Boosting compulsory super to 12% could hurt wages, report warns
Increasing the superannuation guarantee to 12% will reduce workers’ wages and could actually hurt the retirement incomes of low-paid workers, the Grattan Institute has warned.
The finance and services minister, Kelly O’Dwyer, gave a strong indication in early April that the Coalition would keep the guarantee frozen at 9.5% in the budget, when she argued that lifting the guarantee would exacerbate sluggish wage growth.
The Grattan Institute has now called on the Coalition to abandon the bipartisan consensus to lift the guarantee which would otherwise increase the proportion of an employee’s salary paid into superannuation to 12% by 2025.
In a paper, released on Monday, the Grattan Institute chief executive John Daley and co-authors Brendan Coates and Trent Wiltshire cited the Henry tax review to argue there was “no magic pudding” when it came to increasing the guarantee.
“Higher compulsory super contributions are ultimately funded by lower wages,” they said.
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Raising the guarantee to 12% would mean people saving for a higher living standard in retirement than they have enjoyed during their working lives, the paper said, backing an argument made by O’Dwyer to the Australian Financial Review’s banking and wealth summit in April.
The Australian Association of Superannuation Funds recommends that to have a “comfortable” lifestyle at the age of 65, a single person needs $44,011 a year and a couple needs $60,457. The Grattan authors said that level of income “in fact supports an affluent lifestyle”.
The Grattan authors state that the superannuation industry “assumes that incomes should grow through retirement in line with future living standards, and not just keep pace with inflation”.
“Most retirees can expect a wageadjusted retirement income of at least 70% of their pre-retirement income,” they said, citing the level recommended by the OECD.
The Grattan authors argued that increasing the super guarantee may actually reduce retirement incomes for the bottom 40% of income earners because they will lose pension payments.
Since pensions are indexed to wage growth, lifting the super guarantee could make existing pensioners worse off by up to $460 a year for singles and $640 a year for couples by suppressing the value of their pension payments.
The Grattan authors argue highincome earners would be the big winners, because by saving more of their income they would be taxed at a flat 15% rate on extra contributions to their super fund, lower than their current rate of income tax.
Increasing the super guarantee hurts the budget for the same reason: “The 2014-15 budget calculated that delaying an increase to the super guarantee of 0.5% saved $440m in 2017-18,” they said.
“Raising the super guarantee to 12% could therefore cost the budget around $2bn a year in additional super tax breaks.”
A Treasury analysis in 2013 calculated that these costs outweighed lower pension costs, and the savings would not balance out foregone revenue until 2050.
“If our politicians really want to help low-income workers, and are serious about fixing the budget, they should abandon plans to raise the super guarantee,” the report concluded.
Daley said the government “needs to act soon” to cancel the increase scheduled for July 2021, since planned increases would soon be built into the next round of threeyear wage agreements.
When O’Dwyer signalled the government would continue the freeze, Labor and the Australian Council of Trade Unions backed the existing policy for a 12% superannuation guarantee.
The shadow treasurer, Chris Bowen, said in Labor’s budget submission, the Financial Services Council estimated the a two-year freeze on the super guarantee would cost an individual retiring over the next decade $39,000 in savings.
But the Australian Chamber of Commerce and Industry’s acting chief executive, Jenny Lambert, backed O’Dwyer’s argument that super payments reduced take-home pay.
She told Guardian Australia that workers “will be far less likely to see a return to higher wage increases if increased labour costs are diverted into superannuation”.