The Australian’s Adam Creighton has today debunked the commonly held mis-conception that the cost of raising compulsory super (the ‘superannuation guarantee’) from 9.5% to 12% would be borne by employers, not employees, through lower take-home pay:
Penny Wong… on Lateline this week echoed remarks by other Labor politicians that workers would be worse off as a result of the change [freezing the rise in the super guarantee to 12%], dismissing the idea that compulsory super was paid by employees and so their future take-home pay would be higher.
Even the Fair Work Commission, among the most economically naive government agencies, said the increase in compulsory superannuation from July 1 this year had “moderated” its decision to grant a 3 per cent increase in the minimum wage. Is the former finance minister going to claim that personal income tax, which is paid physically to the tax office by employers, is also a cost on business, and not workers? It is unlikely she would claim cutting income tax was a “slug” to employees.
The legal incidence of a payment or tax bears no relationship to its economic, or actual, one. Businesses might write the cheques that fill workers’ superannuation accounts but they ultimately bear none of the cost.
By and large, the amount businesses are willing to spend on labour is fixed in the long run. No laws can alter this amount. They can slice and dice the aggregate — income tax, mandating minimum wages or insisting 9.5 per cent of wages be siphoned off into accounts and so on — but what businesses are willing to pay is determined by the structure and productivity of the economy…
The difference between legal and economic incidence is not rocket science, yet politicians get away with conflating them.
Like Creighton, I have been frustrated by the procession of people claiming that freezing the superannuation guarantee would necessarily harm workers. Few seem to understand that compulsory superannuation is not a ‘free lunch’, and is instead borne by workers via lower take-home pay (less disposable income).
But don’t just take our word for it – the Henry Tax Review drew similar conclusions:
Although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth. This means the increase in the employee’s retirement income is achieved by reducing their standard of living before retirement.
Which is why the Henry Tax Review explicitly recommended the superannuation guarantee be retained at its current level, not raised to 12%, so that it didn’t adversely impact lower income earners:
The retirement income report recommended that the superannuation guarantee rate remain at 9 per cent. In coming to this recommendation the Review took into the account the effect that the superannuation guarantee has on the pre-retirement income of low-income earners.
As argued yesterday, those that genuinely care about improving outcomes for lower income workers should instead lobby to make superannuation concessions progressive. This way, these workers could enjoy a boost in their retirement savings without also incurring a reduction in their take home pay.
