“Three pillar” retirement saving system
•  Age pension: publicly funded, means tested,
indexed
•  Compulsory superannuation savings
•  Voluntary private savings, supported by tax
concessions and some low income support
•  Policy issues (now and future):
–  Growing (unsustainable?) fiscal cost
–  Inequitable distribution of tax concessions and burdens
–  Perverse incentives for saving and work
taxpolicy.crawford.anu.edu.au
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Overall effect of the system
•  Accumulation
–  Very generous tax concessions
–  Inequitable access and distribution of concessions
–  Uneven tax treatment of other savings vehicles
•  During drawdown
–  Tax-free superannuation payouts
–  Tax-free age pension BUT
–  High effective tax rates on income and savings above
a tax-free threshold
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Pension payments; super “adequacy”
2015
Age pension (annual)
ASFA* modest lifestyle
ASFA comfortable
lifestyle
Capital needed for
“comfort”
Single
Couple combined
$22,365.20
$33,716.80
$23,438
$33,799
$42,569
$58,444
$545,000
$640,000
Assumes home ownership, basic health and 7% rate of return on savings
*Australian Superannuation Funds Association
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Who relies on age pension?
•  In 2013-14, about 70 per cent of eligible age
group
–  42 per cent of eligible group are on full pension
–  48 per cent on part pension
•  Even when superannuation system is fully
mature (IGR2010 est.)
–  Almost 40 per cent on full pension
–  40 per cent on part pension
–  22 per cent on no pension
taxpolicy.crawford.anu.edu.au
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Approaches to taxing retirement saving
Contributions
Earnings
Payouts
Comprehensive income
tax
Tax
Tax
Exempt
TTE
Current income tax
system
Low tax
Low tax
Exempt
ttE
Consumption
(expenditure) tax
postpaid
Exempt
Exempt
Tax
EET
Consumption
(expenditure) tax
prepaid
Tax
Exempt
Exempt
TEE
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Superannuation tax expenditures
Year
CIT tax expenditure
(revenue foregone)
(2014 est.)
$billion
EET tax expenditure
(revenue foregone)
(2013 est.)
$ billion
2014-15
29.7
12.2
2015-16
33.5
12.9
2016-17
39.7
13.6
•  Annual increases in order of 10 per cent or more
•  If apply EET benchmark, should apply for all savings
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Distribution of tax expenditures 2014
(CIT benchmark)
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Projected spending on age pension
(2010 Intergenerational report)
2015: Estimated to rise from 2.9% GDP in 2014-15 to 3.6%
GDP in 2054-55 (various assumptions about indexation)
taxpolicy.crawford.anu.edu.au
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Treasury (2012): age pension/super
concession distribution
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Do such generous tax concessions
encourage new saving?
•  Marriot (2010, 203) :
–  “[R]esearch finds that … tax incentives are successful in
increasing levels of savings through the tax-preferred vehicle, but
this does not necessarily result in increased levels in overall
savings”.
•  Chetty et al (2014), based on evidence from Denmark:
–  “[E]ach $1 of government expenditure on subsidies increases total
saving by only 1 cent. In contrast, policies that raise retirement
contributions if individuals take no action - such as automatic
employer contributions to retirement accounts - increase wealth
accumulation substantially. … approximately 15% of individuals
are "active savers" who respond to tax subsidies primarily by
shifting assets across accounts.”
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Workforce participation Aus; NZ
Age
55-59
60-64
65-69
Australia men
80.3
63.1
32.6
NZ men
87.8
78.8
47.3
Aus Men lower
7.5
15.7
14.7
Aus. Women
66.1
45.1
19.5
NZ women
80.5
66.9
33.6
Aus Women lower
14.4
21.8
14.1
Australia total
73.1
54.0
26.0
New Zealand total
84.0
72.7
40.3
Aus lower by:
10.9
18.7
14.3
NZ has universal age pension; small private tax concessional
superannuation
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Pension income test, deemed income
Couple (combined)
Single
Annual income
threshold
$3,952
$7,488
50 cents for
each dollar
over thresholds
none – full
payment
50 cents for
each dollar
over threshold
(combined)
1.75%
3.25%
Reduction in
payment
none – full
payment
Deemed
income
Below $48,600
financial
investments
1.75%
Below $80,600
financial
investments
Above
3.25%
Above
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Pension asset test
Homeowners
Non-homeowners
full pension assets full pension assets
Current
Single
2017
Current
2017
Homeowners
part pension assets
Current
2017
$205,500 $250,000 $354,500 $450,000 $779,000 $547,000
Couple $291,500 $375,000 $440,500 $575,000 $1,156,000 $823,000
Non-homeowners
part pension assets
Current
$928,000
2017
$747,000
$1,305,500 $1,000,000
•  Current: taper $1.50 per fortnight per $1000 ($39 per year)
•  From 2017: taper $3 per fortnight per $1000 ($78 per year)
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Pension asset
test
(1 Jan 2017)
Cut-outs
(asset
allowable
threshold)
$ asset value
Pension
max
Income at cut-outs
(6% or 3% real
returns)
$pa
Real return
Effective tax rate on
savings (asset test)
From cut-outs
$pa
% tax rate
6%
3%
6%
3%
Single
homeowner
547,000
20,437
32,820
16,410
130
260
Single
747,000
23,775
44,820
22,410
130
260
823,000
33,717
49,380
24,690
130
260
1,023,000
38,537
61,380
30,690
130
260
0
0
non-homeowner
Couple
homeowner
Couple
non-homeowner
Top 20%
(Assuming all superannuation payouts)
(no pension)
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Current system plus pension means test
Current income tax
No pension
Contributions
Earnings
Payouts
low tax
Low tax
Exempt
Plus age pension
means test
ttE
ttT
•  Below asset threshold: Exempt (ttE)
•  Above asset threshold: High tax on savings (ttT)
–  Undertaxes while saving, but
–  Overtaxes across the lifecourse
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Budget drives Sydney pensioner to spend
$25,000 on Alaskan holiday
http://www.afr.com/personal-finance/superannuation-and-smsfs/budget-drivessydney-pensioner-to-spend-25000-on-alaskan-holiday-20150525gh93jx#ixzz3m2mFfIO9
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Offloading assets and home upsizing: the
maze to keep your part-pension in 2017
http://www.propertyobserver.com.au/finding/residential-investment/42675offloading-assets-and-home-upsizing-the-maze-to-keep-your-part-pensionin-2017.html
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