By Lucy Dean
Today’s 22-year-old worker will accumulate more than $3 million in superannuation by the time they turn 64 even if they only ever earn an average wage, new analysis has found.
Under Labor plans to increase tax on high-balance super accounts, earnings on retirement savings above $3 million will be taxed at 30 per cent, rather than the concessional rate of 15 per cent.
The measure is ostensibly aimed at high-income earners, but modelling posted on LinkedIn by AMP Capital deputy chief economist Diana Mousina shows at least half of Gen Z will hit the $3 million mark by the time they near retirement in about 40 years. This is due to wage inflation and the power of compound interest.
“The policy, as it stands, is trying to target wealth, and I’m not necessarily against that … but it just doesn’t make sense not to index the brackets,” Mousina told The Australian Financial Review.
“A $3 million balance in 40 years’ time is not the same $3 million balance that you have today. It doesn’t affect 0.5 per cent of the population, it impacts a much higher share.”
Treasurer Jim Chalmers said only 80,000 people, or about 0.5 per cent of the population, would pay the higher rate of super earnings tax when he announced the policy in February 2023.
The Greens want the threshold to be lowered to $2 million, but for this to be indexed in line with inflation.
Mousina’s back-of-the-envelope calculations indicate that if this hypothetical 22-year-old were to work until they were 67, by that age they would have $3.6 million in super. Under current settings, that would attract roughly $24,000 in tax a year.
If the extra tax is implemented at $3 million, they would pay an additional $5400 a year, bringing total tax to $29,300. However, if the $3 million threshold was indexed, they would pay no extra tax, as the worker would not breach the threshold.
Once this worker retires and enters the pension phase, they do not pay tax on super earnings, so whether the $3 million threshold is indexed or not becomes largely irrelevant.
Rather, the rate at which their super balance is taxed is governed by the transfer balance cap, or the amount of super that this person can turn into a tax-free pension. That’s currently at $2 million, but is increased in line with the consumer price index.
Mousina’s modelling follows analysis by the Financial Services Council in 2023 which found that without indexation, by the time a 30-year-old retired, the $3 million threshold would be equivalent to a $1 million threshold two years ago.
When he announced the plan, Chalmers said he didn’t intend to index the threshold, as the super system needed to become more sustainable.
Treasury estimates that superannuation tax breaks will exceed the cost of the age pension by 2050, while analysis by the Grattan Institute has found that two-thirds of the value of these tax breaks flow to the top 20 per cent of earners.
Bequests from super are expected to rise from $1 in every $5 paid out in 2019, to $1 in $3 by 2059, according to consultant Rice Warner.
The new tax is due to start on July 1, 2025, although it has yet to be passed by parliament. While it has faced heavy lobbying from the SMSF Association and the Financial Services Council, Labor’s landslide win on Saturday and gains by the Greens should make Senate approval easier.
Struggling to build wealth
But the plan also follows an election in which the plight of young people struggling to build wealth featured heavily. Labor’s emphatic victory could also been seen as a mandate for the change.
High house prices continue to frustrate first home buyers’ attempts to escape the rental market, while bracket creep means workers who receive inflation-linked pay rises (who are more likely to be young) dedicate higher portions of their income to tax, without enjoying any real increase in spending power. The proposed super tax is another form of bracket creep, the Institute of Financial Professionals of Australia has said.
Mousina said that given divergences in wealth and falling wealth mobility – largely fuelled by soaring house prices and super balances – Labor’s attempt to better target wealth through higher taxes on large super balances was understandable, but without indexation, it would miss the mark.
“[Before doing the modelling] I knew that for a high-income earner, $3 million by retirement was something that they would easily hit by retirement because people often forget the impact of compound interest. What did surprise me was that even for an average income earner who is saving right now, they will hit the cap before retirement.”
Mousina assumed a starting balance of $4446, that this full-time worker was on the average income of $98,000 and that this increased by 3 per cent a year. The super fund made a 6.5 per cent return, and this worker didn’t make any extra contributions.
