Monday, May 18, 2009

Changes to Health Insurance and Superannuation

The recent Australian federal budget announced changes to arrangements for health insurance and superannuation. The former surprised me because it made me aware of a tax concession I didn't even know existed. I'll also comment on how easy it is to exceed the new superannuation contribution limits for some middle income people.

Health Insurance Australia has more or less free government health care under Medicare (with very hefty copays effectively) but also since the late 1990s has tax incentives to encourage people to take out private insurance. When the Howard government introduced the current tax incentives (I lived in Australia at the time) I was under the impression that people earning less than $A30k a year would get a 30% rebate on the cost of their health insurance while people earning more than $A50k a year (which was the top tax bracket when the Howard government came to power!) would be taxed 1% extra a year - the Medicare Surcharge - if they didn't have private health insurance. This 1% wasn't marginal but applied to your entire income. Earn $A1 over $A50k and you got hit by a $A500 charge. The surcharge was also raised higher for a while. I knew that the threshold for the surcharge had been raised to $A75k a year, but what I didn't know was that rebates for private health insurance appear to apply at every income level. I found this out only because of the Rudd government's decision to means test them. Did I misunderstand the original structure of the Howard scheme? Or were the rebates extended to higher incomes at some point?

Back when I lived in Australia in 1996-2002 I never found it worthwhile to get private insurance as mostly I got my income below $A50k and even if I hadn't the insurance seemed to cost about as much as the charge and I like to avoid this kind of hassle. And I had no idea what benefits private insurance might give me. Now both Snork Maiden and I will probably earn less than the $A75k threshold for the 2008-9 and 2009-2010 tax years. When we had to take out private cover for Snork Maiden it cost around $A1,000 per year. Australian Unity quote a rate of $110 per month for the most minimal coverage for the two of us together and I think that is after the rebate of 30%. So it would make sense if both of us earned more than $A75k per year but not before we hit that level...

Superannuation The government lowered the maximum limit for concessional contributions to superannuation (taxed at 15% instead of your marginal rate) from $A50k per year to $A25k per year. It's important to note that required employer contributions are included in this limit. If you exceed the limit you are hit by an extra 31.5% tax on the contributions. The Unisuper superannuation scheme in the higher education sector has extremely high contribution rates. Employers contribute 17% of salary to the fund (instead of the legally required 9%) and employees contribute 8.25% from pre-tax salary. Any academic earning more than $99k per year - i.e. the Associate and Full Professor levels at most universities - will exceed the new limit. You can instead pay the employee contribution post-tax. Then you'll need to earn $A147k to exceed the limit which covers all regular full professors. But anyone in those ranks needs to switch to post-tax contributions.

I'm sure most senior administrators come in above that level - e.g. a department head who is a professor will probably earn an administrative supplement on top of the professor's salary and deans must earn more than that. Also some professors earn more than this due to supplements for people in some areas like law or additional fellowships like the Federation Fellowships. John Quiggin, for example, has one of these and, therefore, has a salary close to $A 1/4 million. These people will need to get their employer contributions lowered and their salary raised (with larger post-tax contributions) to reduce tax. I don't know if that flexibility is available.

3 comments: said...

As far as I can recall, the 30% private health insurance rebate was always available to everyone ie. not means tested. One thing to bear in mind about taking out private health cover is that if you take it out before a certain age (31?) you pay the base rate, and it doesn't increase with age. If you exit private health insurance, you are allowed a certain number of years 'grace' before your age rating starts to go up. Effectively, if you mostly had private insurance in place from age 30 until 70 you would always pay the standard rate. But if you never took out health insurance until age 65, you'd pay a much higher premium based on your age when you take out the insurance.

We took out basic hospital cover to avoid the 1% medicare surcharge, and then dropped it last year when the thresholds were raised (and DW is working part time). If we don't take out private insurance again until age 65 (to avoid the public hospital waiting lists for 'elective surgery' such as hip replacements in our old age!) then our rate would be that of a 50 year old who never had previously had health insurance. Currently our 'age rating' is set to 31, and it will start increasing once our 'grace' period has been used up.

It's awfully complicated, and makes it very hard to work out whether or not it's worth paying for health insurance or not. Having a variable medicare surcharge that is income based makes it even more difficult to decide if private insurance is worthwhile.

The reduced caps on concessionally taxed superannuation contributions have quite an impact even at relatively modest income levels. At around $90K gross salary, a large part of my salary would be taxed at 30% or 40% if I didn't have any tax deductions. Putting the maximum $50K into super ( approx $10K SGL and $40K salary sacrifice) saved around $10K in income tax last year (which will help fund my retirement sans government pension). With the new $25K cap I can only salary sacrifice around $15K. Rather than contribute what's left of the other $25K income after paying 30%+ tax, I'm tempted to just use it for current consumption and hope there's still some chance of getting a means-tested part-pension when I hit 67!

It seems strange that the cost to tax revenue of someone using salary sacrifice (taxed 15% into super) to reduce taxable income (taxed at say, 40%) is treated as a straight out 25% hit to tax revenue. I've even seen this tax deduction described as 'paying' the high income workers to save for their retirement! In reality, it seems no different to the huge 'tax revenue hit' notionally arising from professionals using family companies to limit their tax rate to 30% company tax rather than the top personal tax rate.

To me it seemed quite fair that retirement savings (up to $50Kpa) were being treated to a flat 15% tax rate, rather than using progressive taxation. No-one can know exactly how current income levels will compare to retirement income levels for any particular worker, so using progressive tax rates on retirement (by sjifting $25K of retirement savings from pre-tax to after-tax contributions) that are simply based on gross current income can be just as inequitable over the life cycle. Consider the situation of a male worker on $100,000 who works without interruption until 67, compared to a woman who has several years of nil salary while having children, and therefore ends up having fewer years in the workforce at a higher income level, but her total lifetime wages are the same as the male.

One way to avoid this problem would have been to have a lifetime cap on concessional contributions (similar to the old RBL limits). Say, a lifetime of total concessionally taxed contributions of $1,000,000, with an annual limit of $100,000. That would have made the system fairer for woman spending time outside the workforce, and also helped address the issue of the 9% SGL being insufficient for baby boomers who spent a large part of their working lives "pre-super".

Of course, that wouldn't have produced an immediate boost to government tax revenue at a time of record deficits!

mOOm said...

You are probably right on the lack of means testing that seems to be the case. I apparently misunderstood how the scheme worked based on how the thing was originally "pitched". An interesting idea on a lifetime cap for concessional contributions. Even without the concession there is a tax advantage to super especially for higher income taxpayers due to the lower rates on fund earnings and zero tax once a pension payout is established. The risk is that they are going to end up raising the preservation age to 67 or who knows what else. So right now we are putting a bit extra into super than absolutely required by our jobs but not a huge amount more.

Well I've never taken out private insurance in Australia and I'm 44. The rate that the online quote gave me seemed pretty reasonable. Insuring my father in law (who is 76) while he was in Australia cost about $A1,300 per annum, which is about the same as for us as a couple at our current ages. Though probably the two aren't directly comparable.

John Quiggin said...

Being as mystified about the intricacies of super as the next economist, I left that aspect of the Budget for last. I hadn't got around to considering personal implications at all, so thanks for alerting me that there are some. JQ