Super tax breaks costing $45bn a year are ‘inheritance schemes’ for Australia’s rich, new report says

The Albanese government could save the budget billions of dollars by winding back generous superannuation benefits that effectively produce "taxpayer-funded inheritance schemes" for the wealthy, a new Grattan Institute report argues.

The "super savings" report says such tax breaks now cost $45bn a year, or 2% of GDP, and will soon exceed the age pension costs. Two-thirds of the breaks go to the top 20% of income earners who typically are already saving enough for retirement.

"Much of the boost to super balances from tax breaks is never spent," it said. "By 2060, one-third of all withdrawals from super will be via bequests - up from one-fifth today."

Brendan Coates, one of the report's authors, said the projected huge federal budget deficits and mounting demands for more spending on the NDIS, defence and other programs gave urgency to reining-in "unfair and unsustainable" super benefits.

"Our super tax breaks have been too generous for a long time," Coates said.

The biggest changes were introduced by then treasurer Peter Costello in 2006 and "both sides of politics have been gradually chipping away at the tax breaks ever since," he said.

The 10 recommended changes include raising the so-called division 293 tax on super contributions from high earners from 30% to 35%, and cutting the annual income threshold at which this tax applies from $250,000 to $220,000. The budget would reap $1.1bn a year from the change.

To make the scheme more equitable, the low-income superannuation tax offset should be extended to those earning as much as $45,000 a year, up from $37,000 now. That change could cost $530m annually.

The Albanese government drew the ire of some investor groups and media pundits in February when it announced earnings on super balances above $3m would be taxed at a rate of 30%, up from the current 15%, starting in July 2025. Shadow treasurer, Angus Taylor, criticised the move as an "attack on middle Australia", while the opposition leader, Peter Dutton, has promised to repeal it if the Coalition wins office.

The public's response to that move - which is expected to affect about 80,000 people initially - was "actually heartening" and should encourage the government to go further, Coates said. "Polling of that change shows it has been wildly popular despite intense media commentary."

The treasurer, Jim Chalmers, is busy preparing his second budget -- to be released on 9 May. At the end of last year, the underlying cash deficit for the 2022-23 year was expected to be almost $37bn with the annual shortfall rising to about $50bn in 2024-25 and 2025-26.

Treasury officials are understood to have listened respectfully to the proposals but for now are sticking to the tax changes already planned for the $3m-plus super accounts.

Other changes proposed by the Grattan report include reducing the pre-tax contributions cap to $20,000 a year, from $27,500.

The move would save the budget $1.6bn a year by trimming voluntary contributions typically made by older people with already-high balances. Men also typically benefit much more than women.

Provisions that allow co-contributions and carry-forward provisions, intended to encourage catch-up payments, instead "facilitate tax minimisation and should be abolished" it said. Savings to the budget would be about $1.1bn a year.

The report said all super earnings in retirement should be taxed at 15%, as they are before people retire. Such a change would save the budget $5.3bn annually.

Coates said warnings that changing super conditions would alter people's retirement plans were exaggerated.

"We change tax rates on personal income all the time," he said, adding that the proposed changes would bring superannuation back in line with its original purpose. "This isn't about blowing up the system."