Tax concessionality vital to superannuation

While both Treasury officials and economic commentators have strongly criticised the cost of superannuation tax concessions, Mike Taylor writes that one of the men who helped devise the superannuation guarantee regime believes it would cease to exist in the absence of tax preferment. 

Any practicing financial planner will tell you that, except in the case of high net worths, superannuation sits at the core of clients’ assets. 

Those same financial planners would, if they had been around long enough, also acknowledge that the advent of the superannuation guarantee in the early 1990s had been a substantial driver for growth in the financial planning industry, much as it has been responsible for the growth in the Australian funds management industry. 

There is no debate whatsoever about the fact that there is now almost $1.7 trillion held in superannuation assets in Australia and that the existence of those assets served to dampen the impact of the global financial crisis (GFC) and that, increasingly, they are serving to reduce pressure on the age pension. 

All of which begs the question of why a number of commentators and some senior Commonwealth public servants have, over recent years, seen fit to question the value of Australia’s superannuation regime when weighed against its perceived cost to revenue when its tax concessionality is taken into account. 

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But according to former Keating adviser and Commonwealth department head, Dr Don Russell, those who talk about revenue being foregone as a result of superannuation tax concessions, including those working in the Federal Treasury, are basing their arguments on a misconception. 

That misconception, he believes, is that Australia’s superannuation guarantee regime could be sustained in the absence of tax concessions. 

Quite simply, he argues that you cannot assume there is revenue forgone because that revenue would likely not otherwise exist. 

Addressing a Super Review Post Retirement and Ageing Forum in Sydney, Russell pointed to data published by the Federal Treasury over the past six months, explaining that the estimates contained, therein, were based on revenue foregone, not revenue gained. 

However he firmly believes that in the absence of the tax concessions applying to superannuation, Australians would simply find other destinations, in circumstances where most non-concessional contributions are redirected out of super. 

“The community won’t agree to lock up 9-12 per cent of their income each year for 30-40 years and have the Government determine how they get it back without tax preference,” Russell said. 

He said there needed to be an acceptance that a part of the success of the superannuation guarantee regime was that people had agreed to defer current consumption for a better retirement in the knowledge that there were tax incentives in place to do so. 

Russell argues that instead of seeking to roll back the tax concessional status of superannuation, Treasury officials and commentators need to look at a broader picture and the manner in which policy decisions around the age pension have skewed the environment. 

He said there needed to be an understanding that, because of gearing, high income earners had many ways to save in a tax-preferred way while for most superannuation remained the only option. 

“The superannuation guarantee grew out of the belief that the public purse could not fund the aspirations of the boomers; that self provision would lift national savings and break an entitlement attitude to retirement income,” he said. 

However he said subsequent policy decisions meant that while pension coverage was meant to shrink, it had gone up along with the sheltering of wealth accumulated outside the super concession tax-free. 

Russell said that it was these factors which represented the real problems which needed to be examined.