Progressive Tax Changes to Superannuation in a Life Cycle Framework: Australia

Private pension pillars around the world benefit from concessional tax treatments that aim to increase private retirement incomes and house- hold savings. As shown in table 14.1, most countries tax their private pensions under the “Exempt-Exempt-Taxed” (EET) regime, in which contributions and fund income are exempt from any taxation but ben- efits are treated as ordinary income and taxed progressively. An alterna- tive approach is the “Taxed-Exempt-Exempt” (TEE) regime, which allows no deductions of contributions from gross income but then applies no further tax. By contrast, the existing tax treatment applied to Australia’s superannuation (Australia’s term for private pensions) features a flat tax rate on contributions and fund income, with benefits generally tax-free. As the statutory rate of this flat tax on contributions and fund income is 15 percent,1 the system is concessional for most income earners compared to progressive personal income taxation.2The concessions, however, flow largely to high-income earners, as dem- onstrated by Ingles and Denniss (2009) and Australia’s Future Tax Struc- ture (AFTS) (2008, 2010). For instance, AFTS (Australia’s Future Tax Structure 2008, 22) estimates that over 37 percent of concessional con- tributions go to only those Australians whose incomes are in the top 5 percent.