Tag Archives: superannuation

How superannuation discriminates against middle income earners

The Conversation

File 20180625 152156 1om8b5x.jpg?ixlib=rb 1.1
Tax rules baked into superannuation favour those on low and high incomes. Shutterstock

Ross Guest, Griffith University

While all workers benefit from the 9% superannuation guarantee, those on middle incomes benefit significantly less than lower and upper incomes, according to my research.

I ran simulations on the financial assets accumulated over a working life, comparing this to what would have been earned on the same amount saved but invested outside the superannuation system and earning the same rate of return. I’ve added back the last few words here as this is an important assumption in my analysis


People on low, middle and high incomes are all better off under the superannuation guarantee levy. This is due largely to the concessional tax rate (a flat 15%) on income earned in the super fund.

But lower income earners see a lifetime gain 9% higher than for the medium earner. The high income earners receive a gain 8% greater than those on medium incomes.

Ghosts in the system

About 80% of Australian government spending on cash benefits to individuals and families is subject to means-testing. This includes the low income superannuation tax offset (LISTO), as well as unemployment benefits, pensions and family tax benefits.

LISTO provides a refund of the 15% tax paid on the super contributions. It is a way of compensating low earners for the greater sacrifice they make in forgoing current spending in favour of superannuation saving.

However, means-testing of the LISTO and other cash benefits is a double-edged sword. It may promote some level of fairness, but it can also discourage work through high effective marginal tax rates.

This is because benefits are phased out or cut completely once income reaches a certain threshold, costing the person a benefit they had been entitled to. This is essentially the same as paying a tax.

Means-testing of the LISTO is one way in which our compulsory superannuation levy (SGL) discriminates against middle income earners. Only employees with a taxable income up to A$37,000 are eligible for the refund and it’s capped at A$500 per year.

The super tax offset is lost once taxable income exceeds A$37,000, creating a jump in the effective marginal tax rate paid. This means, according to my simulations, the superannuation guarantee levy provides significantly greater gains to low income earners than middle earners over a working lifetime.


And there are a lot of low income earners. In 2016, roughly 2.9 million employees (28% of all employees) were eligible for the LISTO. This figure is probably an underestimate, as the ABS data used here refers to cash earnings while LISTO is based on taxable income.

The top 20%, or 2 million earners, also gain more than middle earners from their superannuation. This is due to the flat 15% tax on super fund earnings, which represents a significant drop from the marginal tax rate that the high income earner would pay for equivalent savings outside superannuation.

A person with taxable income over A$180,000 will pay 47 cents in tax for every additional dollar earned over A$180,000. But the tax payable on additional income from superannuation earnings is just 15%. This represents a 32% concession (47% minus 15%).

What we could do differently

There is no reason why the superannuation guarantee levy should discriminate against one income group over another. We already have a public pension scheme to support retirement of low income earners – there is no need for superannuation to do this.

New Zealand’s super system, KiwiSaver, offers a great example. KiwiSaver is an “opt out” model of superannuation. Employees are automatically enrolled when they are first employed but they can choose to withdraw their savings.

And unlike Australia’s superannuation guarantee, KiwiSaver allows members to suspend their contributions for between three months and five years after one year of membership. KiwiSaver funds can also be withdrawn to buy an owner-occupied house, provided certain requirements are met.

Read more:
What Australia can learn from the New Zealand retirement system

The flexibility afforded by KiwiSaver means that low income earners are not forced to save through superannuation. In turn this means there is less reason to have tax concessions like LISTO to compensate low earners.

The absence of means-testing benefits in Kiwisaver also avoids the high effective marginal tax rates that act as a disincentive to earn higher income through employment.

KiwiSaver contributions and returns are taxed the same as other savings. This eliminates the gains to high earners from the concessional rate of tax on super fund earnings enjoyed in Australia.

The combination of these KiwiSaver features is that neither the low or high earners are advantaged relative to middle earners.

The ConversationThis is one of several aspects where the New Zealand system of taxation and government benefits is superior to Australia’s in terms of disincentives and complexity, while still allowing New Zealand to have slightly less inequality than Australia.

Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Broad mandate for financial services royal commission takes the heat off banks

The Conversation

Kevin Davis, Australian Centre for Financial Studies

It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.

The banks argue that ongoing speculation and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns.

And with annual interest expenses in the order of A$65 billion, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.

Terms of reference too broad

The draft terms of reference of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities).

One apparent omission in the draft terms of reference relates to credit – and lending has been a major problem area in the past. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.

The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.

Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.

The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.

What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad.

So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes.

In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of regulatory changes in progress following on from the 2014 Financial Services Inquiry and other government policy initiatives.

Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.

The ConversationThe banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the reference to superannuation fund trustees and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.

Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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The latest ideas to use super to buy homes are still bad ideas

The Conversation

John Daley, Grattan Institute and Brendan Coates, Grattan Institute

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence. The Conversation

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing,
while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

John Daley, Chief Executive Officer, Grattan Institute and Brendan Coates, Fellow, Grattan Institute

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Nudges, not legislation will drive people to save more for retirement

The Conversation

Osei K. Wiafe, Griffith University

Getting Australian workers to save more in order to become more self-reliant in retirement is a policy idea most people understand.

Over time there is increasing pressure on government funding of the age pension. In 2013-14, around 70% of Age Pension eligible Australians were receiving the pension, with 60% receiving the full-rate pension. At the same time, age pension costs are projected to increase from 2.9% of GDP in 2014-15 to 3.6% of GDP in 2054-55. This is significant cost to the Australian economy.

The problem is governments can’t easily ensure people save more, and legislating to make it happen is not the right approach. Different incentives to change behaviour may be a better starting point.

Problems with the forced approach

One way to force people to save more is by increasing the Superannuation Guarantee. The guarantee was scheduled to increase to 12% of salary in 2022, although this has been delayed by the current Coalition government for a further three years.

While policies and incentives are important to get people to save more, there is a concern that people take advantage of such policies, using the superannuation system as a vehicle for wealth creation. Where do we draw the line between helping average workers save more and deterring people from abusing the system?

Rather than more legislation, we could turn to behavioural nudges to help increase household savings. This could potentially help encourage people to save more without resorting to more legislation in an already extremely legislated sector.

Use plain English and stop tinkering with superannuation

To start with, the various aspects of superannuation need to be communicated in plain simple English.

Many of us are not clear on what is meant by concessional contributions, salary sacrifice, employer compulsory contributions and the like. As columnist Sally Patten argues, someone visiting Australia might be forgiven for thinking they were in a non-English speaking country when asking questions about our super system.

“If you want to encourage someone to do something, make it easy”, was the sage advice of Richard Thaler, one of the founding fathers of behavioural economics.

Instead our superannuation regime seeks to encourage savings within a complicated retirement savings system. Given people are putting away money they may not have access to for decades, less tinkering with superannuation policies would help build greater trust in the system.

Constant uncertainty regarding superannuation taxation, negative gearing, concessional contributions, purchasing a first home with superannuation funds, etc. undermines trust in the system. Why sacrifice today into a system where you have little certainty regarding your entitlements in the future?

Income is the goal

If retirement income is the goal of superannuation (which is yet to be defined and enshrined into legislation), then rather than talk about a pot of wealth, let’s talk about incomes.

It is great to send out statements informing people of their superannuation balances; it makes everyone feel good especially if their balances are high enough. But showing the annual income that could be derived from this balance, is likely to be a stronger motivator.

This is not rocket science; it’s easier to compare current income with future income than figure that out from a wealth balance. If my superannuation balance today yields an average return of 6% per year for the next 10 years, my projected income will be A$30,000 per year (with all the assumptions in place). Is my future self happy with a A$30,000 pa income? If the answer is no, then I might take proactive steps to save more, work longer, or take a different investment strategy. A simple image of our future self is enough to motivate savings for many people.

Keeping up with the Joneses

Research shows we compare ourselves to our neighbours as a benchmark for social or economic status. As humans, we are preoccupied with our position relative to others around us. In today’s world, this may come in the form of houses, cars and material possessions. Psychologists refer to these items as “wealth signals” and these are hard to avoid.

Knowing we are outperforming another person positively affects reward related brain areas, according to research by German economists.

Humans get some form of gratification by keeping up with the herd or doing better. This may not necessarily be in line with traditional economics models where one’s satisfaction or preferences are unaffected by others people’s preferences.

While our human instinct to keep up with others may be flawed in some ways, there are several ways to influence behaviour with this phenomenon. For example, when I receive my energy bill every quarter, I’m told how much energy I have used relative to other homes in my area. This simple benchmark provides a nudge to consume less, if I am using more than the average household of a similar size. I begin to think of ways to reduce consumption.

On the other hand, it’s always a good feeling to know I’m spending less than the average household of similar size; a smart user, saving the planet. If only my superannuation statement gave me an idea of where I stood relative to the “average” person in my industry, my postcode or age group, I bet I wouldn’t need legislation to make a decision to save more to keep up.

Osei will be on hand for an Author Q&A between 2 and 3pm AEST on Thursday, April 7, 2016. Post your questions in the comments section below.

The ConversationOsei K. Wiafe, Research Fellow, Griffith Centre for Personal Finance and Superannuation (GCPFS), Griffith University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.


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What ‘fair’ superannuation would look like

The Conversation

Rodney Maddock, Monash University

Australia is engaged in an ongoing debate about the fairness of the superannuation system. Those on the highest incomes are seen as extracting the greatest and an unfair advantage from tax benefits currently available. This problem of perception is inevitable in a system where contributions are made out of our pre-tax income.

To try to lessen the concern, the basic approach people have taken is to argue for restrictions on how much can be put into the system each year (on a pre-tax basis). There are also proponents of the view that there should be lifetime limits rather than annual limits. In a sense all these proposals are trying to make taxation of the savings system more progressive, basically driven by a desire for greater fairness. They all make the system more complicated.

Deloitte Access Economics is the most recent contributor. Its recommendation is a little different. It proposes we use the progressivity of the income tax system as our anchor point. This actually seems like a good starting point. The progressive income tax system is designed so that people with higher incomes make a greater contribution to funding society’s needs. It meets the basic requirement of being accepted as fair.

What is interesting with the Deloitte proposal however is that it suggests we all should have an equal discount off our marginal tax rates for our superannuation contributions.

While this too seems fair, it is not clear why we need to have any discount at all.

The common rationale is that we all need an incentive to compensate us because our savings are locked away for a long time. This is rather like a compensation for being compelled to do something. It is a bit odd though because the government compels us to do lots of things without any incentive payments. There is no incentive payment for driving on the left, or for paying one’s taxes. There is no obvious reason for the government to provide incentives for compulsory payments into superannuation. If you have compulsion you do not need incentives. It complicates the system unnecessarily.

A more subtle explanation for the incentive would be that savings should always be lightly taxed (as argued in the Henry review). This is to provide equity between savers and consumers – if I consume all my income today, but you save and then pay tax on your savings, you are paying higher taxes than I am. While this makes sense for voluntary savings, it is not relevant in the context of compulsory savings.

In a paper Stephen King and I wrote for CEDA we argued the sensible and fair approach is to require all payments to compulsory superannuation be made out of people’s after-tax income and there should be no discount at all. The progressive income tax system solves the fairness problem. Eliminating the incentives gets rid of an unnecessary complication and simplifies the system significantly.

The administrative savings would be substantial. Everybody simply pays x% of their after tax income into a compulsory superannuation fund. Get rid of all the limits and caps: get rid of the administrative complexity for once and for all. Compliance would be easy to monitor through the tax system.

People would probably save outside the compulsory system and these would be treated just as outside savings are now: no news rules would be required.

Once the savings are in the compulsory sector they would not need to be taxed further. Again this would simplify the system and reduce administrative complexity.

These changes would bring compulsory superannuation into a similar tax regime as people’s primary residence. In both cases assets are built up over one’s life, based on after-tax contributions, and not subsequently taxed. This might have other advantages of bringing the two systems into closer alignment since housing and superannuation are the two basic forms in which most Australian’s save.

Logic and fairness suggest superannuation and primary residences should both be included in assessing a retiree’s right to access government support in later life. This is an important issue but separate from the issue of providing fairness in the accumulation phase.

The ConversationRodney Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics, Monash University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.


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