Richard Denniss made the claim that the tax concessions applied to super would hit $2 trillion by 2015. There is not a reasonable basis for this. The Treasury has not projected tax expenditures for the next five years and, even if they did, it would be unusual to project them forward at the same rate for the next 35 years, as Mr Denniss has suggested. Furthermore, increasing the taxes applied to superannuation would not lead to a doubling of Commonwealth aggregate tax revenues in 2050 from around the current 23 per cent of GDP to around 45 per cent of GDP.
While tax expenditure estimates for superannuation are significant, they do not actually reflect the overall effect of superannuation on taxation receipts.
There are a number of reasons why this is the case.
Firstly, the Tax Expenditure estimates are based on the revenue that would have been collected if all superannuation contributions and income were taxed at the full marginal rate for every member, as opposed to the concessional rate. For instance, future balances and the associated tax base would be much smaller if higher taxation applied along the way. This is because net contributions after tax would be lower, as would after tax investment earnings.
Secondly, the estimates fail to consider the savings the government makes on the Age Pension due to people self-funding all or part of their retirement via superannuation. Age Pension expenditures are already around $7 billion less a year than they would otherwise be because of superannuation. Going forward, these savings will only increase as the superannuation system matures and average balances at retirement increase.
Thirdly, the Treasury figures assume that the behaviour of individuals in terms of savings and consumption would not change if the tax arrangements applied to super were changed. In essence, they assume that people would continue to place the same amount of money into super, as opposed to other investments, if the favourable tax arrangements were altered. We know that this is normally not the case. Therefore, the leakage into other tax-effective investments, such as negative gearing, is likely to reduce the overall savings to the government as a result of reducing the tax concessions applied to super.
Even the Treasury itself admits that removing superannuation tax concessions would not generate revenue gains as large as the headline figures suggest. In the estimates it prepares based on a revenue gain approach, the Treasury, in fact, shows much lower levels of tax expenditures on superannuation and a lower rate of growth. The revenue gain figure for the concession for employer contributions and investment earnings is $27,650 million under the revenue gain approach, compared to $32,100 million under the revenue foregone approach. The projected increase over three years is 8.7 per cent a year, under the revenue gain approach, and 11.8 per cent per year under the revenue foregone approach.
In the Tax Expenditure Statement this year, the Treasury has also included estimates for tax expenditures for superannuation based on a pre-paid-expenditure tax basis. These figures show tax expenditures on superannuation of $11,240 million in 2013/14, around a third of the misleading headline revenue foregone figure that is often used in public debate.
We need a conversation about future policy settings for both superannuation and the Age Pension, but let’s base it on better data and more concrete projections.
For further information, please contact:
Lisa Chikarovski, Media Manager, 0451 949 300