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Compulsory super is a captive tax base

Stephen Kirchner | 30 November 2012

Speaking at this week’s annual Association of Superannuation Funds conference, Treasury Secretary Martin Parkinson noted that ‘the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny.’ In the lead-up to this year’s Mid-Year Economic and Fiscal Outlook, there was also speculation that superannuation tax concessions would be curtailed.

This points to a major tension in the approach of Australian governments to retirement incomes policy. On the one hand, government wants to promote superannuation as a tax-advantaged saving vehicle to reduce future demands on the budget from an ageing population. On the other hand, governments are increasingly reluctant to forgo revenue today through superannuation tax concessions. How the government resolves this tension will be an important determinant of whether compulsory superannuation achieves its objectives.

Much of the tinkering with the taxation of superannuation – for example, the 1988 changes – has been motivated by a desire to bring forward revenue to meet recurrent expenditure and improve the budget balance at lower political cost relative to raising other taxes. It illustrates the vulnerability of what is a captive tax base to even greater depredations on the part of future governments. As the pool of superannuation assets grows, the temptation for politicians to increase taxes on earnings will also increase.

Superannuation could also become a vehicle for financial repression by spendthrift governments – for example, by forcing super funds to hold government bonds. Until 1981, Australian superannuation funds were forced to hold at least 30% of their assets as government bonds, so there is ample historical precedent for such directed lending to government. The taxation of super to meet demands for recurrent expenditure has been working at cross-purposes with the objectives of retirement incomes policy. Rather than reducing future demands on the federal budget, compulsory super may end up feeding current demands for government expenditure in the absence of reforms to make the taxation of super more transparent.

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and a Senior Lecturer in Economics at the University of Technology Sydney Business School. His policy monograph Compulsory Super at 20 was released this week.