Three top superannuation specialists have warned that the federal government will dip into Australia’s $3 trillion retirement savings pool to help pay for the $130 billion stimulus package aimed at shielding the economy from the outbreak of the coronavirus.

The government has said that a combination of cutting company taxes and increasing the GST were not options, leading Mercer’s David Knox to believe that higher taxes, including on superannuation, were now on the cards in a post-COVID-19 environment. 

Knox said if the Canberra was thinking about a tax grab, it could turn to retirement benefits that are not currently taxed.

“One of the advantages of taxing pensioners is that the government gets revenue from the demographic that has generated the most wealth but which doesn’t contribute to the income tax base,” he said.

“Taxing benefits would give government greater flexibility since both income tax and tax rates on benefits can be politically adjusted up and down when the need arises as we saw flood tax, or a budget repair tax.”

Rice Warner executive director Michael Rice is also convinced Canberra will slap a tax on retirees “when the dust has settled.” 

“The need to raise taxes over the next ten years to pay for all the new debt will point Canberra towards the areas of super that are still heavily benevolently taxed,” he said.

The Grattan Institute’s John Daley also said that higher taxes were a certainty. 

“It might not be the very first thing Canberra does once the country comes out of COVID-19, but the debt repayment will be enormous,” he said.

Daley added that the reason Canberra would look at super was that the overall sector was taxed very lightly and about half of the tax concessions flow to the wealthiest 20 per cent income earners. 

Back to the future?

Should Canberra move to tax retirement benefits, it would be a partial return to its original tax system. Like many other major markets, Australia had long upheld the general principle of exempting contribution from tax entirely (and the earnings they generate) but to tax in full the retirement benefits as they are paid out. 

This was overturned by the Bob Hawke government in 1988 which brought tax collection forward to the contribution stage. Then, in 2006, John Howard’s government scrapped the tax on benefits. 

“If we had adhered to the original system, the younger demographic would build more compound interest and retirees would be funding economic shocks,” Knox added. “It increases the compounding – leading to bigger balances.”