Opinion

Richard Denniss
The inequality of the superannuation system

A part-time cleaner earning $18,000 a year will receive zero tax concessions for their compulsory superannuation contribution; meanwhile, a chief executive of a big bank can get tens of thousands of dollars every year in taxpayer support for their “retirement nest egg”. This is the strange world of Australia’s retirement income system: a world in which those who need the most get the least.

This year, the government will spend more than $41 billion on tax concessions for superannuation with the stated purpose of helping people save for their retirement. But the way the rules are designed give the vast majority of that money to people who will already retire comfortably, while providing next to nothing to those with the lowest incomes and the lowest super balances.

According to research from my Australia Institute colleague Matt Grudnoff, 60 per cent of superannuation tax concessions go to the top 20 per cent of households, with just 11 per cent going to the bottom half of all Australian households.

In a report released last week, he writes: “Superannuation tax concessions also [predominantly] favour men. Despite women making up about 50 per cent of the workforce, they only receive 30 per cent of superannuation tax concessions.”

This adds to the already stark superannuation gap between men and women. “Women retire with substantially less superannuation than men,” writes Grudnoff. “The median superannuation balance for women at retirement is $36,000. For men it’s more than three times that at $110,000.”

According to Treasury, when you compare the age pension and superannuation tax concessions, taxpayers spend at least twice as much supporting the retirement of someone in the top 1 per cent of income earners as they spend on someone receiving the age pension.

Superannuation tax concessions aren’t just enormous and unfair, though: they are also growing – at about 8.5 per cent a year, twice the rate of growth for the age pension. And while you often hear conservative politicians and business leaders bemoaning the “unsustainable” growth in welfare spending, it’s rare to hear them expressing concern about the rapidly growing cost of the tax benefits we give to the wealthiest Australians.

Instead, in Australia’s super system, people who make “poor choices” are blamed. The first big “mistake” people can make comes early – going into low-paid caring professions, such as childcare or aged care. If you want to maximise your retirement income in Australia, you really should “choose” to go into a high-income industry such as medicine or financial planning.

The second big “mistake” people make is taking time out of the paid workforce, perhaps to raise a family, early in their working lives. The final “mistake”, once your house is paid off and your kids have left home, is to take time out of the labour market to care for an elderly parent. Many people earn higher incomes when they are older, so it’s a big mistake not to salt away that money, and the tax concessions that come with it.

See how easy it is to blame the victim?

Imagine there was a $41 billion pile sitting on the table and we were having a debate about whom to give it to. It’s easy to see how someone might suggest we give everyone the same amount. And you could reasonably expect some people might push to give a bit more to those with the least, and to give a bit less – maybe even nothing – to those people who’ve paid off their house and have millions in their retirement accounts already.

Instead, during the meetings in the 1980s where Australia’s system of compulsory superannuation was crafted, it was decided that there would be zero taxpayer contribution to the retirement accounts of the lowest-income workers, whereas those contributions would ramp up exponentially as your wealth grew, with the result that those who have millions saved up or earn millions each year can now get tax concessions worth tens of thousands of dollars a year. Now can you see why the industry doesn’t want people to “engage” with their super?

The people who invented our compulsory superannuation system, and the tax concessions that accompany it, didn’t set out to make a system that takes the disparities in working-life incomes and magnifies them in retirement. Regardless of their intentions, however, that is precisely what they have made. And there are clearly no regrets.

The Labor Party remains proud of Paul Keating’s initiative, while the Liberal Party clearly loves the way superannuation tax concessions flow overwhelmingly to their highest-income voters. Both parties have supported minor tweaks to curb the most excessive benefits to the highest-income earners, but neither has proposed anything that would significantly close the gap between men’s and women’s retirement incomes.

At the same time, when we are doing so little for those with the least, the superannuation industry is working tirelessly to make middle- and high-income earners feel anxious about their finances in retirement. They have spent millions of dollars of our potential retirement savings on TV ads, making people worry they won’t have enough to retire “in comfort” or “with dignity”.

But what is the going price for dignity these days?

According to the Association of Superannuation Funds of Australia, the peak body for the country’s superannuation industry, a couple needs $61,786 a year to retire in “comfort” in Australia. Keeping in mind that income from superannuation is entirely tax-free – and that the couple in question is assumed to own a home – that equates to a weekly disposable income of more than $1000.

By those numbers, a lot of people working full-time in Australia have never experienced comfort.

Most people working full-time are paying off a mortgage, raising kids, or both, and yet the full-time minimum wage comes to only $38,522 a year, and that’s before tax. And then there’s the one million people who rely solely on an annual age pension of $24,268, and the hundreds of thousands of unemployed people trying to live on the Newstart Allowance of $14,534 a year. We don’t talk too much about the right of these people to live in comfort. And we don’t talk about the fact that fewer and fewer welfare recipients will own their own homes in the coming years, while people who do own their home are making record capital gains – tax-free, of course.

But while successive governments have assured us we “can’t afford” to increase unemployment benefits or the age pension, we currently spend more than $24 billion a year boosting the retirement incomes of the wealthiest 20 per cent of the population.

It gets worse.

One of the biggest justifications for putting 9.5 per cent of our wage into superannuation, and for spending $41 billion a year on tax concessions for that super, is that it “takes pressure off the age pension system”. The only problem with this argument is that it’s not true. Not even close.

The people who get the most taxpayer support for their retirement savings are those who are already so wealthy that they were never going to be eligible for the age pension – because the pension is “asset-tested”. Once a retired couple who own their own home have financial assets of more than $863,500, they can’t get the age pension.

The simplest, cheapest and fairest thing we can do would be to copy the New Zealanders and scrap not only the complicated tax concessions that benefit the wealthiest but also the asset test, so that everyone, including the very wealthy, gets the age pension. The enormous savings would make it possible to boost the age pension to be a lot more “comfortable”. New Zealand doesn’t even have what we think of as a “retirement age” – when New Zealanders turn 65, they start getting a payment of $NZ950.84 a fortnight before tax, regardless of whether they are still working.

But we won’t be doing that. Even though we spend a combined $90 billion a year on the age pension and tax concessions, and a further $30 billion a year on superannuation fees, poverty among older Australians is more common in Australia, particularly among women, than in most OECD countries.

We won’t be fixing the system any time soon. The government is reviewing the Australian retirement income system, yet again, and the review, like its predecessors, is in possession of all of the data described above. We know they have it because most of the data comes from government itself. And we know they won’t recommend anything radical because the superannuation industry is so relaxed and confident that rather than wasting time defending the obscenity of the existing inequities, it is running ads demanding we all put more money into their broken system.

How can this be?

Victim-blaming is common in Australia. We blame the unemployed for the lack of jobs in the economy, we blame women for the violence they endure in their homes and, of course, we blame people who can’t decode the small print of their super fund’s product disclosure statement for paying some of the highest fees in the world. We blame people for not saving enough to support themselves in retirement.

Super is boring and people are busy. The victims of the system blame themselves for their plight. And the enormously profitable finance industry would fight even simple and fair changes tooth and nail. But that’s not why it will never be made fair and efficient. It will never be fixed because it’s boring. How much time are you going to spend demanding it be fixed?

This article was first published in the print edition of The Saturday Paper on Feb 29, 2020 as "Retiring the injustice of our super system".

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Richard Denniss
is The Australia Institute’s chief economist.

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