Self-funded retirees would have to boost their savings by up to 9% to make up for Labor’s proposal to end cash rebates for excess imputation credits, according to new modelling.

The research paper by three economists at the Australian National University found that dividend imputation helped retirees boost their consumption by between 5% and 6% and created a “significant bias” in favour of Australian shares in retirees’ portfolios.

Labor has downplayed the significance of the report, noting that it does not model its changes exempting pensioners, and that it acknowledges that high-income earners would be hit hardest by the policy.

In March, Labor released its plan to end cash refunds for excess imputation credits for individuals and superannuation funds to save $11.4bn over four years. Franking credits will still be claimable as a deduction to reduce tax paid on income, and pensioners are exempt from the policy.

Q&A What is a dividend imputation? Show Hide When companies pay dividends to Australia​n​ shareholders out of after-tax profit, shareholders receive franking credits​,​ a credit against their own tax​ ​bill based on the tax paid by the company. This system,​ which is ​known as​"​dividend imputation​", is unusual – only ​four other countries in the world use it.



However, in 2000​ ​the then treasurer, Peter​ Costello, made the system even more generous to shareholders by allowing them to claim a cash refund if they received more in franking credits than they owe​d ​in tax. Because income from superannuation is tax free for people over 60, high​-income retirees can use franking credits to get a cash "refund" of​ ​more than 40 cents for every dollar they receive in dividends.



The cash payments cost the budget $550m the first year they were paid. The ATO estimates that​ ​the measure cost $4.6​bn​ in 2012-13, and Labor claim​s that abolishing the payments​ ​from 2019​ ​will save $8bn a year.



The research paper found that dividend imputation “delivers considerable value to retirees”. On average, retirees would need to boost their superannuation balance at the age of 65 by 8% to 9% to make up for not being able to claim franking credits in retirement, it found.

For example, a retiree with $200,000 in superannuation would need $16,540 to make up for the loss of dividend imputation, rising to $43,069 for a person with half a million in retirement savings.

The paper acknowledges that “wealthier individuals are benefiting from the tax credits to a much greater extent” which raises “some question around equity”.

The cost to the government of providing access to imputation credits “grows in value with initial balance”. For example, the cost to the budget across retirement for a person with an initial balance of $100,000 is about $30,000, rising to $80,000 for those with superannuation of half a million dollars and $400,000 for an initial balance of $1.6m.

The paper argues that although the cost of dividend imputation “may seem relatively expensive” it offers “social benefits”, such as boosting consumption in retirement or reducing the amount workers need to save in superannuation before retirement.

Bill Shorten doubles down over franking credit cash rebates Read more

“Access to imputation credits in retirement therefore helps address the issue of adequacy and reduces the need for a higher superannuation guarantee levy,” it says.

“Removal of full access to imputation credits in retirement could unwind the benefits mentioned above and would undoubtedly solicit significant political backlash from retirees.”

Labor’s shadow treasurer, Chris Bowen, said “more than half of all cash refunds going to self-managed superannuation funds are to those with balances of more than $2.4m” and reiterated that pensioners are exempt from Labor’s policy.

“The paper also notes the substantial home bias generated by imputation credits in retirement – our policy will actually help to de-risk Australia’s retirement savings pool and encourage people to seek out a more diversified portfolio.

“Given the vast majority of retirees with superannuation savings are in super funds with tax liabilities, most retirees won’t see much of a change to their retirement incomes under Labor’s policy.”

Associate professor Geoffrey Warren – one the report’s co-authors – told Guardian Australia that Bowen was right that the majority of the benefit of dividend imputation goes to high-income earners “at the moment”.

“But over time, more people are going to be moving into self-funded retirement,” he said.

“Part of the government policy is to support people to support themselves in retirement, and this will make that job harder … more people will be caught in the net.”