Government cost comparisons between the age pension and the tax concessions incorporated in the superannuation system are inappropriate and misleading, a leading actuary has said.
“[The exercise] is not comparing apples with apples. Let me explain. The age pension cost is a real cost to the government budget. It is paying out dollars to our pensions,” Mercer senior partner and senior actuary for Australia Dr David Knox told delegates at The Tax Institute National Superannuation Conference held in Melbourne recently.
“[But] the super tax concessions are not a real cost. They are a calculated number by Treasury using a particular methodology. If we had no tax concessions, behaviour would change. People would move money out of super into more effective arrangements for their savings. So it’s not forgone revenue as people might like to call it.”
Further, Knox argued a cost comparison between the age pension and the super tax concessions is not being based on comparable demographic cohorts.
“The age pension cost is for the generation who are now over 67. The tax concessions are predominantly for the next generation coming through in the next 10, 20 or 30 years,” he noted.
“We are comparing different generations and they shouldn’t be added together. The tax concessions should be considered to be an investment to reduce future age pension costs.”
According to Knox, adding the two components together to arrive at the proportion of gross domestic product both retirement initiatives are costing does not make any sense, but the methodology is still being used in the compilation of the Intergenerational Report.
“I’m not saying there aren’t costs to government. Concessions are a cost. But adding them to a real cost like the age pension is not in my view valid,” he said.
In addition, he pointed out the most recent Intergenerational Report indicated the retirement savings system is achieving its desired outcome as the cost of funding the age pension is forecast to decrease in future years.