OPINION: Opposition leader Tony Abbott’s budget reply pledge to discontinue the Low Income Earners Superannuation Contribution (LISC) will hit the retirement savings of thousands of low-paid Australian workers.

This scheme, which provides a credit of up to $500 directly back to the superannuation accounts of workers earning less than $37,000 per year, would be scrapped if the Coalition is elected in September “because that’s also funded from the (mining) tax that isn’t raising any revenue”.

Ironically, although Tony Abbott keeps sledging the Government about not implementing measures recommended by the Henry tax Review, he is planning to axe one of the few changes that can be traced back to the findings of that Review.

The superannuation system is not a fair system. The heart of superannuation policy is the link to what people earn, with a proportion of current earnings set aside for retirement. Therefore the value of tax concessions on superannuation increases as a person’s current marginal tax rate and superannuation contributions increase.

In April 2012 Treasury estimated that 23.4% of superannuation tax concessions wouldgo to the top 5% of earners.

Unfortunately, low income earners don’t have the capacity to save much – their income goes on necessities like food and housing costs. What makes this situation even less fair is that the superannuation guarantee is a form of forced savings for employees as it comes out of their wages – deferring income until retirement.

These superannuation contributions are taxed at 15%, which means that a person in the lowest tax bracket gets no tax advantage as that is the same as the rate of tax they would normally pay. It is even worse for a person earning less than the tax threshold: they would pay no tax on their earnings, but pay 15% tax on superannuation contributions.

The Henry Review recommended that this inequity be addressed, and although the Government did not adopt the specific recommendation, it did introduce the LISC to rebate the tax that low income earners pay on their superannuation contributions.

The credit of up to $500 paid back to low-income workers is based directly on the tax paid by the fund: 15% on concessional contributions, which includes contributions paid by an employer or tax deductible contributions by a person who is self-employed.

Superannuation tax concessions are based on encouraging savings: tax savings apply to salary sacrificed contributions, and the government co-contribution scheme requires people to make personal after tax contributions. The LISC is different as it recognises that the superannuation guarantee is forced savings, and grants a tax concession without requiring additional contributions. This boosts retirement savings significantly without reducing take home pay.

There does not yet seem to be a widespread awareness of the new LISC. Unlike some of the other measures that the Coalition has said that it will attack, the LISC legislation has been passed, and it will be paid from the current financial year.

The first payments will be made after income tax returns are lodged, and as it will be paid directly into superannuation accounts, it will be less visible to recipients when it is paid.

Perhaps this is what makes the LISC an easy target. The justification for removing the offset is the failure of the mining tax to collect the expected revenue, but the basis for the LISC is to address an obvious inequity in the system.

The 2013/14 Budget Papers show it is expected to cost the government about A$975 million in the coming year, but this dwindles in comparison with the estimated A$31 billion of tax concessions to be provided in the same period.

Although the Labor government introduced the concession on the back of the mining tax, if the Coalition is genuinely concerned about an unfunded cost, it could be funded by addressing some of the existing inequity in the distribution of superannuation concessions.

The big losers from this announcement are the 3.6 million low paid workers, particularly those in casual or part-time work who would benefit from the contribution. Women are overrepresented in this group, as are young people, recent migrants from non-English speaking countries, and indigenous people.

Although the deferral of the proposed increases in compulsory superannuation contributions will also impact on retirement savings, at least this should result in low-paid workers receiving wage rises that would otherwise be channelled into superannuation. However there is no similar benefit to workers from removing the LISC.

The LISC, while not a perfect policy, did address the most obvious inequity in the superannuation system. The Coalition proposal to abolish it is a backward step that will hurt those who can least afford it.

Helen Hodgson is a Senior Lecturer in the School of Taxation and Business Law at UNSW. 

This opinion piece was first published in The Conversation.