A more-informed debate on the cost of superannuation concessions is needed. The number dominating the headlines recently is that the concessions are costing $52.5 billion a year but this estimate has not been robustly challenged. By highlighting the gross cost rather than allowing for offsets, it significantly overstates the cost of concessions and has the potential to mislead the debate.
As mentioned in my article last week, the 2021 Intergenerational Report (IGR), forecast changes in government expenditure to be as follows:
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Government Expenditure
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% of GDP (2021-22)
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% of GDP (2060-61)
|
|
Health
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4.6%
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6.2%
|
|
Aged Care
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1.2%
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2.1%
|
|
Age and Service Pension
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2.5%
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2.1%
|
Superannuation, strongly encouraged by appropriate concessional treatment, is playing a valuable macro role, and the real aggregate cost of superannuation concessions, should be interpreted in this light. As superannuation continues to mature, the reduction in age pension costs (as a % of GDP) is a welcome development. Notwithstanding this macro view, the need to address equity and fairness issues in super remains.
Where do the tax concessions arise?
The loudly-trumpeted $52.5 billion is sourced primarily from Treasury’s tax estimate figures in the Tax Expenditures and Insights Statements (TEIS) for 2022-2023. Treasury uses this definition:
“A tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment (tax benchmark) that would otherwise apply. Tax expenditures can include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.”
The TEIS shows the three major items contributing to revenue foregone are:
- Capital Gains Tax (CGT) main residence exemption - $48 billion
- Rental deductions - $24.4 billion
- CGT discount for individuals and trusts - $23.7 billion
The major components of the so-called superannuation concessional tax costs (2022-23 estimates) are:
- Employer superannuation contributions - $23.3 billion
- Superannuation entity earnings - $21.5 billion
- Deductibility of insurance premiums inside superannuation - $2.38 billion
- Personal superannuation contributions - $1.55 billion
- Non-superannuation termination benefits - $1.55 billion
- CGT for superannuation funds - $1.35 billion
Lots of targets there for opponents of superannuation concessions.
Treasury recognises the weaknesses
The problem is that the Treasury tax estimates are an unreliable guide to the real cost of concessions, or the revenue gain if government removed or reduced the concession. For example, they don’t allow for social security offsets or behavioural responses if concessions were removed.
This is explicitly acknowledged by Treasury in the most recent Tax Benchmark and Variations Statement:
“Revenue forgone estimates reflect the existing utilisation of a benchmark variation and do not incorporate any behavioural response which might result from a reduction or removal of the variation to the tax benchmark. They measure the difference in revenue between the existing and benchmark tax treatments, assuming taxpayer behaviour is the same … revenue forgone estimates are not estimates of the revenue increase if a variation to the tax benchmark were to be removed.” (my bolding)
A similar statement appears in the TEIS.
These caveats are overlooked in the general commentary on the cost of superannuation concessions, including by Government, the Australia Institute, the Grattan Institute and most of the media who rely upon these information sources. These figures, or at least the use of these figures, are used for a purpose for which they were not intended.
Insufficient analysis has been done on the real cost, or net cost, of superannuation concessions.
A robust attempt was made by the Association of Superannuation Funds of Australia (ASFA) in 2016 (‘Mythbusting Superannuation Concessions – March 2016’) which concluded that the real cost of concessions was just over half the gross cost, as follows (note at the time that the estimated cost of concessions was $30 billion):
- Annual reduction in age pension expenditure as a result of super: $7 billion
- Impact of behavioural change (people shifting money from one tax-effective vehicle to another) that would occur if super tax concessions were removed: $7 billion
- Real cost: $16 billion
The SMSF Association (SMSFA) reached similar conclusions in its submissions to the Tax White Paper (2015) and the Tax Expenditure (TES) Consultation Paper (2017). The SMSFA concluded an even lower net cost using slightly different methodologies, noting that that:
“the TES measurements of superannuation tax concessions … have the following unrealistic assumptions:
- They are measured against a ‘comprehensive income’ benchmark which measures tax concessions against an idealised tax system where all income is taxed at people’s marginal tax rates. The choice of this benchmark has a substantial influence of the cost of the concessions.
- The measurement ignores the fact that people may seek other concessions such as discounted capital gain investments or negatively-geared investments to minimise their tax liability.”
To arrive at a net cost of superannuation concessions needs allow for offsetting social security costs as a result of building healthy superannuation balances.
Retirement Income Review (RIR)
Even the esteemed RIR relies almost entirely on gross costs in its commentary and quantification of the costs of superannuation concessions, largely consigning estimates of net costs (to allow for behavioural changes) to the ‘too hard’ basket.
It observes that people with very large superannuation balances can receive large superannuation earnings tax concessions, including that:
- In 2018-19, a person with a superannuation balance of $5 million would have received, assuming a net earnings rate of 6%, around $70,000 in earnings tax concessions
- Using the same assumptions, a person with a superannuation balance of $10 million would have received more than $165,000 in earnings tax concessions.
(In a footnote, it states that this assumes all superannuation assets are held in the accumulation phase, the assets would be taxed at the person’s marginal tax rate including the Medicare Levy if they were not held in superannuation and there are no unrealised capital gains).
But the RIR also notes:
“This Review uses a comprehensive income tax benchmark to measure the cost of superannuation tax concessions. This means tax revenue actually collected is compared with the estimated amount that would have been collected if contributions and earnings were all taxed at full marginal rates.”
So the RIR makes (or relies on) the same assumptions as Treasury.
Whilst not advocating for a continuation of the current level of concessionality for very large account balances, the narrative needs to be better informed.
It is worth noting that the RIR does quote some Treasury work on page 418 which attempts to account for a reallocation of savings if the concessions (‘revenue forgone’ or RF) did not exist. These ‘revenue gains’ (RG) are estimated for employer contributions and the earnings tax concession. However, the RIR largely dismisses them because:
“... the RG earnings estimate is 14% lower than that for RF. This is because the earnings on these alternative tax-preferred vehicles are subject to lower marginal tax rates than those used in the RF estimate.”
However, it is not clear what assumptions Treasury makes regarding alternative investments outside superannuation, including shares with franking credits, negatively geared property investment and the likely increased utilisation of family trusts and company structures.
Further, the proposed Stage 3 tax cuts will widen further the gap between the gross cost of concessions and the real or net costs.
Will the cost of superannuation concessions exceed age pension costs?
As an added perspective to colour the debate, commentary regarding super concessions is often claimed to ultimately ‘cost’ more than the age pension. On 20 February 2023, Treasurer Jim Chalmers said:
“Right now, we’re on track to spend more on super tax concessions than the age pension by around 2050. I’m not convinced that’s a sustainable way to get to our destination – good retirement incomes for more Australians, now and into the future.”
The framing of these comments infers a material problem rather than a natural, intended and overall positive outcome of public policy design. That said, I acknowledged in my previous Firstlinks article the need to reduce concessions on very high account balances.
One source for the Treasurer’s comments is potentially the RIR which observed that:
“Government expenditure on the age pension as a proportion of GDP is projected to fall slightly over the next 40 years to around 2.3%. Higher superannuation balances reduce age pension costs. The cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of age pension expenditure by around 2050. This is due to earnings tax concessions. The increase in the SG rate to 12% will increase the fiscal cost of the system over the long term.”
Again, all these observations are based on the gross cost of superannuation concessions. Different conclusions would apply if the real cost of superannuation concessions were used.
With an ageing population, which will drive increasing aged care and health costs (as a % of GDP), the fact that the cost of age pension will be declining (as a % of GDP) is a notable and positive achievement.
Address high balances but inform the debate properly
Treasury admits its estimates of the cost of superannuation concessions represent gross costs, and a closer examination suggests the real cost may arguably be closer to 60% of the popularly-quoted level.
Whatever the figures, superannuation concessions need to be sustainable and to have a higher degree of equity and fairness, but they meet neither criterion at the moment.
Whilst not advocating for a continuation of the current level of concessionality for very large account balances, the narrative needs to be better informed. The net cost to the public coffers should allow for behavioural change and social security offsets.
Andrew Gale is an actuary, public policy expert in financial services, a non-executive director and a former Chairman of the SMSF Association. The views expressed in this article are focussed on public policy and are personal views not made on behalf of any organisation. This article is not financial or tax advice and it does not consider the individual financial circumstances of any person.