Ok, so this one is going to dig a little deeper into some topics.
Fair warning, there will be some serious numbers in here… so be prepared (maybe even prepared to read it twice).

Some people will say it’s crazy and arrogant to think you can solve one of a nation’s major fiscal problem’s in the contents of a single blog post… but the reality is that most political problem’s actually have quite simple answers. Why is that? Economies of scale. Issues that seem marginal on face value become serious $$ when scaled up to an economy of 25 million people. Don’t worry, this will make sense with time.

Before I continue any further I want it noted that I do have tertiary qualification in this area… otherwise most people who read this will simply dismiss it as the uneducated ramblings of another pissed off “lunatic leftie”.

So without further adieu… ladies and gentlemen, I present to you, Australia’s Superannuation system.

 How Super Started

The modern Superannuation System was implemented by the Keating Government in the early 1990’s. The initial idea of the system was to create a set of funds which would essentially offset the inevitable increase in retirement costs as the baby boomers retired and moved out of the workforce. The basic idea was that individuals would be forced to save a set proportion of their income each year so as to have enough Money by the time they retired to essentially fund their own retirement and not have to rely on the government for an age pension. The reason this was so essential was that the baby-boomer generation, being larger than the generation that came after it (a first in recorded history), would have consumed more resources in age pension than their children could afford to pay for. Thus, it was decided that a system needed to be put in place to require baby-boomers to fund their own retirement.

The only problem with the superannuation system upon its creation was that the government realised they had actually acted too late. The baby-boomers only had twenty years of their working lives remaining by the time 1994 rolled around and this simply was not enough time for the boomers to accumulate enough wealth in their superannuation funds to fund their own retirements. In addition to this, there was significant resistance to the idea that the government should force individuals to save such a relatively high proportion of their income (the amount was initially set to slowly climb to just over 9%, this target has been raised now to 12%).

In response to this, the government implemented a scheme which, at the time, was sound policy. Basically, the government implemented a system which both softened the blow of having to save a relatively high proportion of one’s income and encouraged individuals to contribute even further amounts voluntarily. The government accomplished this by providing Tax Concessions or “tax discounts” on almost any money that was put into someone’s superannuation account compulsorily. On top of this, a system was also put in place to further encourage people to voluntarily place money into their super by providing a tax discount on any interest earned from the money in their super accounts.

The basic rundown of it was this.

Say you paid 30% of your regular income in tax…
Any money that compulsorily went into your superannuation would instead only be taxed at 15%, this gave you a 15% tax saving… pretty sweet yeah?

Well, it gets even better…
Say you earn $100 interest on the money that’s in your super and your regular tax rate says that you should pay 30% tax on anything you earn… do you pay $30 in tax on that $100 you earned? Nope.
Because of the second tax discount you only pay 15% or $15 tax on that $100 earned. This applies to both interest earned on compulsory contributions AND voluntary contributions; essentially giving individuals a large tax discount on interest earned on voluntary investments.

So, not only were people getting a good deal on money going into their super, they were earning a good deal on profit that their super earned them as well.

Now do you want the icing on the cake?

Once you’re over 60 years of age you can withdraw your super from the fund either as a lump-sum or as a ‘pension’ / income stream. The special thing about this is that both of these withdrawal techniques are tax-free. Essentially what this says is that you can earn an ongoing income from the profits on your super investments for the entirety of your retired life completely tax-free. Profits on which, if they were in regular investments, you would need to pay Capital Gains Tax.

Now you’re probably wondering why I’m complaining about this… I mean, lower tax, this is a good thing right?

Well no; and no for a range of reasons, only one of which I’m going to go over today.

 So what’s the big deal?

You see there are two very distinct groups when it comes to superannuation contributors. There are the baby-boomers; the one’s who were a little late to the 'retirement savings party’ and had to be encouraged to Save Additional Money out of their own pockets if they were to have enough to retire on, and there is everyone else. The difference is that everybody else didn’t need to be encouraged to save additional money, as the 9% (now rising to 12%) that they had to save over their 40 + year working life would be more than enough to afford a basic retirement.

What one MUST understand is that these tax concessions only existed to force baby-boomers to put more money into super; they actually gave people a much BETTER deal than was necessary. So this is going to sound crazy coming from a member of the supposedly selfish Gen Y… but there is no reason to be still giving those tax concessions… the baby-boomers are retiring.

The baby-boomers NEEDED these tax concessions in order to save enough money to be able to earn enough off their super to retire comfortably… We (gen X and Y) DO NOT!

With the current tax concession system an average member of Gen y who contributes $0 on top of their mandatory 9% (+) per year would retire on around between $63 - 75,000 /year AFTER TAX.

According to The Australian Securities and Investment commission (ASIC) the amount of income needed for a modest, single person retirement is around $24,000 /year after tax.

For a comfortable retirement, it’s more around $42,000 per year.

Now let’s think for a second about how the superannuation system was only ever designed to replace the pension and provide a 'modest’ retirement, let alone a 'comfortable one’. Then let’s take a look at what income the average member of Gen Y will retire on if ALL of the superannuation tax concessions were removed.

$40 - 47,000 /year after tax.

And this is assuming that the retiree lives off ONLY the interest from their super. Never mind the fact that almost all retirees also draw a proportion of their actual savings each year as part of their pension / income stream, potentially adding over $10,000 more to this yearly income.

We don’t need these concessions… The baby-boomers don’t need these concessions… so who does? Now I’m going to try and not be cynical… but it seems to me that the only one’s benefiting from the current tax setup are the superannuation companies which are leveraging these huge pools of capital generated through redundant tax concessions, or cashed up Gen X’s and Y’s who are using the superannuation system as a means to dodge capital gains tax on long-term investments.

But all of this doesn’t really matter until you understand just why this is so much of an issue. Check out part 2 to see just how much of an effect this is having on our federal budget and just how out of control this system has gotten.