The argument over raising compulsory employer superannuation contributions often misses the impact on the wider economy and ignores alternatives to boosting retirement incomes.
There is a sustained campaign for the Australian Government to increase employer superannuation contributions to 12 per cent of a worker’s wage (from 9.5 per cent under the superannuation guarantee), and an equally energetic group arguing against the move.
Industry Super Australia, representing the large industry-based superannuation funds, argues that Australians support an increase in the guarantee, and without it will have to work longer into retirement or rely on the Age Pension.
However, both the Henry Tax Review and the Parliamentary Budget Office have agreed that employees pay for compulsory super via lower take-home wages. When compulsory super was increased from 9 per cent to 9.25 per cent of wages in 2014, the Fair Work Commission concluded that employers offset the increased cost by cutting annual wage increases by a corresponding amount.
Middle Australia ends up poorer
Research conducted by the Grattan Institute reveals that on any reasonable assumption, more compulsory super will leave middle-income earners worse off, taking A$20 billion from wages. After adjusting for inflation, Grattan figures suggest the typical (median) 30-year-old Australian worker earning A$58,000 today would lose about 2.5 per cent of wages annually, and over a lifetime their income would be almost 1 per cent (about A$30,000) lower.
Admittedly, middle-income Australians can expect a 1 per cent boost to retirement income. However, Grattan associate Owain Emslie says pensions are benchmarked to wages, and if wages are lower, this will mean lower superannuation contributions.
“It hurts people in the middle, who are more likely to struggle to acquire enough super for retirement in the first place,” says Emslie.
“If more super is offset by a lower pension, it’s these people in the middle who can end up going backwards.”
Super for low-income earners
However, there’s better news for the bottom 10 per cent of low-income earners who, based on Grattan’s numbers, would receive a slight increase in lifetime income, and receive close to the full Age Pension.
One of the other positives of raising compulsory super is extra tax breaks, but they only benefit the wealthiest 20 per cent of Australian earners, who are unlikely to receive the Age Pension.
Based on Grattan’s modelling, these super tax breaks would cost taxpayers an extra A$2 billion to A$2.5 billion, which would dwarf any budget savings on the Age Pension until about 2060.
Other ways to raise superannuation balances
It’s clearly time, argues Paul Drum FCPA, CPA Australia’s general manager external affairs, to stop regarding the percentage by which compulsory super goes up as the only solution to increasing retirement saving.
He says other variables such as fees, affordability, the impact on business, fund returns and flaws within the super system should be addressed within a much broader conversation.
“When it comes to retirement savings, there is far too much emphasis on super. What about looking at lower tax on passive income, like rent or term deposits?” says Drum.
“Sadly, those demanding compulsory super goes to 12 per cent are those with the most vested interests.”
In calling for proposed compulsory super increases to be abandoned, Grattan Institute also argues for fee reductions and addressing flaws in the super system.
“The Institute would like to see other solutions adopted around relaxing the Age Pension asset test, and a boost to commonwealth rent assistance,” says Emslie.
The government might put planned increases on hiatus until after the results of its inquiry into retirement incomes, the first major review of the retirement savings system in 30 years.
In releasing the terms of reference, Treasurer Josh Frydenberg and the assistant minister for superannuation Senator Jane Hume said the review will look at the three pillars of the retirement income system: the age pension, compulsory super and voluntary savings.
Frydenberg says the review will help “determine future policy positions by creating a fact base of what is happening in the system, particularly as we have an ageing population, people are living longer and our superannuation pool is growing dramatically over time”.
However, he says the 12 per cent increase remains government policy and is legislated to proceed. This is despite some coalition backbenchers, such as Liberal Senator Andrew Bragg, calling for super to be made voluntary for anyone earning under A$50,000 annually.
Based on research from Rice Warner Actuaries, this would save the government A$1.8 billion in the first year alone.