Superannuation tax concessions are overestimated (see revised paper 1/2022)

Abstract

The Retirement Income Review (Callaghan) Report concluded that the Australian retirement income system is effective and sound and that its costs are broadly sustainable. This is on the assumption that those retirees who do have sufficient superannuation assets to achieve an 'adequate' living standard (which is an "income' replacement rate of 65 to 75 percent), Exhaust those assets by age 92. However, in retirement the vast majority of middle-income earners strive to preserve their 'nest eggs' and to make bequests, and so are projected to fail the "adequacy' standard. The main contribution of this paper is to carefully analyse the estimates of tax concessions made by Treasury and TTPI. I show that both sets of estimates err by not relying on like-for-like comparisons between the factual that is the tax treatment of superannuation as it stands"nd the counterfactual, that is, the hypothesized, non-concessional, alternative which is used as a benchmark for measuring the extent of the superannuation tax concession. Specifically, while the estimates assume that superannuation earnings attract the benefits of dividend imputation and of discounted capital gains, those benefits are not included in the hypothetical alternative. The result is to vastly over-state the tax concessions that are specific to superannuation. Additionally, I justify an economic formulation of tax rates which better expresses the effective impact of taxes on behaviour and on welfare than the conventional legalistic formulation. This is applied to a scenario in which additional income is earned for the purpose of boosting the person's superannuation account. Especially in relation to retired middle-income earners, the claim that the taxation of superannuation is unduly concessional turns out to be at best unproven, and so, as a result, that claim cannot properly be used to support further public policy interventions affecting the use of savings in retirement, nor for not increasing the rate of the Superannuation Guarantee Levy.