It is not possible to draw an overall conclusion about the relative ranking of the concessionality of the Australian retirement income taxation system owing to the lack of data and to methodological issues with the various studies on this subject.
There is no report by the OECD or other international organisations identified by this study that provides an overall comparison of the concessionality of taxation of retirement savings regimes. This is due, in part, to the lack of relevant revenue statistics data as well as the interaction of taxation and expenditure systems. This chapter therefore focuses on the taxation of private retirement savings.
The examination of the relative concessionality of countries’ taxation arrangements for private retirement savings relies on two studies by Whitehouse (1999) and Yoo and de Serres (2004).
Both papers indicate that the Australian retirement savings taxation regime, like those of other countries, is concessional compared to the taxation treatment of other savings (for example, a bank account).
The Yoo and de Serres paper also highlights the extent to which revenue is forgone in delivering these tax concessions. Australia has the fourth largest amount of revenue forgone per unit of contribution in the OECD-10.
The two papers have contradictory results about the effective tax rates facing private pension savings. Whitehouse (1999) indicates that the concession offered by Australia’s taxation of retirement savings is the third highest in the OECD-10. In contrast, Yoo and de Serres (2004) indicate that Australia has the second highest effective tax rate applying to private pension savings out of the OECD-10. This contradiction cannot be reconciled because of methodological issues with both papers.
These methodological issues reduce the reliability of their results on the effective tax rates and their usefulness for international comparisons. In particular, Yoo and de Serres (2004) use different bases for determining the tax rate, depending on the taxation regime applied, and Whitehouse (1999) measures concessionality against a benchmark derived from a country’s own marginal tax rates.
Whilst there is no standard ‘international model’ of retirement savings taxation, eight countries out of the OECD-10 use an EET tax model. This group of eight can be further broken down into those who impose tax at normal marginal tax rates and those who offer a more concessional taxation treatment of benefits. The two exceptions to the EET approach are Australia and New Zealand. However a key finding is that the most important point about the overall concessionality of the taxation arrangements is the rate(s) of tax imposed.
When compared with the OECD-10, Australia is broadly mid-range for the generosity of its contribution limitations and provides above average concessions in terms of the availability and taxation treatment of lump sum payments.
This chapter differs significantly from most of the other chapters in this review because there is no authoritative primary data source upon which to rely. OECD revenue statistics do not capture taxes on retirement savings in a consistent or transparent manner across countries. Rather, depending on the retirement income system used, the tax burden will be spread (at varying rates) across various parts of the direct income tax base. Without separate data it is not possible to examine the ratio of taxes to GDP, the tax mix or any of the other indicators used in other chapters. In any case, an international comparison of the taxation of retirement savings arrangements is problematic as both the structure of retirement income arrangements and the taxation regimes which countries apply to them vary widely.
Box 7.1: The structure of retirement income arrangements
Retirement income arrangements can be defined in different ways. Perhaps the most commonly used typology is the so-called ‘three pillar’ approach set down by the World Bank. These pillars are described as:
a publicly managed system with mandatory participation and the limited goal of reducing poverty among the old [the ’first pillar’]; a privately managed mandatory savings system [the ‘second pillar’]; and voluntary savings [the ‘third pillar’].
In practice, arrangements can be much more varied than might be implied by describing them as falling within a particular pillar. Arrangements within a pillar can vary as easily as those between pillars. For instance, the OECD notes that safety-net arrangements (which would be a ‘first pillar’ arrangement) can broadly be of four different types.
Retirement income systems are also generally composed of a mix of various forms of income secured from various pillars. The pillar which is the chief focus of retirement arrangements can vary significantly from country to country. This focus will often impact upon a country’s policy in relation to the taxation of private retirement savings.
This chapter does not compare these disparate systems, but focuses on the taxation regimes imposed on private retirement savings vehicles (that is, second and third pillar arrangements which are not government-controlled or managed) through an examination of the concessionality of regimes (this requires consideration of all elements of the taxation regimes, not only a comparison of tax rates applying at particular points). This partial analysis limits the drawing of robust comparisons or conclusions about the taxation of overall retirement savings.
As is the case in relation to other taxes, there are limitations to such comparisons that do not take into account the different contexts in which the taxes are imposed. For example, the different extent to which countries rely on private retirement savings vehicles can reduce the value in making international comparisons. That is, a country that has little reliance on the use of private retirement savings vehicles as the primary retirement income vehicle (perhaps due to a universal public pension regime paying large benefits) may be able to afford to offer highly concessional tax treatment to them.
Further, any study which focuses purely on the taxation arrangements (that is, the rates and incidences of taxation) ignores the costs incurred in providing concessions to such savings. Retirement income arrangements are also strongly affected by variable factors such as retirement age and life expectancies (which affect the period of time spent in retirement) and indeed broader social constructs including the level of expected individual responsibility for retirement income provision and social or family support structures. This will impact on policy decisions about the appropriate level of taxation of retirement savings (including decisions about tax concessions).
Discussion of the taxation treatment of retirement savings tends to focus on the taxable or tax exempt status (and tax rates) which applies to contributions, earnings and the payment of benefits. However, limiting the discussion to these elements has the potential to be misleading. Keenay and Whitehouse (2003) have noted the importance of avoiding ‘comparing the rates and structures of retirement benefits across countries without also considering the effect on older people of systems of personal income tax and social security contributions’. Many countries, including Australia, offer significant personal income tax concessions to retirees (under various qualifying conditions) such that the overall tax burden is significantly less than if the same level of income was derived by a non-retiree. In general, such concessions are not captured in international comparisons of taxation treatment of retirement savings.
Lastly, even where comprehensive studies of international tax treatment are undertaken they generally have to homogenise the regimes they are looking at (for instance, by ignoring particular concessions or the impacts of other sources of income) to allow the drawing of comparisons.
After examining the concessionality of the taxation of private retirement savings, some descriptive comparisons of particular aspects of retirement savings regimes are considered. The limitations which governments apply to the level of contributions to, and benefits flowing from, the retirement savings system are examined, along with the availability and taxation treatment of lump sums.