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Super catch up contributions: how the rich get richer

Super catch up contributions: how the rich get richer

A recently published report by the Grattan Institute into Australian super contributions has found that tax breaks designed to assist people with broken work histories are in fact mostly being taken advantage of by top income earners.

The tax break feature of the super system was designed to help those who were most likely to fall behind in super contributions, particularly women who take maternity leave. However, as the “Super Tax Targeting” report shows, it is not the intended middle-income earners who are making these contributions or in fact women at all. Pre-tax contributions are most likely to come from top income earning males and, as a result of this and other tax breaks, $25 billion dollars of government revenue is lost a year.

“Our analysis shows that more than half the benefit of current superannuation tax breaks flows to the wealthiest 20 per cent of households who already have enough resources to fund their own retirement ,” says Grattan Institute CEO John Daley.

“In tight budgetary times, these costs are unsustainable and must be reined in.”

It’s a similar story when it comes to post-tax contributions with around half of these voluntary contributions coming from people who already have at least $500,000 in their superannuation fund. By contrast the 70% of people with super balances of less than $100,000 make just 9 per cent of total post-tax contributions.

To combat this trend the Grattan Institute has suggested three main reforms to the super system to assist in making sure that tax breaks best serve the goals of superannuation. Firstly, contributions from pre-tax income should be limited to $11,000 a year. Secondly, lifetime contributions from post-tax income should be limited to $250,000. Finally, earnings in retirement – currently untaxed – should be taxed at 15 per cent, the same as superannuation earnings before retirement.

With Australia’s ageing population and a growing number of retirees, young people and low-income earners are the hardest hit by the current system as they are taxed more to make up for retirees living tax-free. The reforms suggested are bold but could be beneficial in protecting these financially vulnerable groups from high tax rates in the future.  

“Previous repeated changes to superannuation have been too timid. A wide gap remains between the goals of the system and what it actually delivers,” Mr Daley says.

“Decisive reform must target super tax breaks at those who need them most.”

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