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How super hurts the poor and middle income earners

  • 27 March 2015

Next time you hear financial industry executives demand that governments mustn't change superannuation because the sector badly needs 'certainty', take your cue from the former head of the Commonwealth Bank David Murray.

When asked on the ABC's 7.30 early in March about business complaints about political instability, Murray said business executives 'are rewarded very handsomely for managing uncertainty – that's their job'.

It's little wonder that the finance sector wants no changes to super. Thanks to compulsory contributions, the funds management industry enjoys an ever-increasing flood of money into its coffers.

Despite the way the existing system hurts low and middle income earners, damages economic efficiency, wrecks the budget and makes it harder for interest rate cuts to reduce unemployment, both sides of politics surrendered to the sector's demands before the 2013 election. Labor promised no major changes for five years and the Coalition for four years.

Treasury's conservative calculations show the tax concessions on super will cost the budget over $40 billion in 2017-18. According to the Henry tax review, any savings on the growing cost of the age pension from super will not be enough to offset the cost of the concessions. Given that the average household savings ratio was higher before compulsory contributions began, super may do nothing increase the number of people whose savings are too high to pass the age pension's mean tests. But this has not stopped the Abbott government claiming the cost of the age pension is unsustainable without mentioning the added burden of the super tax concessions.

Although the age pension will cost about $49 billion in 2017-18, it is means tested. In contrast, the super concessions are heavily biased in favour of high income earners. Those on the top marginal tax rate of 47 per cent pay the same 15 per cent tax as very low income earners on contributions that employers make on their behalf. This even applies to part time workers who otherwise pay no tax below  $18,200. At the other end of the scale, retirees can have an income of well over $1 million a year from super and pay no tax. They don't even have to pay the Medicare Levy.

Compulsory contributions also hurt low and middle income earners by stopping them allocating this money in ways they consider to best meet their needs while working, such as helping bring up a family, paying off a mortgage and so on. The impact on