It looks like someone in Treasury has mucked up the sums that show Australians are giving a $30 billion annual subsidy to superannuation.

Accordingly, the whole basis of the government's plan to have another swipe at superannuation is undermined.

I have a high opinion of the basic skills of Treasury but this represents its third major blunder in less than half a decade.

The former head of Treasury Ken Henry proposed a mining tax that would have destroyed much of our mining industries. Treasury did not pick up that the sums were wrong. The then prime minister Kevin Rudd and Treasurer Wayne Swan announced the tax and it cost Rudd his job.

Then a new mining tax was concocted and from day one Treasury’s estimates of likely revenue looked wrong. They did not revise them and Wayne Swan spent the money he expected to get.

There was no worthwhile money in that tax so the government spent vast sums that were not there and not likely to be there for a long time. This has been a major problem for a government wanting to find money for education and disability insurance.

And so it turned to Treasury to calculate the so-called 'middle-class welfare' subsidy in superannuation. Treasury calculated the tax benefits as costing the government about $30 billion a year. According to the government this seemed to be middle-class welfare that must be attacked to fund its plans.

After the mining tax debacles I should have checked its figures. Instead it was a body called the Self Managed Superannuation Fund Owners Alliance that revealed the mathematical error.

The Treasury people made two base calculations, both of which were justifiable. The person who made the calculations warned that they should not be added. But some bright spark did add them and Wayne Swan did not pick it up.

The SMSFOA illustrates the mistake with a taxpayer putting $100 into super now and earning income on this investment over 35 years, which Treasury calculates at 7 per cent annually.

Firstly, the $100 is taxed at 15 per cent leaving $85 to be invested. If the contribution were taxed as income at a marginal tax rate of 46.5 per cent (top rate plus Medicare levy), instead of the 15 per cent concessional rate, the tax on the $100 contribution would then be $46.50 not $15.

Accordingly the taxpayer has received a tax concession of $31.50. The benefit sums that came from that calculation are mathematically correct.

Secondly, they did a separate sum which says that if the taxpayer invests that $85 over 35 years at 7 per cent interest compounded, the return is $656 on just this one contribution. A 15 per cent tax on that $656 is $98.40. Once again Treasury compared the 15 per cent tax rate to a 46.5 per cent rate to determine how much was being subsidised. Once again that produced a correct mathematical sum.

Thirdly, as the original researcher warned, these sums cannot be added because if the taxpayer was taxed at 46.5 per cent when the money is invested, then the taxpayer would have only $53.50 to invest rather than $85. Accordingly the returns are obviously slashed, as is the claimed subsidy. So as the original researcher warned, when you add the figures it produces nonsense and a very large overstatement of the government subsidies.

But there are more problems with the sums. Treasury has assumed a 7 per cent return over 35 years. That’s not been the experience of superannuation investors in recent years. Given our low interest rates and China’s change in direction it might also not be the experience in the future (China makes a frightening energy shift, February 7). A 5 per cent return calculation would have been more realistic.

Very clearly those aged over 60, when they invest their superannuation money tax free to produce a pension, gain a benefit, which is in the sums. But to gain a reasonable income on today’s interest rates (not some 7 per cent return trumpeted by Treasury) you need about $2 million.

So if you want to tax people with superannuation balances over $2 million at a higher rate you will create an administrative nightmare. And you will not raise a lot of money because few have those sort of sums, and the government now restricts how much can be invested in superannuation.

And then of course no calculation is made for the reduction in aged pension liability that superannuation delivers. That surely must be in the sum. We need to do the sums again and when that's done Wayne Swan will find that housing is where the big subsidies are and they can’t be touched.

Wayne Swan has dodged a dangerous bullet. Had he repeated the mining tax mistakes and spent money being raised in superannuation on the basis of false sums the community would have erupted in fury.

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There should be no apologies for an inept Treasury. When did they ever get a calculation or forecast right. Treasury have a history of getting it wrong and when you add the same ineptness of the RBA to the situation nobody believes anything that comes out of them (How Treasury mucked up its super sums, February 8). Not only are they inept but play the bipartisan game as well. Both should be decimated and a new regime brought in to tighten up their skill level and independence.
Why not reduce the subsidies on housing (How Treasury mucked up its super sums, February 8). Negative gearing should not be an option for existing houses.Fair enough for new constructions to encourage the industry.Investors will work out what is best for themselves
Robert, you're forgetting that the end balance of super is meant to be used up (How Treasury mucked up its super sums, February 8). You keep referring to the income that can be earned on the balance without touching the capital. Why is that?
Also, the reason we have superannuation is to limit the amount of age pension that is paid to the majority of people. It is not up to the Govt to force people to save enough to have say 65-70% of their pre retirement income when they retire.
Thirdly, the current tax benefits of super pretty much go to the wealthiest 15-20%. Seems a bit unfair that the majority are subsidising the retirement income of those who can afford to save for it outside super.
That's the other issue I have. This single minded focus on super. It is but 1 way to save for retirement and not the only way.
Why is it OK for someone to take their lump sum super and pay off their private debt which then allows them access to a larger pension payment? It doesn't work that way for the unemployed, so why do pensioners get this free kick?
The fact is the current tax forgone on super now costs more than the age pension. How much longer will that occur? I'm not sure but it seems a silly policy to spend more on solving an issue than the issue costs.
Why do people who already have assets at a level that would stop them getting a pension still get super tax benefits?
Gen X are in the unenviable state where they have to pay for the old pension system and the new one, so in a way the boomers are getting an extra bonus free kick from the generation that trails them.
To get back to basic principles: super was meant to have people fund their own reasonable safety net during retirement (How Treasury mucked up its super sums, February 8).
With $2 million there is little need to contribute further. One may even say beyond a certain 'reasonable benefit' one shouldn't be allowed to contribute further into super if it isn't for the mechanism becoming too complex to effect, hence during the past decade changes were based on limiting contributions at the front end instead. Beyond this level people should save under the normal tax regime.
Super is meant to provide extra incentive to establish a safety net- not to create a tax haven for those with excess wealth.
If this article is accurate then it reinforces just how bereft our leaders are of commonsense (How Treasury mucked up its super sums, February 8).
Our leaders also fail to consider that every action produces a reaction.
For example gearing assets inside super is not very effective due to the low tax rate. Raise the rate and there will be more negative gearing (with the consequential loss of revenue) and increased risk. If contributions tax is raised and contributions further restricted, then it is likely negatively geared investment outside of super will also rise.
Whatever the correct calculation for the SMSF cost might be, changes made to it will not provide the net gains expected since investors will search for other tax effective investment alternatives which are likely to be more risky and of less overall benefit to the whole nation.
Following on from the points made by Stephen and Chris, any tax on the pension phase would be disadvantageous compared to the alternatives and would lead to people opting out and more likely to use the public pension (How Treasury mucked up its super sums, February 8). This is because the capital component of the pension or annuity is being taxed as income. A 15% tax rate on a pension would therefore be equivalent to a 25% (approx) tax on investment earnings. If an investor had funds in cash or managed funds and drew down a mix of capital and interest the capital component would not be taxable.
The current debate, or at least people in favout of another increase in superannuation taxation, are forgetting that funds are not accessible until retirement and for that reason are concessionally taxed. They are also forgetting that high income earners only receive a higher proportional tax benefit because they are on high marginal tax rates.The analysis being produced by the government needs to look at the total taxation picture across income bands, not at super in isolation. For example, someone on an income of say $55,000 pays no net tax and is highly likely to recieve a full pension which is totally subsidised by other taxpayers. I'm not suggesting this is wrong, just that the ongoing reference by the labour party to higher income earners not contibuting their "fair share" is blatantly political and only highlights that good, long term economic management isn't highly valued by the current government.
I am just a silly old lay person but I can tell you something for a fact. I am fast losing faith in the superannuation system (How Treasury mucked up its super sums, February 8). The rules change all the time, and I can no longer see a benefit in going without our own money in our lifetime only to be penalised in the future. I have told my husband I would rather be in control of our own money, save it and invest it and spend it as we see fit, because there is no reward for trying.
Research shows gov spending returns 50 cents in the dollar. Private spending over time returns over one dollar for the dollar spent (How Treasury mucked up its super sums, February 8).
This is common sense economics.
Why do we continue to waste our wealth.
How do we know it wasn't the Minister's office that got the figures wrong? (How Treasury mucked up its super sums, Februray 8.) Public servants can't speak publicly and are unable to explain their actions or the process. In 30 yrs we will find out what really happened.
Too many spreadsheets and not enough common sense! (How Treasury mucked up its super sums, February 7.)
I am afraid I dson't have any confidence anymore in any estimates or projections coming out of Treasury.(How Treasury mucked up its super sums).
The actual deficit result for the 2011/2012 year was so far out compared with the Treasury figures( about 100%), how could you place any reliance on any figures coming out of that office.
Governments need to keep their hands off superannuation once and for all.
The introduction of Mysuper and stronger super are going to add millions of dollars to the administration of super.
For instance Funds are having to spend millions of dollars changing their IT platforms to provide information in the form required under the new arrangements just to provide data to APRA.
The government has also increased their levies on super funds to pay for their administration of the new arrangements with funding ofd APRA, ASIC and the ATO.
All of these costs will impact on on the returns of members.
A return of 5% after tax and fees looks very likely as a long term position given the levels of volitility in investment returns we have seen over the past 5 years.
The GFC and the subsequent Global Government Debt Crisis have left us with this volatility. Superannuation Trustees have been attacked for their returns in recent times but have been hampered by frankly fraud on a global scale.
A factor that seems to have been ignored in the other current pipedream is CGT for those in pension mode (How Treasury mucked up its super sums, February 8). If you are taxed for something which should be income producing, then you are able to offset costs and more importantly losses. Its typical that treasury starts talking when things start going forward. Imagine if some bright spark suggested CGT during pension phase just prior to the GFC.... the government would then have to cover a portion of our losses, which in turn can offset future tax on profits.
Ah $85 x 1.07^35 =
$85 x 10.67658148 = $907.50
6% will give the the calc in the article $85 x 1.06^35 = $85 x 7.686086792 = $653.32.
See how easy it is to get things wrong. (How Treasury mucked up its super sums, February 8.)
If I may be permitted to paraphrase a proverb that's been attributed to everyone from Aristotle to Ghandi: The measure of a Government is how it treats its elderly. (How Treasury mucked up its super sums, Februray 8.). Right now this Government is positively salivating at the prospect of seizing the wealth of the elderly. Why: to make the elderly dependent on welfare? Are they that desperate to feel needed?
A major problem is that most of the labor party come from a background of professional unionism (How Treasury mucked up its super sums, February 8). They are not doctors, accountants, lawyers, small business people. There in lies the major problem with them running a functional government - they simply do not have a breath of experience in their backgrounds to enable them to draw on their education and past professional lives to effectively run a sound government.
It is shocking to see some of the comments on how superannuation policy should be based upon (How Treasury mucked up its super sums, February 8). Some want the superannuation policy to be solely directed to people who 'should have them', not the rich. Rich now but what happens when they are old and no longer rich and without superannuation? Superannuation is meant to quarantine wealth and allocate it to be used in old age for all strata of society.
With regards to concessions, Government has to provide an incentive so that this policy can be promoted. If there is no incentive the policy might as well be wishful thinking.
However, it may be the case that the superannuation balance may exceed reasonable retirement needs beyond a certain level of accummulation and government concessions could be withdrawn accordingly.
There is already an existing tax regime on superannuation contributions and earnings during the accummulation and pension phases so superannuation should not be seen as a new untaxed sector. Many superannuation accounts have already suffered large losses during the GFC with many would-be retirees having to prolong their working life.
I am perplexed by the calculations in your article. From my knowledge of superannuation and applicable tax on accounts I believe - The initial $100 contribution (note word contribution) will not attract tax until it earns a profit (note word profit) - as it is only profit that is taxed in these accounts (How Treasury mucked up its super sums, February 8). Using your illustration equation then the first year if invested at 7% would make $7 profit and that $7 would be taxed at 15% making total tax of $1.05. Therefore balance of account for start of second year would be $105.95 ($100 x 7% = $107 - 15% of $7 = $105.95). Please correct me if I am wrong. Using the same scenario but with the 46.5% tax in the calculation the equation is such ($100 @ 7% = $107 - 46.5% of $7 = $3.26 = balance of $103.74) The saving is 2.21% per $100? Yes? No? I really would like your comments as I am not being a smarty I am sure that is how the calculation should be done. Thanks Carolyn
To be compliant, investments in superannuation must meet the sole purpose test - they must be solely used to provide for retirement (or premature death). That's how the man on the street views super too - it's to support them for the rest of their lives after their last payday (How Treasury mucked up its super sums, February 8). Hence, the government has encouraged personal contributions and spouse contributions to ensure that couples as well as individuals can meet that need. Funnily enough, I'd worked out that I needed $2m to support myself and my wife in retirement and when the contribution limits were imposed at $25,000, have got my wife to life her's to $25,000. Now, we'll be penalised for that prudence. I should instead get her to drop back to her employer's contributions and hope the government are there to pick up the pieces. Unfortunately, they won't.
Great comments Mark, "...deliberately set into policy fo save future age pension outflows (How Treasury mucked up its super sums, February 8). Those "concessions" are not a gift from government - they are a policy-driven trade-off to cap government's long term liabilities". I been reading the debate holding the same view. My first job was a bank Teller and I well remember each second Thursday the line out the door of retired folks cashing their Government Pension cheques. After a life time of working and paying income and other taxes the penion was considred a right in this country - not so long ago. So Super is a way to reduce that burden on the Government and move it to the individual. It seems to me the tax concessions provide an effective incentive for people to fund their own retirement and this needs to be taken into account. Maybe instead of seeing Super as a way to get more Government revenue think of it as an expense avoided or reduced.
You are right Mark Freakley - Tony Abbott's policy to remove the supperannuation subsidy for millions of low income Australians is an example of the class warfare that sadly is inherent in our society (How Treasury mucked up it's super sums February 8)Interesting that there have been no comments re this matter in this discussion!
James Redman is a genius - got it in one. Far from being a middle class welfare measure the Super tax concessions are an incentive for people to fund their own retirement. If they do, it saves the Government an average of $700,000 for each retiree who doesn't draw a pension (How Treasury mucked up its super sums, February 8).
It would make more sense to make Pension sacrifices tax free, and have no limit on contributions at all. But Labor hate the idea of working class people becoming independent of the government: they want to introduce even more predatory taxes on Super contributions to drive as many people as possible back to the pension where they belong, in Labor values.
They are also driven by the need to finance their reckless spending now that their mining tax has become the latest in a series of failures, and they have already spent the money they expected to raise. Swan should resign over his abject failure to balance the budget.
Although I cannot see any government making the changes, superannuation should be seen as deferred income. It is to both the saver's and government's advantage to reduce the dependence on a public, i.e. government pension later in life. I would suggest that this can best be done by having no tax on superannuation contributions but normal taxation on withdrawls (at whichever is the appropriate marginal tax rate). I would allow superannuation by either or both partners to be split in whichever ratio the partners wish at time of retirement (of first partner) and for outstanding balance to be passed to surviving partner on death of first partner. On death of second partner any capital left in the superannuation policy may be paid out as stated in the will but that the receivers would pay tax on it at their marginal rate. I would allow up to 7 years for the amount to be paid out. In this scenario all monies paid out of the superannuation fund are taxed at the marginal rate of the relevant recipient.
But back to some of the assumptions stated in this article. Virtually no-one is in the top tax bracket in the first few years of their career. And it is not that many years since the current rate of 9% contribution came in, so for most older taxpayers their superannuation funds are nothing like as rosy as the government imagines. The trillion plus dollars in the collective Australian superannuation funds is because there are 8 plus million taxpayers and all those who have now retired. Clearly, those on lower incomes all of their working lives are not going to have sufficient for retirement and for them there needs to be an adequate pension. Also the wealthiest will one way or another look after themselves, and we should not twist rules as part of a Class war. So superannuation should be a way in which the middle classes from around the 4th to 9th decile are able to provide for their retirement. The rules for superannuation need to be consistent with the rules elsewhere.
The maths of it all ... lets say $2 million in super was all just the standard contribution of 10% over 30 years. This actually implies the person was earning about $500K plus per year (How Treasury mucked up its super sums, February 8). Simply puts into perspective how few people fall into this category. Makes the whole exercise look as ludicrous as it is.
The really annoying and frustrating thing about the Gillard Labor Government's mooted yet-again meddling with the Superannuation system, is that we all know that it is precipitated by their gross economic and financial incompetence, and that whatever they steal from the superannuants effected, with great impact upon those superannuants, will be a mere pittance in filling the black-hole of debt and deficit they have created, and in their never-ending socialist lust for other people's money.
I am in the pension phase of my super plan (How Treasury mucked up its super sums, February 8). I have paid good taxes all my working and investing life. I now live off the principal and very pressured earnings of my pension fund. I will most likely never again earn a dollar outside that fund or contribute another dollar to it, so my pension drawings are my financial life-blood. I must withdraw a minimum amount from that fund every year whether I need it or not, and whether I can afford to do so or not. I contributed to my SMSF according to all of the many and varied and, appropriately, increasingly incentivised, rules that have been in play over the years, paying contributions tax for every otherwise un-taxed contribution, paying tax on fund earnings, paying tax on pre-pension-phase withdrawals, and paying often considerable accounting and statutary fees and charges all along.
As other comments have mentioned, before any government further undermines the already fragile credibility of the superannuation system which for the vast majority of us who believe in looking after ourselves is the only real alternative to a government pension, they should have a long hard look at the burden that public servants, at all levels of government and at all levels within government, place on the Australian taxpayer, and that definitely includes judges and politicians.
Gillard and Swan thoughtlessly "float" this constant meddling, without any regard for the stress and worry imposed on those potentially effected.
Bring on the next election.
In all reasoned conclusions and based on historical probability, the Government got it wrong, not the Treasury (How Treasury mucked up its super sums, February 8). If you haven’t noticed, if anything is any shade of good, the Government grab it with alarming vigour. If it is wrong, tainted, distorted, and illegal or just turns out wrong, it is the fault of someone else, preferably the opposition.