The unfairness of superannuation?


Is it just me or have others noticed a plethora of voices claiming that superannuation is unfair? ‘We must make super fair’ is the typical tone of the claim. Usually, this is followed by some ideas for more regulation, compulsion, tax, affirmative action and so on. To date, I have not observed people complaining about lack of fairness coming to the obvious conclusion and easiest way of fixing a system they believe is broken: remove the compulsion to participate.

But first let’s examine the argument: is it the case that super is not fair? What constitutes fairness? If two people of identical age, income, pattern of work, net investment returns and age of retirement have contributions made at the level of the compulsory Superannuation Guarantee (SG), then they will accrue exactly the same super benefit at retirement. There is no racial, ethnic, gender, religious or sexuality factor involved. The identical outcome will emerge for both people. That sounds like fairness to me. What would be surprising would be a different outcome based on one of those other characteristics.

So who claims unfairness, and on what grounds? Two general claims are common: low income earners and women. For low income earners, the main argument stems from the logical outcome of a progressive income tax scale. The marginal rate of income tax for high income earners is higher than that of low income earners. As a consequence, less income and more superannuation contributions result in a greater rate of tax saving for higher income earners. To argue that is unfair would logically require the argument that progressive tax scales are unfair. Would a flat rate of income tax across all incomes then not work better? Strangely, that logical conclusion is never reached. Instead, punitive tax measures have been imposed on the super of higher income earners.

With retirement income for women, the evidence that women typically enter retirement with a lower average balance than the typical man is cited as proof of unfairness. Why is the average balance lower? Does it not have more to do with the work pattern of women compared to men than any inherent unfairness based on gender? To change the outcome would require different policy based purely on gender.

There is one genuine aspect of super that is unfair. It is the compulsory SG. It is the SG that forces the deferral of income into a retirement savings pool inaccessible until age 60 when that money could have been put to other uses. Low income earners do have a legitimate gripe but it has nothing to do with the progressive income tax scale. The SG is the fundamental cause of the discontentment. If it were abolished, then only those people who genuinely wanted to use super for retirement savings would do so. The rest could make their alternative arrangements.

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3 thoughts on “The unfairness of superannuation?

  1. “For low income earners, the main argument stems from the logical outcome of a progressive income tax scale. The marginal rate of income tax for high income earners is higher than that of low income earners. As a consequence, less income and more superannuation contributions result in a greater rate of tax saving for higher income earners. To argue that is unfair would logically require the argument that progressive tax scales are unfair.”

    David, with respect I think you have skipped lightly over a few issues here. Yes we have a progressive income tax scale. No, I don’t think the critics of the fairness of superannuation would prefer a flat tax scale.

    But what about:

    (1) the concessional treatment of contributions, that favour those on higher marginal tax rates, and which the Henry Committee suggested could be alleviated by making the contributions tax rate (MTR-15%)? True, this issue has been partially addressed.
    (2) the concessional treatment of the investment roll-up within the fund? Someone who pays 45% MTR benefits enormously but someone who pays no tax suffers.
    (3) the tax free nature of superannuation earnings in retirement, at least up to $3.2 million for a couple – clearly this is more concessional for wealthier retirees than poorer ones.

    It is the tax treatment within our progressive tax system which the critics don’t like. And to be honest, although of course I am a beneficiary of Mr Costello’s generosity – I think they are right. Basically our superannuation tax rules unwind the impact of progressivity, to the extent that someone can shunt money into superannuation.

    Cheers David

    John

    • Thanks John. It is perhaps mischievous to argue that a flat income tax rate would solve the problems of the low income earner, but it is surely true that a progressive rate is essentially the cause of the perception of unfairness in the amount of tax concessions afforded to different levels of income? Yes, I’m skipping lightly over complexities. But I do make the point that the low income earners have a legitimate gripe – it is that they are compelled to contribute, and have the additional drag (I’m tempted to call it fiscal drag) of the means test reducing their pension – another aspect that does not apply to high earners.

      A point not often argued is that superannuation is fundamentally linked to earnings. Therefore, any assessment of tax for grounds of equity should consider the tax on both super and income in aggregate.
      All the best.

      • David I think you have a very valid point when you argue that compulsory saving is unfair in the context of the means tests, especially given the new assets test taper rate of 7.8%. I think a consequence of the new, higher taper rate is that the benefit of saving becomes questionable for the many Australians who expect to retire on a part pension. I guess I would blame that on a poorly designed means test but you could say that it’s the interaction between forced saving and the means tests which causes the problem.

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