Super reform not enough to close retirement gap: Grattan

Grattan Institute fellow Brendan Coates has called for better targeted super tax breaks to address the fact that about half the value of superannuation tax breaks are flowing through to the top 20 per cent of income earners, according to Grattan Institute research.

He also argued the government should introduce targeted rent assistance for retirees living on the age pension while renting, noting that single female retirees who do not own their own property are at the greatest risk of retirement poverty.

“If we’re serious about closing the gender gap in retirement incomes, we have to look beyond superannuation for solutions,” he said.

“Many commentators – particularly those associated with the superannuation sector – advocate for more generous superannuation tax breaks to boost retirement incomes.

“Others support top-ups to superannuation savings for women, or accelerating the shift to a 12 per cent Superannuation Guarantee. But many of these proposals would do little to close the gender gap in retirement,” he continued, contending that more generous super tax breaks are likely to exacerbate the gap.

Noting that the ability to make concessional contributions are predominantly used by older, high-income men to reduce their tax exposure, Mr Coates questioned the efficacy of provisions to boost the annual $25,000 cap on pre-tax contributions to help lower income women.

He explained that only 2 per cent of women with balances of less than $500,000 are expected to make pre-tax contributions to super of at least $25,000 in the 2017-18 financial year, with the majority of this slice enjoying an income in the top 20 per cent.

“It is unclear that topping up superannuation accounts is the best way to improve retirement incomes for low-income earners.

“Measures to boost the retirement incomes of low-income earners delivered through the tax and superannuation systems are inherently less well targeted than an increase in income support payments, because they are directed at individuals, not households, and only assess households’ income, and perhaps super assets, but not other wealth.”

Giving a nod to Industry Super Australia’s idea to have an automatic $5,000 “super seed contribution” paid into younger low-income earners accounts, he said measures like these – while more effective in closing the gap – also come with hefty price tags.

What does he propose?

Instead, the government should cap annual contributions from pre-tax income to $11,000 a year, saving the budget $1.7 billion while having minimal impact on future age pension payments as the reduced tax break would predominantly affect those unlikely to be on the age pension.

Additionally, contributions from post-tax income should have a lifetime cap of $250,000, or annual cap of $50,000.

“It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the personal income tax system.”

Thirdly, and perhaps most controversially, Mr Coates said the currently untaxed earnings in retirement should instead be taxed at the 15 per cent rate superannuation earnings currently attract prior to retirement.

“A 15 per cent tax on all super earnings would improve budget balances by around $2 billion a year today, and much more in future.”

Outside of superannuation tax reform, a targeted $500 a year boost to Age Pensioners’ Rent Assistance would be the most effective way of addressing low-paid retirees’ financial difficulty.

“This would cost $250 million a year. And by targeting those at greatest risk, a larger boost could be provided at relatively little cost,” Mr Coates said.

“Such a boost could be quarantined to age pension recipients only, or applied more broadly across other income-support payments at a further cost of $450 million a year.

“Importantly, such a boost would help people already suffering poverty in old age – unlike boosting superannuation savings, which would help only those who are yet to retire.”

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