Super tax approach flawed, says Mercer

Treasury’s approach to superannuation tax is flawed and revenue gains will be much lower than those quoted according to Mercer’s latest superannuation tax report.  

Mercer senior partner and author of the report, Dr David Knox said the focus on super tax concessions did not take a holistic view of the country’s retirement savings strategy and would skew long-term policy settings.  

“Firstly, it ignores future age pension costs which will inevitably increase if super benefits were reduced due to higher tax on contributions, earnings or benefits,” said Knox.   

“Secondly, it ignores any redirection of contributions to other tax effective investments that would occur if the super rules became less favourable.”  

Mercer’s report found that the cost of super tax concessions to the Government increased by 187 per cent from an average wage earner to someone that earned double the average wage, however, age pension savings for the Government increased by 310 per cent between the two.  

Mercer said as income rose, the net cost to Government reduced as a percentage of tax concessions, revealing a direct link between tax concessions and age pension costs. The net cost to Government, accounting for future age pension savings, for an average wage earner was 63 per cent of tax concessions and reduced to 45 per cent for an individual on double the average wage.  

“Therefore, increasing the taxation of superannuation would reduce future superannuation benefits and thereby increase future age pension payments,” the report said.  

Knox said continuous tinkering would drive Australians to seek alternative tax-effective vehicles for voluntary super contributions.  

If tax expenditure figures continue to be used to shape superannuation policy but fail to provide long-term objectives and certainty it said.  

“The tax expenditure debate will not go away if the tax expenditure figures are relied upon as the proof point for future reforms,” said Mercer   

Mercer managing director and market leader for the Pacific, David Anderson said a better long-term solution was increased integration between the age pension and superannuation.