Why you shouldn't be scared of these super changes

There seems to be an endless supply of news articles on this topic, ranging from concerned tutting to full-blown doomsaying and accusations of class war. Almost all this coverage misses the mark; these changes, while modest, are an important first step in reforming Australia's broken and unequal superannuation system.

So, what's changing?

Currently, most people get a tax concession on their superannuation earnings (the money made by your super investments). Rather than being taxed at your marginal tax rate, the money made from your super investments is only taxed at 15 per cent. That is a lot less than the top income tax rate of 45 per cent (plus the Medicare levy).

But the government is proposing to raise the tax on superannuation balances of over $3 million. These people will pay an additional 15 per cent on earnings.

Importantly though, it is only on the amount above $3 million. For instance, if you have $4 million in super, you will only pay additional tax on a quarter of your earnings.

The tax is projected to raise $2.3 billion in its first full year, and $40 billion over a decade.

If $3 million in super sounds like a lot of money; that's because it is. Very few of us have anywhere near that amount of super. According to Treasury, the tax will initially affect 80,000 people or one in 200 (0.5 per cent) super account holders. For comparison, according to the most recent Tax Office data, less than half of people in their 60s have more than $250,000 in super.

To be clear, this is a modest change to a broken system.

Superannuation tax concessions were originally justified to help people save for a comfortable retirement. But they have become a tax avoidance machine that funnels money to the top and subsidises inheritances for rich families.

Tax concessions on superannuation cost the government about $60 billion every year, nearly as much as the Age Pension. They disproportionately benefit high-income earners, with more flowing to the top 10 per cent ($22 billion) than the bottom 70 per cent combined.

Crucially, the $2.3 billion raised by this reform is a lot smaller than the $22 billion the top 10% currently receive in tax concessions. Even after the changes, superannuation tax concessions will still disproportionately benefit high-income earners.

So, what's all the fuss about?

The most common criticism is that the $3 million threshold is not 'indexed' to inflation, and so although only the very, very rich have $3 million in super at the moment, with time it might be a lot more of us. This is greatly overblown; according to Treasury modelling even in 30 years, only the top 10 per cent of taxpayers may have to pay any additional tax at all.

Also, a future government can always just raise the bracket if they want to. Income tax brackets are not indexed either, and governments change them regularly. Yet commentators are acting like taxes on super can't ever again be adjusted, with some making claims that the tax will affect many Gen Z people when they retire ... in 40 years!

History shows how silly this is. Australia's income tax brackets have changed drastically and frequently in the last 40 years. If Australia had the same tax brackets now as it did 40 years ago, anyone earning over $36,000 a year would be in the top tax bracket of 60 per cent - including anyone in a minimum wage job working full-time, and even some working part-time.

If people are truly concerned about this "indexation issue", they could simply support the Greens' amendment to lower the threshold to $2 million and index this amount to inflation. This would still only affect the very rich.

According to the most recent Tax Office data, less than one in 100 (0.6 per cent) of super account holders have more than $2 million in superannuation.

For those that are truly concerned with the welfare and future of Gen Z, there are better priorities than speculating that in 40 years they maybe ... might ... if you include some questionable assumptions ... pay a bit more tax.

For instance, climate change will certainly drastically impact their lives, yet Australia continues to intensify this crisis, continuing to expand fossil fuel projects and spending over $10 billion on fossil fuel subsidies every year.

Another issue raising much scaremongering is that the tax will apply to "unrealised capital gains".

Capital gains are when the value of an asset (such a property) rises. 'Unrealised' means that the asset hasn't been sold yet. Critics seem to think this is inherently unfair, but unrealised capital gains are a real form of income. For instance, if the value of your assets rises, you can borrow against this value regardless of whether you've sold them yet.

Others speculate that this will somehow undermine or crash the economy. Much analysis fails to recognise that Australia already has an effective tax on unrealised capital gains: the asset test on the Age Pension.

If the value of your assets rises, the amount of Age Pension you can receive drops; in economic terms, this works the same way as a tax, yet the Australian economy has somehow survived.

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Lastly, there are concerns that this will harm people with small businesses or farms. This is only true if people are currently holding their business or farm in their super account.

Why would people do this? Because the huge tax concessions on superannuation encourages people to pile all their assets into their super account to avoid paying tax. This is not the purpose of superannuation, and definitely not the purpose of the tax concessions.

These changes will not fully fix the superannuation system, but nor will they crash the economy, bankrupt Gen Z, or destroy farmers and small business owners. They are, however, an important first step in reducing inequality in Australia.