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Are superannuation tax concessions fair? 

Experts and system reviews say current concessions aren't sustainable – and benefit some people more than others.

Last updated: 18 October 2021


Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • Australia's superannuation system has several built-in tax concessions which help people build up more retirement income.
  • Some economists and equality advocates believe the tax concessions are badly targeted and could be reformed to help give lower-income earners a better standard of living in retirement.
  • According to a study cited by the Retirement Income Review, pensioners leave about 90% of the assets they had at retirement when they die.

Superannuation tax concessions are a vital feature of Australia's retirement income system, though there isn't agreement on their overall purpose. 

The recent Retirement Income Review (RIR) looked closely at these concessions. It noted they support people saving through super "for the purpose of retirement income and not purely for wealth accumulation". 

Others have pointed to the way these concessions help reduce government spending on the age pension. The more people are encouraged to save, the fewer will qualify for the means-tested payment.

But, bizarrely, the RIR and the 2021 Intergenerational Report found that the concessions are on track to cost the country more than the age pension in the coming years. This finding has reignited calls from some experts who argue that the government needs to rethink the concessions.

What are the superannuation tax concessions?

There are a number of concessions, namely:

  • The tax rate for super earnings is generally 15% during the accumulation phase. For many Australians, this is much lower than the tax they pay on their income.
  • The system lets people make voluntary contributions (before or after tax) and pay less income tax.
  • With some limited exceptions, retirees don't pay tax on income from their super fund.
  • Lump sum super death benefits paid to a beneficiary (like a child) aren't taxed.

Are the concessions widening inequality?

The 2021 Federal Budget made several tweaks to super but left in place the tax concessions that are central to our retirement income system.

A range of experts have advocated for changes to these concessions, believing they're not sustainable or well targeted.

The RIR view

The RIR took a comprehensive look at these concessions and found the current system design "increases inequality in the system". 

To understand how the RIR arrived at this conclusion, you have to remember that super is a contributory system. This means the amount of super you end up with is based on how much you earn during your working life, and your ability to make voluntary contributions. As a result, higher income earners inevitably get more money from tax concessions than people on lower incomes. 

Magnifying inequality?

"What super tax concessions currently do is magnify the inequalities of working life into retirement," says Matt Grudnoff, senior economist at The Australia Institute.

Peter Davidson, principal adviser at Australian Council of Social Services (ACOSS), says tax concessions in the current system don't flow to those who need help the most. 

"People on the lowest wages, who are mostly part-time workers and mostly women, get no tax benefit at all," he says.

Concessions in context

But not everyone is convinced the super tax concessions need to be substantially changed. 

David Knox, senior partner at Mercer, argues that the concessions need to be understood in the broader framework of Australia's retirement income system, which includes a tapered means test for age pension eligibility.  

Broadly speaking, the system design means people with little super receive more from the government through the pension. Correspondingly, those with a lot of super receive less, or nothing, through the age pension.

Knox sees the current system as broadly reasonable, but notes "there is inequity at the top end".

Sustainability and abuse concerns

Jason Falinski, MP and chair of the standing committee on tax and revenue, says every parliament is responsible for monitoring tax concessions and ensuring they're "delivering fair and non-distortionary outcomes for all Australians".

"Spending gets pored over all the time, but tax concessions which can cost just as much, often don't get looked at appropriately," he says.

"What the Intergenerational Report showed is that [super tax concessions] will become so expensive that they will only start to make a positive contribution from 2038 onwards.

"If the system is meant to reduce the burden of people's retirement income on the community, but we're doing it in a way that actually increases the cost of it, then that's clearly counterintuitive."

Mega rich cashing in

Stephen Jones, shadow minister for Financial Services and Superannuation, says some people aren't using the system in the way it was intended.

"Super rich people are using super as a vehicle to minimise tax and accumulate balances, which are clearly not for retirement income purposes," he says. 

"[People doing this] undermine the sustainability of the whole system and fan arguments from people who want to make radical changes to the super tax system. If those people want to continue to abuse the system, that will lead to calls for changes to stop the sort of abuse that's going on."

Super rich people are using super as a vehicle to minimise tax and accumulate balances, which are clearly not for retirement income purposes

Stephen Jones, shadow minister for Financial Services and Superannuation

Recent news stories have highlighted a small raft of mega-wealthy people with enormous super balances. Super accounts running into the hundreds of millions of dollars are exponentially more than anyone realistically needs for their retirement income, but they still benefit from super tax concessions.

As the RIR pointed out, tax concessions are there to help people build up their retirement income "and not purely for wealth accumulation".


According to the Retirement Income Review (RIR), the current settings of the concessions "benefit men more than women", as more men are high income earners.

Concessions "benefit men more than women"

The RIR found that the current settings of the concessions "benefit men more than women" as more men are high income earners.

"The way it currently works is effectively increasing gender inequality in retirement," says Grudnoff.

Ann O'Connell, a professor at Melbourne Law School, says women are disadvantaged in two ways: first, through the gender pay gap and, second, because more women act as primary caregivers and spend time out of the workforce.

"This inevitably means that any concessions attached to superannuation as voluntary savings will favour men overall," she says. 

Entrenching inequality?

Sandra Buckley, CEO of Women in Super, also has concerns about whether the current settings are fair.  She says the concessions "are skewed towards high-income earners who are predominantly male who make up two-thirds of the recipients… The concessions further entrench the inequalities and inequities in the system".

There is a super tax offset for lower income earners (known as LISTO), which the government pays directly into the super fund of people who are eligible. But it doesn't fully compensate recipients, Buckley says.

Trade-offs in the system

A key concept in debates around the fairness (or not) of super tax concessions is that they involve a trade-off. When the government lets an individual pay less tax than they otherwise would, the government is forgoing revenue and supporting that individual.

If the government reduced tax concessions in super and had more revenue, it follows that it could redistribute this revenue to other benefits.

ACOSS: Extend the 15% tax rate 

ACOSS, for instance, has recommended that the 15% tax rate for super fund investment income be extended to funds paying a pension. 

In this proposal, the income people get from their super would remain untaxed. The extra tax money gained wouldn't just return to the government coffers for general purposes, but instead be used to guarantee a free place in a decent aged care facility for every Australian. 

"People can either pay for aged care through increased fees or share that cost through the tax system," says ACOSS's Davidson. 

"We think it's much fairer for that cost to be shared through tax, as we do with health care."

Many save too much for retirement

In theory, this trade-off could kill two birds with one stone. Many older Australians currently save more than they need in retirement because they're concerned they won't have enough to cover future health and aged care costs. 

Pensioners leave about 90% of the assets they had at retirement when they die

This fear means many people die with significant balances instead of enjoying their hard-earned savings in retirement. In fact, according to a study cited by the Retirement Income Review, pensioners leave about 90% of the assets they had at retirement when they die. 

But guaranteeing a decent aged care system would remove some of this worry, leaving retirees free to spend more of their retirement income and enjoy their post-work lives.

Assumptions around trade-offs

The Australia Institute has also noted the trade-offs in the system.

"The amount we spend propping up retirement incomes [through tax concessions] is certainly enough to make sure everyone has an adequate retirement," says Grudnoff.

Knox offers a word of caution on the trade-offs involved in super tax concessions: "A lot of those numbers are based on wrong logic," he says. 

"The value of concessions is an artificial number; it makes all sorts of assumptions about the behaviour of individuals if we didn't tax super. Some of them are obviously wrong."

In theory, for example, high income earners who currently benefit from the super tax concessions could move this money to other tax-advantaged places, such as trusts.   

Tax discount on earnings during your working life

Unlike income tax, which charges progressively higher tax rates the more you earn, tax on super earnings is flat for most Australians. Those earning less than $250,000 a year pay a flat 15% on their super earnings. Those earning a combined $250,000 from income and super contributions pay a further 15%.

Grudnoff says the flat rate is the biggest failing of the current system. He suggests a progressive rate applied as a discount would be more efficient and equitable.

Davidson adds that the flat tax on fund earnings is a bad policy.

"Clearly, it's not equitable because people with the most capacity to pay are paying less, and people with less capacity to pay are paying more," he says.

The rebate option

Some experts argue that introducing progressive tax rates on super earnings would be excessively complicated.

ACOSS says there's a way to cut through this complexity while also achieving a fairer tax system on super – by creating a rebate system of 20% off a person's marginal income tax rate. This proposal would also mean lower income workers get a tax offset they don't currently get. 

Tax discount on voluntary contributions

You can also boost your retirement income by making voluntary contributions to your super. 

You can do this by 'salary sacrificing' your super, where your contributions are taxed at a maximal rate of 15%. This rate can be substantially less than the income tax you pay at your usual marginal tax rate. 

Fund members can also make non-concessional (or after-tax) contributions of up to $110,000 each financial year. Again, when this money is in super, it will be taxed at 15% rather than the member's usual income tax rate, which could be much higher.

Limited impact

The RIR found the concessions that encourage these contributions have only a "limited" impact on overall saving.

Davidson says the current settings of these caps are another example of the system incentivising Australians to save beyond what they need for a reasonable retirement.

"The caps should be designed to subsidise nothing more than a decent level of income and living standard, not luxury," he says. 

With this in mind, ACOSS recommends lowering these caps to about $15,000 per year.

"That would save a great deal because higher income earners who are shovelling money into super wouldn't get the tax breaks they're getting now," Davidson says.

No tax on earnings during retirement

According to the Retirement Income Review, some super tax concessions aren't a good-value way to help people achieve an adequate income in retirement. It singled out the earnings tax exemption in retirement as a concession that will grow faster than the economy as a whole as the system matures. 

The RIR concluded that this discrepancy means the concession isn't a cost-effective way to help people receive an adequate retirement income.

Funding aged care

Davidson says taxing the super earnings of retirees could achieve what ACOSS sees as a fairer trade-off in funding a reasonable level of aged care. 

Knox believes there's a debate to be had around whether tax-free retirement earnings in super should continue. "Most of the assets held in the pension phase are held by wealthier individuals, so to extend the investment tax to [that] phase might be worth looking at," he says.

There's a limit on how much people can have in their tax-free pension accounts. As of 1 July 2021, the transfer balance cap is between $1.6 and $1.7 million depending on the person's age. People with super over the cap amount need either to take the excess money out as a lump sum or to keep it in their accumulation account – where it will be taxed at 15% instead of being tax-free in the retirement phase.

No tax on super passing to children

Davidson says people often die with money left in their super account that goes to the children, tax-free. The Retirement Income Review found that "most people die with the bulk of the wealth they had at retirement intact".

"We're essentially subsidising inheritances instead of subsidising free, quality aged care," he says. "That should change."

The 'stability' argument

One argument against reforming super tax concessions is that changes to the system make it harder for people to plan their retirement.

Although it says it's not against super tax concession reform, National Seniors Australia has argued that a raft of changes shouldn't come in at once. 

The Australia Institute's Grudnoff says the stability argument has "some validity" but shouldn't be the final word on whether or not these concessions are changed.

"It's a democratic question, who we hand out tax concessions to and who we don't," he says. "If the tax concessions aren't sustainable or properly allocated, I don't think it's unreasonable to change them."

Phasing in changes

Davidson says the stability argument isn't a persuasive reason not to reform the rules around contributions, which have already been changed many times. Further, he says, this tax already applies to fund earnings during a person's working life.

Falinski says any changes to the concessions should only be applied prospectively, not retrospectively. 

A possible way to ensure stability in the system while revising the concessions would be to phase any changes in gradually.

What is the purpose of super?

Not everyone sees articulating the role of super as a vital step towards better policy. 

"This idea that we can centrally plan the purpose of super is a false errand, and I'm not entirely sure how it improves the system," says Falinski.

But in Knox's view the lack of consensus around the ultimate purpose of super clouds debates over whether the concessions are fair and efficient.

However the goals of super are defined, the RIR found that the current tax concessions "increase inequity in the retirement income system". 

It went on to suggest that one objective of the retirement income system should be that government support (including tax concessions) "should be targeted to those in need".

We care about accuracy. See something that's not quite right in this article? Let us know or read more about fact-checking at CHOICE.

This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.

Stock images: Getty, unless otherwise stated.