Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 529

Rethinking super tax concessions for the future

Superannuation tax concessions have been the subject of considerable public debate in recent times. The debate is likely to be fuelled again by this week's release of draft legislation for a new tax on investment earnings for total superannuation balances above $3 million.

The legislation and commentary around it suggest that the current tax arrangements for superannuation are unfair and/or unsustainable.

This article tackles this issue from a different perspective. That is, are there long-term financial benefits from the tax concessions for individuals and the government?

But let’s begin with an analogy.

It's not super versus Age Pension

Many Australians own an investment property. The annual expenses relating to this investment include borrowing costs, maintenance, land tax, council rates and insurance which may exceed the income received from their tenants. However, their investment is for the long term and any short-term negative cashflow is an investment for the longer-term benefit.

Superannuation tax concessions should be considered in a similar way. That is, taxpayers (through government policies) are investing for the longer term, in line with two broad government objectives. The first is to enable Australians to have a dignified retirement and the second is to reduce future Age Pension costs.

Hence, we'll look to address the following question:

Does the government’s investment in superannuation provide a fair outcome for individuals and improve the government’s future fiscal position?

This longer-term holistic approach also highlights the inappropriateness of comparing today’s Age Pension costs with the level of superannuation tax concessions for future retirees. These two forms of government support are given to different generations for different purposes. There is no reason why one should be higher or lower than the other.

The base case: a median income earner

Consider an individual on the current median income of $65,000 and subject to a marginal income tax rate of 34.5%, including the Medicare levy.

Assume this worker receives an SG contribution of 12% throughout their career of 40 years and will have a retirement period of 25 years from the age of 67. We will also assume that at retirement, the individual will convert their accumulated superannuation benefit into an account-based pension, which represents the most popular retirement product in Australia today. We will also assume that the retiree withdraws money from their account-based pension using the minimum drawdown rules which apply from 30 June 2023. Again, this represents the behaviour of many retirees who have a reasonable superannuation benefit.

We will compare this superannuation scenario with a non-super counterfactual. That is, the government continues to require a savings rate of 12% but provides no taxation concessions so that these savings are taxed at the individual’s marginal tax rate. The resulting investment income would also be taxed but at a slightly lower rate to allow for the capital gains discount and franking credits. During retirement, the retiree would again withdraw money based on the minimum drawdown rules.

Under both scenarios, the retiree may receive a part or full Age Pension, subject to the current income and assets tests, with the thresholds indexed to CPI.

Figure 1 shows the actual tax paid during the 40 years of active employment, from both the superannuation and non-super scenarios. The numbers have been deflated by CPI to express them in today’s dollars. The top solid lines in Figure 1 represent the total tax paid each year while the lower dashed lines show the tax paid on the super contributions and the saved income respectively. The difference between the solid and dashed lines represents tax paid on the investment earnings which naturally increases as the balances grow over time.

Figure 1: The real value of tax paid each year

Now let’s turn to the retirement years. Figure 2 shows the total income and Age Pension received each year, again deflated by CPI, to express it in today’s dollars (AP=Age Pension).

Figure 2: Real income during retirement

Several observations are worth making.

  • The Age Pension (AP) paid under the non-super scenario is higher than under the superannuation scenario due to the lower level of financial assets.
  • The Age Pension payments increase materially during retirement under the superannuation scenario as the superannuation balance is gradually reduced. This outcome highlights the impact of the assets test on the Age Pension.
  • Due to the impact of the assets test, the total income in the super scenario begins below the income in the non-super scenario but overtakes it at age 75 due to the impact of the increasing Age Pension.
  • The total income received is jagged under both scenarios due to the impact of the minimum drawdown rules.

Finally, and not shown in the graph, is the capital available at age 92 under the two scenarios. In today’s dollars, the balances are $274,150 and $162,822 for the super and non-super scenarios respectively.

The real value of all the future income in retirement plus the remaining capital at age 92 under the superannuation scenario is 23.1% higher than the real value of the future income and remaining capital under the non-super scenario. This represents a good outcome for the individual with superannuation.

But what about the cost to the Budget?

However, the question remains: How much did this positive outcome for the retiree with superannuation cost the government?

The costs to the government include the superannuation tax concessions shown in Figure 1 as well as the limited income tax during the retirement years, in contrast to the income tax that would be paid under the non-super scenario. However, these concessions must be offset against the extra Age Pension payments paid under the non-super scenario shown in Figure 2.

Table 1 shows the government finances under both the super and non-super scenarios allowing for future Age Pension payments and the tax received during both the pre-retirement and retirement years. These future cash flows have been deflated in Table 1 at both the assumed CPI rate of 2.5% and the assumed long term bond rate of 5%.1

Table 1: The net present value of future cash flows between the government and the individual

These figures highlight:

  • The most significant cost to the government relating to the provision of retirement income for a median income earner is the Age Pension.
  • This cost is significantly reduced by the presence of superannuation.
  • There is a net gain to the long-term government finances under the superannuation scenario, both in real terms and when the bond rate is used as the deflator.
  • The income tax paid during retirement is higher under the non-super scenario as both the investment earnings and the Age Pension are subject to tax.
  • As expected, the present value figures are much lower when a higher deflator is used.

In sum, the superannuation scenario provides a better long term financial outcome for both the individual and the government than the non-super counter-factual.

Of course, there are many different scenarios for different income levels, though most of them also show a similarly favourable outcome for the superannuation scenario for both individuals and the government. These scenarios and their assumptions can be found in the full report here.

Tax concession improvements

Many government reports, including the Henry Tax Review and the Retirement Income Review, make the case that superannuation should be supported by the government through tax concessions and not be taxed in the same way as other forms of saving. However, that is not to say the current arrangements are fair or appropriate.

Our recommendations for improvement include:

  • reducing the taper rate of the assets test of the Age Pension from $3 per fortnight to $2 per fortnight.
  • increasing the current minimum drawdown rates for pension products by 2% to increase the level of drawdown during retirement.
  • maintaining the current concessional contributions cap, as it should be no less than the required SG contribution rate on the maximum super contribution base.
  • halving the current non-concessional contribution cap or introducing a lifetime cap for non-concessional contributions.
  • reducing the threshold for the Division 293 tax from $250,000 to $225,000 (or 20% above the top marginal income tax rate).
  • introducing the additional tax on investment earnings for balances above $3 million while ensuring that this cap is always greater than or equal to the indexed transfer balance cap.


Dr. David Knox is a Senior Partner and Senior Actuary at Mercer Australia. This article is general information and not investment advice, and does not consider the circumstances of any person. Mercer's full report "Rethinking super tax concessions" can be downloaded here.


October 14, 2023

The more various bodies & governments tinker with super the less faith future generations will have in the system. Many forget that when compulsory was introduced it was at the cost of pay rises at the time. It is OUR money so in polite terms, get your hands off it!

October 12, 2023

What seems to have been forgotten in all these discussions around Super "tax concessions" is that they were provided as incentives to encourage people to save for their retirement and thereby reduce the burden on the Government coffers of the Age Pension. For the pensioner Superannuant, in our case entirely self funded via our own contributions, that has meant:
- Not having the use of that money for what is now over 32 years! That severely crimped our and our childrens' lifestyles for planned benefits in later years that may now not occur.
- Spending inordinate amounts of time investing, worrying about those investments, and riding the constant ups and downs of financial markets.
- Putting up with constant changes, additional costs and worrying dislocations as successive Governments changed the arrangements and rules around Superannuation.

Having done all this upfront for 32+ years, any changes should be grandfathered at the very least. Self funded Superannuant pensioners have obeyed all the rules for 32+ years and now find, in retirement, the rules changed on them retrospectively.

October 08, 2023

The boffins in the Government removed the work test rule extending the age to add to super to 75 years sounds, positive for those with some nonsuper investments to consolidate. However they only apply the indexation to super Transfer Cap to those young enough to have not yet converted to pension phase.
This is Government age discrimination. If you converted to a pension when the Transfer Cap was $1.6M then your stuck with that despite being able to contribute to the age of 75 years without a work test. The Transfer Cap for pension funds does not index. Why does the Transfer Cap indexation not apply to all super funds rather than only those who have not yet converted to pension.

October 06, 2023

Richard - "by retiree trap" I was simply making the point that when you are still working and still earning a salary each month you have a very different perspective than when you are retired, dependent on your savings, living with the volatility of markets and the musings of Canberra. In other words "you do not walk in my shoes"!!

October 07, 2023

It's real. I worked in superannuation for 15 years until I retired 18 months ago and I got just a little tired of business development people in their 30s and 40s telling me what I needed in a superannuation retirement product. You. Have. No. Idea.

And don't start me on the endemic casual ageism.

When I eventually retired and got a letter from my "pension" fund, it was addressed to "Dear Pensioner". Ouch. :(

Richard Lyon
October 08, 2023

That makes sense, Rob. Not sure that I'd use the same expression, but the sentiment also applies to the difference between the intellectual understanding of what is right for someone in "my position" and how it actually feels for me.

October 06, 2023

As we age we also find it harder to make sense of complex analyses like this one. As Groucho Marx put it when presented with Freedonia's treasury department report in Duck Soup: "Clear? Huh! Why a four year-old child could understand this report. Run out and find me a four year-old child. I can't make head or tail out of it."

I have no quibble though with David's recommendations, which are understandaby aimed as making the system fairer and ensuring retirement savings are used for exactly that purpose. We don't need a a four year-old to understand that.

October 06, 2023

Superannuation has a social purpose. Even beneficial for the budget in the long term as shown in the article. Where is the treasurer's moral outrage about people with $10 million dollar houses or 35 investment properties?

October 06, 2023

A lot of the money 'forced' out of super by the new tax will go into houses and house prices. Not very intelligent for a government concerned about the housing problem

October 05, 2023

A big chunk missing in simulations: unspent amounts during retirement adding to non-super retirement capital.

Mercer's "Retirement 'Income' Simulator" suffers from the same deficiency:

In the simulator, reducing the "Desired Retirement 'Income'" to an inconsequentially small amount should result in consequential unspent amounts accumulating in "Other Assets" - but does not.

Fixing the simulator to accumulate unspent capital withdrawals and income amounts would make the otherwise excellent simulator more realistic. [Previous feedback has been ignored.]

Similar modification to your modelling herein would also be more realistic. Who knows what portion of retirement cashflow median, average, high incomers don't spend [ie save]?

October 05, 2023

David - you have walked straight into the "non retiree trap". Once you have retired, after saving for a lifetime, it is reasonable and fair to believe that the goalposts, at the end of that compulsory savings period, do not move. As a retiree, you want and deserve, certainty as you age, that your savings, maybe augmented by a pension, will support your lifestyle till the day you die. You do not want the fear of Academic/Treasury/Actuarial rule changes hovering over your head.

Reality is that as we age, we progressively lose the ability to cope with change or to make decisions - even Actuaries! Constant tinkering frightens retirees who correctly question "what next"? Spreadsheets and models are one thing, but people matter and academic musings from wherever, deeply disturb many retirees with zero ability to respond or adapt.

October 05, 2023

Exactly right. Continually changing the Super system is causing mistrust and loss of confidence in the system amongst many people.
I have no way of knowing how much actual usable money I will have in Super when I eventually retire. Who knows how low the Div 293 tax threshold will go in future or how low the 3M additional tax threshold will go as governments seek funding sources.

October 11, 2023

Dear CC
I wholeheartedly agree with your point that continually changing the super system will result in workers supporting it as a means to become self-funded retirees.
In the case of the draft Bill released by the Government, those of us who served Australia as Public Servants for many years and hoped to rely on our Defined Benefit pensions to fund our retirement find ourselves facing a significant reduction in our income while still not being eligible for Government health and other benefits.
Unlike SMSFs, Industry or Retail Accounts, tax liabilities cannot be paid from the balance of a Defined Benefit Fund.The draft Bill proposes that tax amounts attributable to Defined Benefit Scheme members will be due and payable within 84 days of an assessment being given to an individual by the Commissioner of Taxation.
Moreover, even though my Defined Benefit's pension is taxed at normal rates, the draft Bill contains no reduction of tax payable for any income taxation that an individual is otherwise paying on their pension benefits. This means that I will pay 60% tax on my Defined Benefits pension, whereas retirees who rely on income from SMSFs, Industry or Retail Funds, will pay no tax on the income they earn (TSB of $1.6m), 15% on TSB from $1.6m to $3m and 30% on earnings above that.

Richard Lyon
October 06, 2023

I'm not sure what the non retiree trap is. However, if it is something to do with rule changes, then David hasn't fallen into it at all. His analysis specifically assumes a continuation of current rules. It's a bit like the Intergenerational Report.

I do suspect that David has fallen into a different trap:

He has effectively created money from nowhere. He describes a closed system of tax and pension flows between individuals and the government, attached to an investment market that only pays out to the individual. That is, money in the hands of the government earns no return. Similarly, the government loses no investment income (or has no extra debt interest to pay) from lower tax receipts. So a low-tax, low-pension model will always be better for the aggregate (individual + government).

In addition, I have some concerns with the assumptions in the Mercer paper. In particular, the gross investment return looks high relative to other assumptions (especially as it appears to be before adding back franking credits) and does not incorporate a reduction over time in accordance with a lifestage approach. Also, the favourable impact on tax rates of capital gains (realised and unrealised) and franking credits appears to be much greater for super than non-super investment. It's hard to be sure of the latter point, because the paper is vague on the non-super tax rate assumptions.

Finally, I am disappointed that the assessed value of retirement income (and residual) is not disclosed in the example - nor, indeed, in any of the examples in the paper.

John De Ravin
October 09, 2023

Sorry Richard but I don’t “get” the point you are making in your third paragraph. David’s Table 1 shows net present value comparisons of the difference between the super and non-super scenarios, with the nominal discount rate being either 2.5% lpa (columns 2 and 3) or 5%pa (columns 4 and 5). So while it is open to discussion whether these nominal rates are the most appropriate earnings rates to assume, it doesn’t seem fair to say that no allowance has been made for the time value of money.
Or have I misunderstood something?


Leave a Comment:



Australia isn't ageing as quickly as the Government says

Why Australia is crying out for a National Longevity Strategy

The future of retirement is already here


Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.


New research shows diverging economic impacts of climate change

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.


Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.


This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.