Fairfax’s Peter Martin has joined the chorus urging the federal government to abandon scheduled plans to raise Australia’s superannuation guarantee (i.e. compulsory superannuation contributions) from 9.5%:
… people who work in the finance industry and the trade union movement and the employer organisations… would get an extra $10 billion a year of our wages to play with, if, as scheduled, compulsory contributions climb from 9.5 per cent of our salaries to 12 per cent in the space of a few years.
They would be doing more than playing with our wages. They’d be collecting hundreds of millions of dollars more in fees for doing it, for making essentially the same investment decisions as they are making at the moment.
But think what it would mean for the rest of us, for the vast bulk of the population who (after a five-year phase in period) would have an extra 2.5 per cent of each year’s salary taken from us and put somewhere else. If we were told we were about to get a tax increase of that size (and in essence it would be a tax increase) we would be enraged. All the more so because the phase-in will be brutal…
Less well-off Australians are trapped. Saving little outside super because of more immediate demands, such as rent or mortgages or raising families or putting themselves through university, they are forced to accept less take-home pay than they would have got at the times in their lives when they need it most in return for the promise of more when they were retired and mightn’t need it as much…
If Labor wins the next election, it will have to either wind back its schedule itself or risk sending living standards backwards.
If compulsory super stayed at 9.5 per cent, anyone who wanted to would still be able to put away extra and anyone who couldn’t wouldn’t have to. We could hang onto our money.
New analysis from The Grattan Institute supports this view:
The Grattan Institute says the bipartisan policy to lift the rate of compulsory superannuation contributions should be dumped because the vast bulk of benefits are heavily skewed towards the wealthy, while also worsening the budget bottomline.
“Despite what the super lobby claims, the current 9.5 per cent super guarantee – taken together with the age pension and non-super savings – is sufficient to deliver an adequate retirement income for low and middle-income Australians”…
“Increasing the rate will not help these earners in retirement: most of the benefits will flow to high-income earners, while low-income Australians could cop both lower incomes in retirement and lower wages today”…
The institute also repeated its criticism that future increases should be scrapped because of the budgetary impact of revenue foregone thanks to the concessional tax rates enjoyed by superannuation. It believes the budget would be $2 billion a year worse off if the guarantee hits 12 per cent.
The former Gillard Labor Government had originally legislated for the superannuation guarantee to rise to 12% in 2019. However, the Abbott government, which inherited a superannuation guarantee rate of 9.25%, froze it at 9.5% until 1 July 2021 and delayed the scheduled increase to 12% until 1 July 2021.
According to Martin, this year’s Budget will contain the scheduled rise from 2021, meaning it is yet to be abandoned by this government.
Regardless, raising the superannuation guarantee above its current level of 9.5% is unambiguously bad policy.
As noted by Peter Martin above, the cost of compulsory superannuation contributions falls on the employee, not on the employer, and any increase in the superannuation guarantee will lower one’s take home pay. This point was explicitly acknowledged by the Henry Tax Review when it stated:
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.
As Minister for Financial Services & Superannuation in the former Labor Government, Bill Shorten also acknowledged that superannuation is paid for by employees, not employers:
NEIL MITCHELL:
Okay. When superannuation goes up from 9 per cent to 12 per cent, who pays?..
BILL SHORTEN:
What will happen is that superannuation, the increases to superannuation, will be absorbed as part of people’s pay rises… they get a pay rise, of which some will probably go in super, yes…
NEIL MITCHELL:
Okay. So you’re saying that the superannuation increases will be paid for by absorbing money out of the wage increases.
BILL SHORTEN:
That’s the evidence…
Given this fact, where is the logic in forcing lower income earners to sacrifice more of their pay into superannuation, especially when real wages are falling? Many are already struggling with the high cost of living, so it makes little sense to reduce their disposable incomes even further.
The Henry Tax Review agreed, which is why it recommended that the superannuation guarantee be retained at its current level, not raised to 12%:
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.
Let’s also not forget that tax concessions on superannuation already cost the Budget an inordinate sum, and are growing rapidly. Raising the superannuation guarantee to 12% would mean they become an even bigger Budget drain over time. Meanwhile, it would do little to boost superannuation savings for lower income workers – those most likely to become reliant on the Aged Pension – given the lion’s share of superannuation concessions would flow to higher income earners (even after the recent modest reforms).
Put simply, Labor should stop deluding itself and the Australian people in championing an increase in compulsory superannuation.
Such a move would merely heighten inequities already present in Australia’s superannuation system. It would rob younger (and lower paid) workers of much-needed disposable income and worsen the long-term sustainability of the Budget.
About the only winners from such a policy would be the superannuation industry, which would get to ‘clip the ticket’ on more funds under management and earn fatter profits.
Indeed, there are few better rent-seeking industries to be in than superannuation, which is why reforms to fix the underlying problems in the system (e.g. excessive fees, unequal distribution of concessions on contributions/earnings, etc) is critical before Labor even considers raising the compulsory superannuation rate.
