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Is it fair that the wealthier get the most super benefits?

Introduction. A Firstlinks reader, Derek O’Hare, asks whether superannuation unfairly advantages wealthier people, and he suggests an alternative taxation structure. We asked David Knox of Mercer to respond.

Hi Firstlinks

I’ve been following your content for a couple years now and have found it informative and helpful in many ways. I wondered if I could suggest a further avenue for discussion?

I’ve read articles elsewhere that point out the inequitable distribution of the tax advantages of super. The vast majority of taxation benefit goes to those with the highest incomes and those least likely to ever need the age pension in the first place. Some articles suggest that instead of 15% flat tax rate on super contributions and earnings, a 15% discount off the individual's marginal rate would be a more sensible option and more in line with the idea of propping up retirement incomes and reducing age pension reliance from the less wealthy. They argue that the tax breaks given to those people who don’t need them is better off (and will far outweigh) spent on the age pension down the line.

I find their arguments to be compelling and apparently sound. I think I would find it helpful if Firstlinks – which has no particular bias as far as I can tell – could provide some opinion and discussion on these matters.

Kind regards,
Derek O’Hare


Hi Derek

Good question. Let’s go back a step or two.

The Government supports the provision of retirement income over an individual’s lifetime in two ways:

  • The means tested age pension
  • Taxation concessions to superannuation

Not surprisingly, lower income earners receive more age pension and higher income earners receive more superannuation. This is confirmed in the following graph from the consultation paper issued by the Retirement Income Review.

However this graph is misleading as the present values of future payments and support are calculated at a high 5% pa.

In our submission to the Review we made the following comments.

Although this rate (5%) represents a reasonable estimate of the average increase of nominal GDP in recent years and hence the likely growth in future tax receipts, it is not a measure that reflects inflation, wage growth or even the government’s borrowing rate. All these rates are much lower and better understood by the community and are often used to calculate net present values. The use of a lower discount rate would increase the relative value of future age pension payments due to the fact that they are assumed to be paid in 40-65 years’ time and so change the shape of the graph.

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It is also worth noting that the graph is in respect of individuals and therefore could be considered from a per capita perspective. Hence the nominal GDP increase may not be appropriate. In short, it must be recognised that the selection of the discount rate, in particular, is critical as it inevitably influences the outcome.

If one allows for a lower discount rate, the value of the age pension increases, thereby benefitting lower income earners. In fact, it becomes a U-shape.

I would also note that the value of the earnings tax concessions for higher income earners shown in the graph assumes that if these individuals did not have their money in super, they would be paying the top marginal tax rate on their investment income. This is clearly not the case, as there are many opportunities for them to reduce the tax on investment eg negative gearing, low income partners, trusts etc.

In fact, when you consider the full picture of retirement income and allow for realistic assumptions, the level of Government support over a lifetime is remarkably level across different incomes.

I might add that when you consider the 30% tax rate on contributions for high income earners and 15% tax for average income earners, together with the LISTO, we are not far away from a 15% rebate on super contributions for everyone.

Hope that helps and happy to discuss.


Dr David Knox is a Senior Partner at Mercer. See This article is general information and not investment advice.


July 31, 2020

What is ignored in this debate about haves and have nots that comes up from time to time, and usually initiated by jealous socialists, is that over their working career salaried employees at the high end have contributed vast amounts of tax compared with wage workers. So if they get concessions in the twilight of their life they deserve it. The mega superannuation folk get caught with the tax after $1.7M

April 30, 2020

And of course all of this ignores the huge cost to govt of the various bureaucratic processes such as for example the asset and incomes tests incurred by centrelink and other govt depts !! Whereas a universal aged pension would eliminate much of that !!

April 27, 2020

If the point of the exercise is to ascertain whether the pensioner or the self funded superannuant retiree benefits more from money either given, or through tax concessions, forgiven, by the Australian tax system analysts would need to include the benefits that accrue to pensioners through heavily subsided access to aged care in-home and nursing homes packages of funding. These are benefits and subsidies not available to those who are not pensioners.
My pensioner mother has now passed away but in December 2018 Hammond Care provided over 27 hours of care and transport to her. Of the total fees for this service my mother paid $320.88 and the Government Funding on a Level 3 package paid $3,058.15.
Should you include this very generous government benefit on your graph in some sort of averaging as it applies to those receiving the aged pension, analysis about the largess enjoyed by those who saved for their retirement compared to those who are funded by the taxpayer would change.
I am grateful for the funding and care provided to my mother. However whenever I read and hear about the 'poor' pensioners I find that the statistics and stories fail to cover all the benefits in financial terms that pensioners enjoy out of the taxation pool.

Derek O'Hare
April 23, 2020

Hi David

I'm afraid I failed to understand most of what you were saying here.

Of what value is the superannuation guarantee to a part time worker on less $18,000 per year? They are effectively worse off by having their money directed to a super fund than having it paid out in wages. What about those earning less $37k? They receive a 4% tax concession for money that is taken from their wages.

And then there are those earning between $180k and $250k who receive a 30% tax concession on their earnings that are directed to super.

From a government policy point of view, at least as I understand the purpose of super to be, this doesn't make sense. The first group is not likely to accumulate enough superannuation to mean a lessening of their reliance on the age pension anyway. So why bother?

At present, the tax concessions on SG and earnings are almost equal to our total aged pension payments. The vast majority of these tax concessions go to those who are least likely to need them, and can afford to make concessional contributions over and above the guarantee. So it appears to me as if the system is skewed against the people the system is supposed to benefit the most. Where is the logic in that?



July 31, 2020

Hi Derek.....You need to re-read the article until you understand it. It is crystal clear to anyone reading it objectively.
The welfare in Australia balances out the deficiencies in contributions towards both the high income earners, who are also the high tax payers , and the low income earners , who are basically welfare recipients from the get-go !
There is no reason for anyone NOT to contribute to the best of their ability towards their eventual retirement funds.
Some will contribute very little and others will contribute a lot ! That is what the Superannuation Scheme is for !
The PENSION is paid to those who are unable [or were unable] to become financially independent by their own efforts.
That seems to be a reasonable result for being fortunate enough to be born into a country charitably disposed , and
wealthy enough , to afford to pay for it's less financially successful people.......or don't you think so ?
You seem to convey a feeling that somehow the competent and conscientious and provident people are not doing enough
for their counterparts and that a financial redistribution is required to address the "inequity" which , as the article clearly
shows , is already addressed by the welfare already existent.
You seem to fail to realise that "the government" has no money of its own. It simply takes YOUR money and mine and
a host of others , and redistributes it as it will benefit them electorally and " do the most good ' , whereas any factula analysis of welfare will show that it actually destroys the recipients by creating dependence and destroying self-respect and purpose in life. But that is another article you need to read elsewhere.
Sorry that I can't be more supportive....but I think that the Superannuation arrangements in Australia work well and work best when not ' continually tinkered with' .
Regards , Trevor.

April 23, 2020

The elephant in the room that makes it better for the better-off is the (legal) abuse of the super system for estate planning. The compulsory and concessional regime was intended to provide for retirees in their twilight time, not for the grand kids' Oxbridge education. This largely explains why the purported reprieve of unfunded age pension burden that falls on the taxpayer (who on an average is less well off than the better-off population referred to above) is now considered a shifting mirage.
Together with other structural faultlines (no wealth or gift tax, the Orwellian salary sacrifice whereby personal outgo can somehow be treated as pretax, ignoring family home for the asset rich cash poor Centrelink recipient...) this increases the perception of inequity and pervasive inequality for the lower paid (Thomas Piketty stuff). Perceptions matter as they drive behaviour.
COVID-19 can be the trigger for the discussion DH suggests, but will we be so bold?

April 23, 2020

Published data from the ATO etc which contains information about the total member(s) balances of individual SMSFs (disclosed in bands) shows that the historical provision to make unlimited undeducted contributions to an SMSF has led to a bastardisation of the SMSF concept. To address this outcome, several legislative changes have been made in recent years that now limit contributions, and the 2017 transfer balance cap limits the total amount that can be held by a member in a tax-free pension account or accounts. As a result of the various limits in place, no new mega-balances in SMSFs will be possible in future.

Given that SMSF mega-balances still do exist today, the 2017 transfer balance cap should now be complemented by the introduction of a second cap which will limit the accumulation balance that an individual member is permitted to have and which is taxed concessionally. Let's call the new cap the member's total balance (MTB), being the sum of the member's pension account(s) and accumulation account(s).

If the MTB concept were adopted, then the proportional rule should be extended as follows: Taxation of the pension account proportion remains zero. Taxation of the accumulation account proportion will be 15%, as at present. Taxation of the remaining proportion above the MTB is taxed at the member's marginal tax rate. A member who has not reached pension account age but who has a mega-balance would not receive any concessional tax treatment beyond the new MTB.

A suggested MTB might be twice the transfer balance cap amount, which already well defined, and in place now.

In suggesting this MTB concept, I disclose that I personally would be affected by the suggested MTB limit being imposed.

Jon Kalkman
April 23, 2020

It is refreshing to see an analysis that compares the tax concessions to super, with the cost of the age pension because they are both a cost to government revenue. It is interesting to note that the tax-payer support given to retirees in all income brackets is essentially the same over their life time.

But there is one area where the concessions given to super seem excessive. According to Rice Warner, the top 100 SMSFs account for $79 billion, or an average of $79 million each. As the government has decided that a person only needs $1.6 million in a tax-fee pension fund for a comfortable retirement it means, on average, these SMSFs have $75.8 million in accumulation funds assuming the average SMSF has 2 members. Moreover, according to the ATO there were also, before this current downturn, over 4000 SMSFs are each worth more than $10 million,

The income in an accumulation fund is concessionally taxed at only 15%, when this income would be taxed at the highest marginal rate if earned outside super. In an accumulation fund there is also no obligation to withdraw any money unlike a pension fund which mandates the progressive removal of money from this concessional area. Accumulation funds just keep growing.

We know that these large super funds are perfectly legal and they came about when there was no limit on non-concessional (after-tax) contributions before 2007. It could be argued that the income earned in these funds is from contributions/investments on which tax has already been paid, but the same is true of investments outside super as well. We also know that eventually these funds will be cashed out on the death of its members, but until then the tax concessions flowing to these accumulation funds in retirement are substantial and do nothing to offset the cost of the age pension.

A couple can have $3.2 million together in a super pension fund that pays no tax and they pay no tax on those pension withdrawals. In addition, they can have about $800,000 invested outside super and also pay no income tax, thanks to SAPTO. It seems clear that people do not to need have more than $10 million to generate a comfortable retirement. It is however an ideal investment structure to minimize tax and for estate planning.

These large funds distort the whole analysis of tax concessions and super. Firstly, people who are not yet retired cannot make any more non-concessional contributions once their fund reaches $1.6million so they will never benefit from this tax concession available to accumulation funds in retirement. Secondly, the median size of an SMSF is less than $700,000 but, as we saw in the franking credit debate, journalists and politicians incorrectly assume that all SMSFs are very large and therefore benefit from extraordinary tax benefits.

Anthony Asher
April 23, 2020

Another point that can be made is that the incidence of the tax system should be seen over all sources of income over a lifetime, and that super is only a part of it. If you want to make the system more progressive, the simplest way is to increase the top marginal tax rate. Eliminating some of the loopholes mentioned by David would make it more fair - but perhaps more complicated. Most envisaged changes to super would just make it more complicated.

Kym Bailey
April 23, 2020

A flat tax system is simple to administer and the current system has the superfund collecting the tax.
If a change to, for example, marginal tax rates less a discount, it would not be realistic for the superfunds to manage this and it would make the personal ITR more complicated. (This is the way the US manage 'pension plan' contribution taxing.)
The SGC is an income trade-off and for most, results in a long term capital access trade-off, so a low level of (flat) tax is appropriate. Contribution above the SGC does bite "high income earners" via the Division 293 super surcharge who pay 30% tax on super contribution.
The surcharge is an administrative pain that should be looked at with clear eyes, before we start to consider changing the current flat rate of super.

April 20, 2020

Like most things in politics today (except for Covid19 it seems) every debate is so adversarial we can’t have some reasonable discussion. People are only classified as for or against it. We are not allowed to have a middle ground where can talk about changes.

But anyone with some sense can see that, despite it been a largely ‘good’ system, it has multiple flaws. Why can’t we have a reasonable discussion to improve them?

Hopefully the government review will bring some sensible recommendations.

April 27, 2020

The contest of ideas, an interesting concept.


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