The federal budget could save up to $13.5 billion a year by curbing superannuation tax breaks that disproportionately benefit the richest Australians, according to a new Grattan Institute report.

The think tank said on Monday that the Albanese government should expand its recent crackdown on super concessions and target a number of other tax breaks across the budget, including the tax-free status on super earnings extended to millions of Australians after they retire.

Superannuation tax concessions cost the federal government $45 billion a year in foregone revenue, two-thirds of which benefits the top 20 per cent of income earners, Grattan said.

And the majority of the resulting boost to balances is never spent, they said, with one-third of super withdrawals by 2059 forecast to come from inheritance, up from just a fifth in 2020.

Grattan Institute economic policy program director Brendan Coates said on Monday the super system is “unfair and unsustainable”.

“Super has become a taxpayer-funded inheritance scheme,”  he said.

“Reining in super tax breaks is a responsible way to boost government revenues in a world where the government has committed to higher spending on defence, health care, aged care, and disability care.”

Prime Minister Anthony Albanese unveiled a crackdown on super tax breaks earlier this year, promising to save billions by limiting concessions on accounts worth more than $3 million.

But Grattan says between $11.5 billion and $13.5 billion a year could be saved by also targeting the generosity of pre-tax contribution caps, government co-contributions, the tax-free status of earnings for retirees, and more.

The think tank also believes that would make room to make the system more generous for lower-income Australians, recommending an expansion of tax offsets for those earning up to $45,000.

“These changes are fair,” Grattan said in its report.

“Retirees would pay some tax on the earnings from their super – the same as those working today – and much less than younger workers pay on their wages.

“Taxing super earnings in retirement isn’t retrospective because it only applies to future earnings.”

Wealthiest Australians cash in

Grattan’s report found almost 90 per cent of tax breaks on retirement earnings go to the wealthiest 20 per cent of retirees.

Between $5.3 billion and $7.3 billion a year could be saved by instead taxing these earnings at 15 per cent, affecting about two million Australians.

“Tax-free retirement earnings mean an increasing number of Australians are checking out of the tax system, while the budget faces spending pressures associated with an ageing population,” researchers said.

A further $3 billion in estimated savings could be drawn from a new “High Super Balance Surcharge”, Grattan recommended.

It would apply a 30 per cent tax rate on earnings from super accounts worth more than $2 million – the top 1 per cent of retirement balances.

“Balances above $2 million benefit from substantial tax breaks that are not needed for comfortable retirements, and will mostly just boost bequests [inheritance],” Grattan said.

The case for moving superannuation away from intergenerational wealth transfer was outlined by Treasurer Jim Chalmers in early 2023.

He has unveiled plans to legislate a purpose for the retirement system that emphasised its role in providing comfortable retirements.

But current rules will see the role of inheritance in super keep rising.

Federal Treasury analysis shows that by 2059 $1 in every $3 paid out of super will be a death benefit, up from $1 in $5 in 2020.

Over the past decade the wealthiest 20 per cent of Australians received on average three times as much from super inheritance than the poorest 20 per cent, Grattan noted in its report.

Making matters worse, researchers said the $45 billion in super tax breaks that remain in the budget will also worsen intergenerational inequality in coming decades, because government spending on health care, aged care, and pensions will soar as the population ages.

“There will be fewer working-aged people for every person over 65 to pay for it,” Grattan said.

“The share of households older than 65 paying tax has halved over the past two decades, and average income tax paid has barely changed for people older than 65, despite strong growth in their incomes and wealth.”