The government decision not to index upcoming changes to the superannuation system will mean more than half a million Australians will be financially worse off at retirement, analysis shows.
Using Australian Taxation Office (ATO) data, the Financial Services Council (FSC) demonstrates that under Labor’s proposed plan for higher taxes on super balances over $3 million, more than 500,000 Australians will eventually be subject to the extra tax.
That is a substantial leap from the approximately 80,000 people who will currently be affected by the changes.
The main reason is the shifting value of money over time. Or put another way, $3 million in the future won’t be able to buy what $3 million can today.
Dr Don Hamson, managing director of Plato Investment Management, told Independent Financial Adviser there must be further research into how many people would be affected in the future.
“You only need to do some basic math – if inflation ran at 4 per cent per annum for the next 30 years, and remember inflation is currently 7.8 per cent, a $3 million cap would be equivalent to just $925,000 in today’s dollars,” he says.
“You only need to do some basic math – if inflation ran at 4 per cent per annum for the next 30 years, and remember inflation is currently 7.8 per cent, a $3 million cap would be equivalent to just $925,000 in today’s dollars,” he said.
He believes the policy changes are popular with the public mainly because they haven’t been told of the long-term implications.
“I think voters need to know how many people will be impacted in say 30 years’ time, not just how many are impacted now.
“The other big question for the majority of retirees and even those nearing retirement is – what other changes is this government likely to make next?”
Blake Briggs, CEO of the FSC, says it will be younger generations who are hit the hardest, but that more older Australians would fall into the tax trap as well.
“500,000 impacted Australians is over six times the current government estimates, which only takes into account balances that are currently over $3 million,” he says.
“Leaving the cap stuck at $3 million will mean that in today’s dollars a 30-year-old will have a real cap of around $1 million, calling into question the intergenerational fairness of an unindexed cap.
“Caps in the superannuation system are indexed to ensure generational fairness, so that each generation gets the same outcomes and benefits from the superannuation system.”
The FSC analysis shows that a 45-year-old school principal earning $150,000 today, and with a super balance of $650,000, would hit the $3 million threshold by the time he or she retires at age 65.
It also found a 55-year-old dentist earning $220,000 today with a $1.4 million super balance would also hit the cap before reaching 65.
Federal minister for employment and workplace relations Tony Burke has reiterated that the proposal is a “modest change” affecting a “tiny percentage of people”.
“The top tax bracket is 45 cents in the dollar. If you’ve got more than $3 million, you’ll be paying 30 cents in the dollar and for everything up until that – 15 cents in the dollar,” he said.
“When the top tax bracket’s 45 cents in the dollar, it’s still a highly concessional rate.”
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