Super switch cap will hurt us all

From 1 July 2017, the government put a limit on the total amount of superannuation that can be transferred into the retirement phase. The transfer balance cap is $1.6 million and will be indexed periodically in line with inflation. While the legislation was ‘sold’ as being relevant only to the ‘rich’, economist Sean Corbett has a very different view.


Ask not for whom the bell tolls on super – it tolls for all of us.

Behind the disguise of increasing the tax paid by the ‘rich’ for their savings via super, the government introduced changes in 2017 that will eventually mean all of us will be taxed more on our super savings.

I guess it was always only a question of time before politicians’ resistance to lifting taxes on the $3 trillion pool of savings meant to provide for all Australian retirees was broken down.

The intent of the change, as stated on the Australian Tax Office (ATO) website, “is to better target tax concessions to ensure the superannuation system is equitable and sustainable”.

By “equitable”, the government is alluding to the fact that equity is raised by increasing taxes for those who can afford them more. But far from being “equitable”, the change will increasingly capture more and more people who are not rich. And eventually it will capture all people.

By “sustainable”, the government really means sustainable for them. We are now in a world where people’s expectations for more and more services and benefits is fed by our government’s willingness to surrender rather than point out that this has to be paid for by taxing some (or all) people more or increasing debt, which also must eventually be paid for by taxing some (or all) people more.

And the government is doing this by stealth. It is exemplified in the too-clever-by-half method of indexation applied to one of the 2017 changes that will delay its application to the many (the ‘poor’), so that the government in the short term can hide behind the assertion that it only applies to the few (the ‘rich’).

Introduction of a pension transfer balance cap
The pension transfer balance cap applies to the total amount of superannuation that has been transferred into the retirement phase. It does not matter how many accounts you hold these balances in.

The amount of the cap starts at $1.6 million and will be indexed periodically in $100,000 increments in line with the Consumer Price Index (CPI).

The government introduced the pension transfer balance cap from 1 July 2017 on the amount that can be transferred into the retirement phase of super. Superannuation balances in the retirement phase are generally taxed at nil while superannuation balances before retirement are generally taxed at 15 per cent.

This change increases superannuation tax by 15 per cent on the amount that anyone has in superannuation above the cap.

While it is true that the pension transfer balance cap should affect very few people now, it will affect more and more people over time. This is because the cap is only to be indexed by inflation (CPI).

But people’s superannuation balances will increase over time in line with wages, since superannuation contributions are a percentage of wages, and wages have historically risen faster than inflation as our living standards rise.

Therefore, the real value of the cap after inflation can be expected to decrease over time and will also decrease over time relative to people’s superannuation balances, meaning more and more people will be caught by the cap and will have the additional tax of 15 per cent applied to more of their super in retirement.

If average wages are expected to increase by one per cent per annum more than inflation over time, then the real value of the cap will be equivalent to the cap shrinking from $1.6 million to around $1 million over a normal working life (in today’s dollars).

In other words, the cap will only be worth around $1 million in real terms by the time someone now entering the workforce retires.

Evidence of intent
It is easy to ascertain that there was a degree of intent behind the decision to index the pension transfer balance cap only by inflation rather than by wages. This is because the limits on contributions into super, which were changed at the same time, were indexed in line with wages.

In fact, the introduction of caps on contributions made the introduction of the pension transfer balance cap largely unnecessary as the changes, which reduced the amount of voluntary contributions that could be made, will limit the amount of super that people will have in retirement anyway.

This fact makes it even more likely that the real intention behind the introduction of the pension transfer balance cap was to increase tax on people’s retirement savings once they reached retirement.

Blaming the ‘rich’
The truly insidious part of the change was the government telling the public it was justified because the increased tax would be imposed only on a few people who were ‘rich’ and who were supposedly working the super system to advantage.

The fact is, while the increase in tax imposed by the government might apply only to a few better-off people now, over time it will apply to everyone.

The government was happy to allow contributions to super, and therefore the amount of super that people end up with in retirement, to grow in line with wages while at the same time knowing that the inevitable result will be more tax being applied in retirement because the pension transfer balance cap will grow more slowly.

The inevitable result will be that the government will end up with more tax and we will all be worse off in retirement, including the least well off among us.

A double whammy
But wait. There’s more!

The increase in tax on the retirement savings of future retirees will reduce their after-tax income, but their assets will be treated the same as they are now for the purposes of the Age Pension.

This will mean that their total income in retirement, including the Age Pension, will be reduced via the increase in tax while the government will be better off – due to the increase in tax – while spending no more on the Age Pension.

This comes about because the overwhelming majority (more than 90 per cent) of super in retirement is invested in allocated or account-based pensions, which pay retirees a regular income.

The amount invested in an allocated pension will not change because of the increase in tax applied to it. All that will change is the after-tax income that it provides, which will go down.

What will not change is the assets assessed under the assets test and income that those assets are ‘deemed’ to provide under the income test, which means that, although your after-tax income will go down, you will not be entitled to any more Age Pension.

A sting in the tail
Of course, it won’t work out that way.

Many people will try to maintain their standard of living in retirement and will increase the income they receive from their super to make sure their total income in retirement compensates for the increased tax.

Unfortunately, that will mean that their super will run out sooner and the government will then have to pay them more Age Pension as a result. This move by the government will ultimately prove to be a false economy.

This change does not mean that just the ‘rich’ will be paying more tax on their super in retirement. Eventually we will all be paying more tax – we just can’t see it yet. The bell will eventually toll for all of us.

The government has been able to place this time bomb under the super system in such a way that nearly everyone will not hear it ticking until it goes off.

You almost have to admire their subtlety. What I can’t admire is their ethics.

Do you agree with Sean Corbett’s view? Do you think the 2017 legislation is, essentially, a time bomb?

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