(Not So) Super. Arithmetical realities are being ignored.
Announcement posted by Business PR Group 16 Apr 2013
The current conversation on Superannuation overlooks the realities of simple arithmetic and compound interest.The problems inherent in the current system stem from arbitrage (avoidance and evasion).
The power of compound interest. You don’t have to be Einstein to realize that the combined effect of the 15% contributions tax and the 15% tax on earnings inhibits personal and national wealth. If $850 ($1000 minus 15%) was invested at (8.2% minus 15%) 7% for 48 years it would generate $20,400. If $1000 was invested at 8.2% for 48 years it would generate $40,600 – almost twice as much!
In 1915 the Fisher/Hughes Government introduced corporate tax concessions for retirement funding. Before the superannuation guarantee was introduced a 5% tax on fund earnings was applied. Typically white collar and professional employees contributed 5% from salary (deductable) which was matched by an equal contribution from the employer.
When the Superannuation Guarantee arrived the 5% tax was increased to 15% and a contributions tax of 15% applied. The combined effect of these two taxes has the potential to reduce a future retiree’s accumulation by at least 35%, leaving only 65% in terms of capital, in other words the retiree’s capital account could be around 54% greater.
The below average to average worker of today is going to be either significantly or partly social security dependent upon retirement. Consider the reduction in future aged care costs if those who would be significantly dependent were to become less dependent and those who would be partly dependent were to become fully independent.
A casual observation indicates that less than $7B in SG taxes is derived from the lower 50% of the workforce, whereas a future reduction of say 30% in the aged care budget would save around $11B in today’s money values.
The future value of our nation’s employee superannuation accounts will have the potential to be around 40% greater if taxation is avoided until the goose that lays the golden egg has reached puberty.
The considerable cost in money and time of increasing the contribution to 12% (and thereafter to 15%) can be averted as a 10% fund untaxed matches a 15% fund taxed.
The current issue stems from arbitrage. Lump sum investors in the later years of the Howard/Costello government were encouraged to invest up to $1,000,000 into a 15% tax shelter. They were exchanging a 45% (or 40%) tax rate for a 15% rate. Therefore every $1B of super tax revenue gained was at the cost of $3B ($2.66B) to other revenue. At the time aged pension asset means test was less than $400,000!
A simultaneous solution must be found to address both arbitrage and inadequate retirement accumulations. I advocate that all account earnings be taxed at 30% from a tax free threshold of $60,000*. This threshold should reduce by $500 for each extra $1,000 earned and therefore fully exhaust at $120,000. Thereafter further money should either be deposited into a normal savings product (after withholding 30% tax), or cease (and convert to taxable salary).
The current tax points are toxic. I am sure that taken to a 40 year forward estimate the future will be much brighter if we make the changes sooner rather than later. Our current arrangements have probably already cost the nation and its people around $300B in net wealth.
I propose that the changes should be made over a five year period from 1 July 2015.
- The proposal to increase contributions to 12% (and thereafter to 15%) should be scrapped. The compulsory contributions should be capped at 10% from 1 July 2015.
- Each of the 15% taxes should be rolled back
by 3% per year to zero at 1 July 2019.
- Compensation should be given to retirees who will have suffered over two decades of SG taxes. I propose that the threshold be loaded by 60% as at 1 July 2015, reducing by 2.5% per annum to zero at 2039 for such people. Naturally, those who put $1,000,000 on deposit 30 June 2006 will only receive a 20% loading.
- In the transitional period the threshold will actually be taxed 12% from 1 July 2015 tapering to a fully tax-free threshold of zero from 1 July 2019.
The cost of implementing changes could be in
the vicinity of $30B over five years. The
real cost is to do nothing. The future savings by not having to advance
contributions to 12% (and 15%) is considerable. The way things stand at the
moment individual prosperity and national wealth is being seriously
compromised.
Go to www.revenuereview.com.auhomepage item “Wealth for Toil or Safety Net Dependency” for more information.
I look forward to your comments.
Contact
Richard Hackett-Jones
0405 405 110
info@revenuereview.com.au
Revenue Review Foundation
www.revenuereview.com.au
* Indexed to 80% of average fulltime wages $72,500 x 0.8 = $60,000