Make this change… then leave Super alone!

It would be very simple, and objectively incredibly fair.

Australian notes and coins surrounded by a calculator and the word super spelt out.

Image source: Getty Images

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Sitting down? Got a coffee or a cold drink? (or something stronger, if you're reading this later in the day?)


Because there's something I need to get off my chest.

It's about Superannuation.

And the constant tinkering with the system.

Look, I'm a massive fan of Superannuation.

The idea of being forced to save for our own retirement, when history and overseas experience says we wouldn't do it voluntarily, is a good thing.

We absolutely should save for our own dotage, if we have the resources, and not rely on our descendants to pay for it. It's just the responsible thing to do.

But the pollies can't keep their hands off it.

Some want to use it for housing deposits.

Some want to use it for TVs and jetskis (or, less unkindly, instead of using the Federal Budget as support, during the worst of COVID when everyone else got something from the government purse).

Some want to cap Super.

Or just cap the amount we can have in 'pension phase'.

They want to tax it differently.

They want it used for 'nation building'

The list goes on. And on. And on.

Look, we shouldn't be surprised. As the old saying goes, never get between a politician and a bucket of money.

But still, Super takes the cake.

Now, let me get this out of the way: I'm absolutely not someone who says you shouldn't change something, if it can be improved.

Nothing is sacred, and everything should be on the table.

But seriously… the ink isn't even dry on the last change before someone wants to have another go.

This time, the government wants to cap Super at $5 million, according to the AFR.

Why $5m?

Do you want the government's answer or the honest one?

They can give you the former. I'll have a stab at the latter.

Probably because they figure that anyone with a larger Super fund isn't paying their share of tax (correct), and they think that $5 million is large enough that it's hard to defend introducing a cap at such a large amount (probably also correct).

The former is policy. The latter is politics.

But again, this is a cash grab where the government thinks it can raise a little more cash without too much electoral pain.

Which is a little economics and almost all politics!

The problem, as with the former government (a pox on both their houses), is that they're fiddling around the edges.

An arbitrary cap here, an arbitrary cap there.

Raise a little, raid a little, duck the hard questions, breathe a sigh of relief.

And we wonder how the tax system became so complex!

Actually, we don't have to wonder. I'll tell you.

The tax system is full of cheap, easy wins, and special interest concessions.

Then add a sprinkling of ideology, regardless of policy value or even real world application.

It owes far more to politics and far less to policy with every passing electoral term.

Another pox on them both.

The solution to the Super mess is very, very easy.

There's just not enough vision – or guts – to actually deal with the problem.

Which is?

I'm glad you asked.

Do you know how much tax is payable on Super withdrawals when you're over 65.





Yep, it doesn't matter how much money you have in Super, or how much you withdraw.

It's tax-free.

Yes, seriously.

And inside Super?

Earnings in the accumulation phase (before you convert it to a pension or anything above about $1.6 million when you've retired) are taxed at only 15%.

In pension phase, earnings on an account balance of up to $1.6 million is tax-free!

And you wonder why we have a budget problem.

Super is a wonderful way to build wealth, with huge tax concessions, for retirement.

It is a sensational system.

But post-retirement?

For many, it's just one giant tax lurk.

Meaning someone else has to pay the bills.

At the moment, there's no limit to how much you can have in Super, taxed at a maximum of 15% (and the average tax rate would be much lower for almost everyone).

Even under the government's proposed $5m cap, you could earn, say, 9% per year, on average, in an ASX ETF, pay 15% tax, then take out $380,000 tax free.

Yep. Tax free.

And we're arguing about Stage 3 tax cuts instead?

(I'd roll those back for high income earners, but that's a whole other article, so save some throwing tomatoes for that one!)

If you think anyone should be able to draw $380,000 per annum out of Super and not pay tax on it, when we're taxing nurses, coppers and factory workers at a marginal rate of 30% or more… well, I can't help you, but I don't think you're considering the national interest.

The solution?

Very. Bloody. Simple.

First, keep the concessional 15% tax rate on earnings during someone's working life. The concession is an incentive to contribute to Super, and helps build a nest egg to make retirement more comfortable and ease the strain on the public purse. Perfect!

Second, keep the 15% tax rate on earnings inside Super when they retire. For the same reasons.

But third – and this is the big one that'll really annoy (some) people – tax all retirement income, regardless of source (Super, pension, employment) for people over 65, at marginal tax rates above a generous tax-free threshold, say, $20,000 above the pension.

Get a pension and no other income? No tax.

Get a pension and want to work, earning another $300 per week? No tax.

Got a Super fund that pays $19k per year more than the pension? Cool. Nice work. No tax.

But when you go over that?

You pay tax at, say, 30c in the dollar for every dollar you earn over the tax-free threshold, then 37c and then 45c in the dollar as your income (from all sources, combined) rises.

Who can seriously argue with that, other than from purely selfish reasons?

It makes pensioners no worse off.

It lets pensioners stay in the workforce – or rejoin it – without losing the pension.

It incentivises older Australians to keep working, with a higher tax-free threshold after retirement age (leading to healthier, happier, more engaged older Australians, and stopping an arbitrary brain drain).

And it raises much needed funds for the Federal Budget in an objectively very fair and equitable way, collecting tax from those on higher incomes, just as we do with workers.

And why wouldn't we do that?

Well, because the self-interested would whinge that we're taking some of their $100,000 or $200,000 or $300,000 tax-free annual payout.

Cry me a river.

The Opposition might cry foul, hoping for a repeat of the 'franking credits' backlash, but that would be petty politics.

(Speaking of which, the whole franking credits debate would also be completely moot, because the marginal taxation of retirement incomes would probably offset much of that 'refunded' money, for those on higher incomes!)

The usual suspects would whinge, on purely ideological grounds. Apparently they want the nurses and coppers to foot the national bills instead.

But those groups aside… doesn't it just make sense?

And it would be very simple, and objectively incredibly fair.

So… it probably won't happen.

But it should.

Only political will, and self-interest would stand in the way.


But it's the right thing to do. And it should be done.

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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