In case you missed it, this is part 2 of a two-part series on Australia’s super system. Make sure you read part 1 before heading onto this section.

Up until now I’ve left out the key point of this whole article… why am I even looking at such a seemingly marginal issue such as Superannuation tax concessions?

Three points will demonstrate exactly why.

1: The current federal deficit is nearly $50 billion /year

2: Superannuation Tax concessions cost the Government between $30 - 42 billion /year.

3: They are completely pointless because they primarily assist high-income earner while ignoring low-income earners who will still need the age pension when they retire.

Why is this? Well, based upon compulsory savings of 9-12% of a minimum wage income, these people (who struggle to afford voluntary contributions) will not save enough with their compulsory super contributions alone, for an independent, modest retirement.

To sum up, these concessions were put in place in order to create a ‘market signal’ encouraging baby-boomers to invest their own disposable income into super so that they would have enough money to retire on. Somewhere along the line though the government has forgotten that these market signals were only meant to be temporary. Those that have had mandatory super their entire lives (see: majority of Australian workforce) are legally required to contribute enough to fund their own comfortable retirement. We don’t need to be encouraged.

So why then, does the public and the government insist that removing or changing these tax concession on super would be unfair… It would be totally fair.

Not only is it fair, it is necessary.

 So what do we do?

I’m not saying scrap the concessions entirely, on the contrary, it is essential that we encourage low-income earners to voluntarily contribute to their superannuation. With tax concessions set up properly we could eventually scrap the age pension entirely, saving the government around $40 billion /year. The problem is that the current concession scheme is not setup to do this. This scheme was set up to encourage baby boomers, as they entered the last decade of their working life, to shovel any spare money they had into their super funds in order to bulk them up for retirement.

The current scheme was never intended to be in place long term, it simply wasn’t sustainable. The current scheme disproportionately benefits those in higher income brackets, particular young, highly educated Gen Y and X individuals who are going to reap the benefits of 40+ years of low tax, high-return investments when they retire.

So how do we fix the problem?

It’s pretty simple actually. Put a cap on superannuation tax concessions and refocus the concessions towards low-income earners to encourage them to voluntarily contribute to their super.

 Down to the nitty-gritty.

Once an individual’s super-fund/s have a combined total value of more than what is required for them to grow themselves and fund a comfortable retirement, increase the tax paid on contributions and earnings up to a more reasonable level. Then, redirect those savings the government gets from taxing those established funds into even further tax concessions for those funds still in the accumulation phase that belong to lower income individuals.

This way, low-income earners get a higher effective rate of saving as their compulsory contributions and any voluntary contributions they can afford to make are taxed at an even lower rate than under the current scheme. Alternatively, the government could use the tax revenue gained from the established funds to lift the cap on super co-contributions from it’s current level of $500 /year. This would encourage low-income individuals to contribute more voluntarily as they would see an immediate matching of their contributions from the government rather than having to wait years before noticing the compounding effect of lower tax rates.

If the government wants a price signal to encourage low-income earners to save for retirement… This is it.

This will create a system where, by the time Gen X begins to retire, the age pension would be nothing more than a safety net for those individuals who were unable to work due to sickness or injury. Not the $40 billion dollar /year expense that it is today.

 The bottom line.

Compound interest is the 7th wonder of the modern world… but it only benefits those with enough disposable income to build decent wealth pools at a relatively young age.

Tax concessions on superannuation should be geared towards creating a system which allows EVERYBODY to retire without relying on government support; not to pad the enormous retirement nest-eggs of well-off Gen X’s nor to create an investment tax haven for educated Gen Y’s and their self-managed super funds.

Current superannuation tax concessions are a complete con. They cost the Australian government nearly as much as education and defense combined and will never show up in the budget balance sheet. If the age of entitlement is truly over, this middle and upper-class welfare has to stop.

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Disclosure:
A: I am 'an educated Gen Y with a very high returning superannuation fund’, this idea would hurt me more than almost anybody.

B: All calculations were done based on figures provided by Treasury and ASIC using a long-term investment return of 7% and a mandatory superannuation contribution of 10% of the mean Australian income.

C: The rate of 10% was used as it is difficult to get an accurate figure for long term compulsory superannuation contributions as the system has progressively scaled up to its current rate of 9.5% and will over an unknown time climb to a rate of 12%.