Should we cap superannuation at $5 million?

The point of superannuation is to have a comfortable retirement and be self-sufficient.

To be more blunt, it’s to ensure you aren’t a burden on the public when you stop working.

If you’re paying the top tax rate (about 47¢ in the dollar when you include the Medicare levy), extra money you put into your super is only taxed at 15% as a super contribution — so you keep a lot more.

But why should we do that for something that – currently – some people are using to make more money than they need for retirement?

Fifteen years ago, there was no limit on how much money you could pump into your super each year.

That loophole’s now closed — now, there’s a contribution cap of $30,000 a year on top of what you might already be sacrificing.

But the legacy lives on. 

A 2020 Treasury report found retirees were often withdrawing the bare minimum and dying with most of their super untouched.

That money left behind, which would likely become inheritance to family,is taxed at just 17% leading to the intergenerational transfer of huge amounts of wealth at a very low tax rate. 

If the whole point of super is to fund retirement, what’s the reasonable amount you actually need by the time you hit 65?

According to Robert Breunig, director of the Tax and Transfer Policy Institute at ANU, “If you’re earning $200,000 a year, you’d end up with around $4–5 million in super by retirement.”

He reckons that’s a pretty good benchmark.

“I wouldn’t mind seeing a rule that says you can contribute up to $5 million in super. After that, you can’t save anymore in super — you save it wherever you want,” he told the National Account. “That would kind of get rid of a lot of these problems.”

Seems fair. If you want more than $5 million for retirement, no worries — just invest it in stocks, a savings account, or whatever the latest crypto is this week. 

But do you really need the taxpayer to help you do that?

If the cap was indexed so inflation didn’t eat it away over time, it… might work?

Sure, it’d be a tough sell politically. But it’s one of those boring-but-important changes that could make a big difference down the track.

A lot of people think super needs reform and that things need to change.

One example: The Labor government is introducing a tax that applies to accounts with more than $3 million.

Right now, Australia faces two options.