“These tax breaks boost the retirement savings of super fund members, and ensure that workers don’t pay punitively high and compounding effective tax rates on their long-term savings held in super,” Coates and Moloney said.

“But two-thirds of the value of super tax breaks benefit the top 20 per cent of income earners, who are already saving enough for their retirement and whose savings choices aren’t much affected by tax rates.”

They added that few retirees draw down on their retirement savings as intended, that many are actually net savers, and by 2060 Treasury expects one-third of all withdrawals from super will be via bequests – up from one-fifth today.

“Superannuation in Australia has become a taxpayer-subsidised inheritance scheme. These generous tax breaks for super savers mean other, more economically distorting taxes, such as income taxes and company taxes, must be higher to make up the forgone revenue,” they said.

Regarding Division 296, they claim it is “nonsense” that not indexing the threshold will result in the tax affecting most younger Australians, or will somehow disproportionately affect younger generations.

“Even if the threshold remains unadjusted until 2055 – in the unlikely scenario where it remained unindexed for 10 successive parliamentary terms – it would still only affect the top 10 per cent of retiring Australians, who can expect to earn more than $142,000 a year on average throughout their careers.

They added Treasury’s approach of levying a 15 per cent surcharge on the implied earnings of the account over the year will impose a tax on unrealised capital gains because existing super earnings taxes are levied at the fund level, not on individual member accounts.

“Taxing capital gains as they accrue removes incentives to ‘lock in’ investments to hold onto untaxed capital gains, as the Henry Tax Review recognised, could create cash flow challenges for some investors with large super balances who hold illiquid assets,” they said.

“Instead of only moving on super balances larger than $3 million, the government should set the threshold at $2 million, saving another $1 billion a year.”

However, further reforms in superannuation tax could save a further $4 billion a year.

“Currently, many wealthier Australians receive a larger tax break per dollar contributed to super than many low-income earners,” Coates and Moloney said.

“To change that, the pre-tax contributions of people earning more than $220,000 a year should be taxed at 35 per cent, instead of the 30 per cent charged to those earning more than $250,000 currently. This would save the budget $1.1 billion a year.”

The annual pre-tax contributions cap should be lowered from $30,000 to $20,000.

“This would save upwards of $1.6 billion a year. Contributions above this level tend to amount to tax minimisation by wealthy older Australians, rather than genuine retirement savings,” they said.

“Co-contributions and carry-forward provisions – both intended to encourage catch-up contributions – instead facilitate tax minimisation and should be abolished, saving $1.1 billion a year.”

Retirees would pay some tax on their superannuation savings.

“Australia’s super system won’t be sustainable so long as most retirees can opt out of the tax system altogether from age 60,” Coates and Moloney added. “Super earnings in retirement – currently untaxed for most people – should be taxed at 15 per cent, the same as superannuation earnings before retirement. More than half of the benefit of tax-free earnings in retirement goes to the wealthiest 20 per cent of retirees. This change would save at least $6 billion a year today and much more in future.”