The interim report found that the "embryonic" growth in direct leverage by superannuation funds, if allowed to continue, "may create vulnerabilities for the superannuation and financial systems".
"The general lack of leverage in the superannuation system is a major strength of the financial system," said the report.
"Although direct leverage in superannuation is small, the current ability to borrow directly may, over time, erode this strength and create new risks to the financial system."
Mr Baker said the report "makes it clear" that it considers the relaxation of the prohibition on gearing in super "to have been a mistake".
"[The FSI interim report] does not mince words on this one: its view is that leverage should not be a core focus of any super fund and is inconsistent with retirement income policy," said Mr Baker.
The report lines up four key objections to gearing within super, said Mr Baker: it undermines the role of super in stabilising the financial system in times of stress; it creates a 'moral hazard' via the transfer of ultimate risk to the government; it is "correlated with bad advice"; and it extends super tax concessions from saved funds to borrowed funds.
"The first objection pushes back on the traditional view that SMSFs are too fragmented to have any systemic effects," he said.
"The report suggests such a scenario could restrict a reprise of the financial crisis situation, where the super system was successfully able to recapitalise the banking system," said Mr Baker.
The 'moral hazard' of the age pension safety net may encourage SMSFs to take excessive risks, he said.
"The link with bad advice was something of a surprise, with the report quoting ASIC data that what the regulator considers poor SMSF-related advice is often part of a gearing strategy," Mr Baker said.
But the "most interesting" objection to gearing in super relates to the interaction with tax concessions, he said.
"This report argues for the concept that tax concessions for super should apply only to monies which have been saved rather than borrowed; and that gearing in super creates an unintended extension of super tax concessions," said Mr Baker.
"It points out there are already plenty of opportunities and tax benefits to borrow outside of super."
Indeed, it is a "relatively easy" exercise to construct an SMSF that never pays tax at all, Mr Baker said.
