This war on grandparents’ savings has to end

As the government continues to ponder its next moves on taxation, debate has yet again turned to the issue of superannuation tax concessions.

At the National Press Club this week, the Chief Executive of AustralianSuper made the case that fiddling with the tax settings on super (yet again) would not be the panacea for intergenerational issues that some claim.

While obviously the head of a super fund is the definition of a vested interest, he isn’t wrong.

First, the fact that some economists hotly dispute the very high estimates produced by Treasury is often forgotten in the debate over the cost of superannuation tax concessions.

The Treasury methodology shows that the cost of concessionsis growing much faster than the cost of the age pension. However, this relies on the assumption that the income not put into super would be taxed at full marginal rates, and any returns on that income if it was invested would also be taxed at full marginal rates.

This represents an incredibly punitive taxation regime for retirement savings — one that would be atypical globally.

When assessed against a more realistic ‘expenditure tax’ benchmark, which assumes an efficient and more realistic tax treatment for superannuation, the cost of concessions plummets. In 2021, CIS author Terrence O’Brien estimated the cost under this method was less than $8 billion a year.

This means that the supposed rivers of gold that would come from taxing super do not exist.

Another big problem with the plan to solve intergenerational inequality by taxing super is the one Doc Brown warned about in Back to the Future. We are not thinking fourth-dimensionally (the effects over time).

Today’s young people will have to live under the more punitive tax regime for super for much longer than those who are already at or near the decumulation phase.

Not only will they face a mature system for the whole of their working livings, they will have far more of their income quarantined than their predecessors ever did.

In that sense, raising taxes on super to hit those currently at or near retirement will actually have a far higher impact over time on those at the beginning of their working lives.

There is also other unappreciated fairness aspects to this as well. People have worked, saved, and arranged their retirement in good faith under the rules that exist at the time.

They do not deserve to have the goalposts constantly shifted by a government desperately searching for every tax dollar they can find. This fairness is every bit as important as intergenerational fairness.

Moreover, all workers (young and old) deserve some compensation for being forced to quarantine part of their income for the entirety of their working lives.

None of which is to say there are not real issues that need to be addressed in the super system, including the fact that super is a one-size-fits-all regime that actually fits surprisingly few people.

We will also need to grapple with the impact that quarantining such a large percent of workers income will have on other priorities, including starting a family and buying a home. This problem will only continue to become more visible and acute as the effect of the rising guarantee rate becomes clearer.

In a bigger picture sense, we should also accept and appreciate that some intergenerational inequality is inevitable and likely a good thing.

Those who have worked and saved for 40 years will have far more assets and wealth than those who have just entered the workforce. This isn’t a bug, it’s a feature.

Moreover, the major goalposts in our lives have changed over time in a number of ways that impact our lifetime income and wealth trajectories. For example, as more people go to university and stay there for longer, they delay the point at which they start earning substantial income.

People are also getting married and having kids at an older age. Younger workers change jobs and careers more often than people used to 50 years ago.

These life-course changes can appear to be issues of intergenerational unfairness, but are not.

By far the bigger issue is ensuring that young people — and indeed future generations to come — have at least the same level of opportunities as their parents and grandparents did (and ideally far more).

This is why the framing of discussions on intergenerational fairness almost exclusively around government taxation and spending is so troubling.

First, because government taxing and spending actually involves a transfer from younger workers to older retirees not the reverse — especially when you consider the rising costs of the Age Pension, Aged Care and the DSP.

Second, we risk missing many of the areas where government intervention is actually denying opportunities.

The best example is housing. Government programs to provide financial assistance to young home buyers are terrible policy. All they do is feed into rising house prices. It would be far better to reform government zoning and development rules to increase supply.

In this case, there is a real opportunity cost to young people from restricting development.

A real policy to address intergenerational inequality would involve a genuine attempt to understand the priorities and challenges facing different age cohorts in society and where government regulation and policy serve as roadblocks to progress.

In some instances, competing priorities between generations will need to be worked out in the public square. We can’t, and shouldn’t expect everyone to want the same thing.

By contrast, as long as the debate is focused on the politics of envy and who needs to cop it in the neck from higher taxes, the real problems facing younger and older Australians will go unaddressed.

Simon Cowan is Research Director at the Centre for Independent Studies.

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