How Australia's superannuation system subsidises the wealthy

Australia Broadcast Center

14-07-2025

What's the definition of reform? It all depends on who you're asking.
The Macquarie Dictionary neatly sums it up as thus: "The improvement or amendment of what is wrong, corrupt, etc."
But when it comes to money, and particularly taxation, the righting of wrongs is chucked out the window. Self-interest reigns supreme.
Everyone, it seems, claims to want tax reform. But you only need to scratch the surface to figure out that what they really want is to not pay any tax at all, and to let someone else pick up the tab.
Never has that been more evident than right now with the growing chorus of opposition to the federal government's plan to claw back some of the tax breaks available to the nation's richest households.
The backlash underscores the difficulty in implementing real reform. Only a tiny fraction of the population will be impacted by the proposed changes — which will claw back about $2 billion a year in revenue — and, on any reading, they hardly need to be on the receiving end of social welfare programs.
Treasury advice provided to the Albanese government after its re-election revealed this week by the ABC, the need for higher taxes and spending restraint to put the federal budget back into balance.
But the tax system is not merely an instrument for raising revenue.
It is also an important tool for distributing national income to minimise the harmful impacts of wealth inequality that can erode social cohesion, harm economic growth and lead to political instability.
For all the noise over the mooted superannuation changes, it simply is an attempt to partially close off a loophole that has been used to set up tax shelters for the rich rather than provide for retirement.
Even after the changes, wealthy individuals will still be able to provide themselves with a generous tax-free income.
Younger Australians, meanwhile, on much lower wages will still be forced to carry the can, subsidising a cohort of well-off retirees for health care and aged care services.
It's the kind of intergenerational wealth transfer that has raised concerns for many economists.
Somewhere out there, there's a self-managed super fund with more than half a billion dollars.
If the person behind that fund is retired, in a half decent year, the fund would be throwing off around $50 million or so in income, a little under $5 million a month.
Most of that income is taxed at a mere 15 per cent, a rate way below the level of most working Australians.
That's now about to change although the privileges aren't being entirely stripped away. But it's generated an enormous backlash from the wealthy and powerful section of society.
The Australian Tax Office no longer reveals the size of the top individual funds. Perhaps it is too embarrassing.
The latest figures, obtained last October for the 2022/23 year by the Australian Financial Review, show that the 10 biggest self-managed funds had an average of $422 million each in assets and 42 funds had more than $100 million each.
Clearly, super funds of this magnitude aren't about a retirement income. They're tax shelters.
Once the beneficiary has retired, the earnings from super funds are mostly tax free on balances up to $2 million. That limit, introduced by the Turnbull government, was an attempt to haul in the runaway expenses of the overly generous superannuation system.
When first initiated, the limit was $1.6 million but it has been frequently lifted to keep pace with inflation, including just a fortnight ago.
Beyond the new $2 million limit, retirees are obliged to pay just 15 per cent in tax on earnings and only on the portion above the limit.
That's below the tax rate for a worker pulling in a meagre $18,200 a year where the tax rate is 16 per cent.
Even apprentices and those just a little beyond the minimum wage have some of their earnings taxed at 30 per cent while tax rates for those higher up the scales hit 37 per cent and top out at 45 per cent.
Under Jim Chalmers' proposed new system, another cap will be put in place.
Funds with balances between $2 million and $3 million will continue to pay 15 per cent tax on earnings between those bands. Those with more than $3 million will pay 30 per cent on earnings above that upper limit.
That's still below the top two tax rates for those who actually work for a living and represents a generous subsidy, a social welfare payment, for those sitting on massive retirement funds.
In an average year with 7.5 per cent returns, a fund with almost $2 million will deliver a retiree close to $150,000. With the kind of returns we've seen in recent years, up to $200,000 wouldn't be a stretch.
That's a pretty decent income. And it's tax free.
Once the fund grows beyond $2 million, tax starts to kick in but only on the earnings above the $2 million threshold and only at 15 per cent.
Bear in mind that most retirees in this category would likely own their own home.
With a fund approaching $3 million, kicking back almost $300,000 a year, the tax bill on that income would be a mere $15,000.
On any measure, that is a large income capable of supporting someone in retirement.
Compare that to a young Australian worker struggling to make ends meet and pulling in the average $102,000 a year. He or she would be up for a tax bill just shy of $24,000.
If they weren't paying exorbitant rent, they'd be weighed down by an enormous mortgage that would most likely be draining most of their income, leaving little room for any kind of discretionary spending.
Superannuation and housing have contributed to an ever widening inequality gap in Australia during the past 20 years.
According to a study by the University of NSW, Australians in the top wealth decile saw their riches grow a far greater rate than the bottom 60 per cent.
Almost half of all the increased wealth went to the top 10 per cent of households since 2003.
As our population ages, fewer workers will be forced to support an ever-growing number of retirees, many of whom will require expensive medical treatments and aged care.
The mathematics clearly don't add up.
At some point, revenue will need to be raised from somewhere other than lowly paid employees and the businesses that employ them.
The obvious target will be a shift towards taxing wealth in addition to income.
But that kind of shift doesn't come without a fight. Any change to tax regimes involves someone being worse off. And even if they remain better off than most others, powerful vested interests refuse to cede ground.
That's precisely what we're witnessing now, where a little over 80,000 well-heeled individuals are digging in to ensure they not just retain their wealth but the ability to ensure it grows at the expense of others.
According to the Grattan Institute, tax breaks on super contributions alone cost the federal budget $50 billion a year and disproportionately accrue to older and wealthier Australians.
Malcolm Turnbull was labelled a turncoat for introducing the superannuation earnings ceiling.
Jim Chalmers, in the meantime, has been attacked for not being bold enough, that a thorough overhaul of the system is required rather than tinkering around the edges.
Perhaps the much-vaunted Economic Reform Roundtable will yield a breakthrough where everyone abandons self-interest and comes together to work in the best interests of the nation.
Then again, maybe not.