The government must prioritise tightening superannuation tax breaks and lowering the Division 296 tax threshold to $2 million, the Grattan Institute has urged, warning that current settings are unsustainable.
The Grattan Institute has called for the government to cut the super tax threshold to $2 million, saying its planned $3 million cap doesn’t go far enough.
In its Orange Book 2025: Policy priorities for the federal government, the Grattan Institute also suggested raising the Division 293 tax from 30 per cent to 35 per cent and lowering the income threshold at which the tax applies from $250,000 to $220,000 a year.
“This would save the budget about $1.1 billion a year and stop many high-income earners benefiting from larger tax breaks, per dollar contributed to their super, than low- and middle-income earners,” the report said.
The Grattan Institute has also called for:
- Lowering the pre-tax super contributions cap from $30,000 to $20,000, estimating savings of $1.6 billion annually by reducing tax-minimisation strategies for wealthier Australians.
- Abolishing carry-forward provisions and government co-contributions, saying they mostly benefit high-income couples rather than encouraging genuine catch-up contributions.
- Taxing all superannuation earnings in retirement at 15 per cent, the same rate applied before retirement.
“Retirees would then pay some tax on their superannuation savings – the same as people working today – but still much less than younger workers pay on their wages,” the think tank said.
“This reform would save more than $5.3 billion a year. These changes, together with lowering the cap on limiting super tax breaks to $2 million, could save the federal budget more than $10 billion a year, and much more in future, without reducing the adequacy of retirement incomes.”
Reforming default super fund selection
The think tank also recommended that the next federal government adopt the Productivity Commission’s recommendation to reform the way default super funds are selected for new workers.
Namely, the Productivity Commission said that new workforce entrants would be presented with a shortlist of 10 “best-in-show” funds selected by independent experts, which would be reassessed every four years.
“A competitive wholesale process for selecting default super funds would put more pressure on funds to reduce fees and improve performance, which would boost Australians’ retirement incomes and reduce future Age Pension spending,” it said.
The think tank said this would be especially helpful for disengaged members.
Simplify super for retirees
Moreover, the Grattan Institute called on the next government to simplify super for retirees and give them the confidence to spend their savings by introducing three key reforms.
“First, retirees should be encouraged to use some of their super to buy an annuity from the government. Retirees should be encouraged to allocate 80 per cent of any super balance above $250,000 to purchase an annuity, with the rest to be drawn via an account-based pension that provides flexible access to capital,” the institute said.
“This would boost retirees’ incomes by up to 25 per cent compared to solely drawing on an account-based pension at legislated minimum rates. And it would ensure that the bulk of retirees’ incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives.”
The second reform recommends the establishment of a free retirement income guidance service to assist at least one-third of new retirees, while the third urges the government to ensure “best-in-show” super funds are also selected based on their ability to provide efficient account-based pensions and high-quality retirement advice.
Big challenges needing fixes
Ultimately, Grattan said “Australia’s retirement incomes system is serving us well”, but it faces “some big challenges”.
The think tank said that more than half of single retirees who rent privately live in poverty, super tax concessions now cost $52 billion a year, and the system remains overly complex, with many retirees underspending and super increasingly functioning as an inheritance scheme.
Fixes, it said, include “simplifying the system for retirees, curbing superannuation tax breaks that cost far too much, and strengthening protections for vulnerable retirees”.
