Memo to Labor: Don’t lift the superannuation guarantee

By Leith van Onselen

It appears the Labor Party is still considering speeding up the timetable for lifting Australia’s superannuation guarantee (i.e. compulsory superannuation contributions) from the current date of 2025 :

Revenue and Financial Services Minister Kelly O’Dwyer warned Labor against meddling with the current trajectory in an environment of flat wages growth.

“Increasing the superannuation guarantee earlier would only mean lower wages for Australian workers,” she told The Australian Financial Review.

Shadow treasurer Chris Bowen left open the option.

“The Liberal Party is ideologically opposed to our compulsory super system and the increase in the Super Guarantee – they’ve delayed it twice now,” he said.

“The Turnbull government will find any excuse to break its commitments on superannuation, which has seen millions of Australian workers with lower retirement incomes as a result”…

The Abbott government, which inherited a rate of 9.25 per cent, froze it at 9.5 per cent in the 2014 budget for four years and delayed the increase to 12 per cent until July 1, 2021…

Under a second change legislated later in 2014, it extended the freeze at 9.5 per cent until July 1, 2021 and the 12 per cent rate until July 1, 2025…

Each 0.5 per cent increase is worth almost $2 billion a year in lost revenue to the budget.

Raising the superannuation guarantee above its current level of 9.25% is unambiguously bad policy.

As noted by Kelly O’Dwyer 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 happens with superannuation is that people’s pay goes up anyway. It goes up each year, by and large. 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…

NEIL MITCHELL:

Well, so, just to get it clear, business will not be paying an extra dollar, right?

BILL SHORTEN:

No, I can’t see that business will be paying any more in the future than they otherwise would have been if the superannuation changes hadn’t gone through…

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 – almost $10 billion a year according to the article. 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.

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Comments

  1. How about just getting rid of super altogether! It costs the budget around $30B per year in tax concessions where the majority go to the wealthy who would have enough assets for retirement anyway. Another who takes time out of the work force or works part time are seriously disadvantaged by the system and raising the super guarantee to 12% only exacerbates the inequality of this flawed system.
    We are better off making the system voluntary and removing tax concessions and just paying a pension.

    • What a moronic statement… get rid of super and have no back up or savings???

      The problem with this website, too much ideology, not enough real world experience. Or applied logic????

      Imagine tax rates above 50% for every one!! A Ponzi scheme extraordinare. Budget shortfall would make the argument for lower tax company rates a minuscule joke! Especially taking into account future demographics… the patient breathless stupidity.

      The contributors have to make up their minds wether they are about business or socialism. Its fine to argue for universal healthcare, we all agree on that one – or limiting excess pay rates for public servants, but…

      • What a moronic reply! Is $30B in tax concessions worth giving people a little more savings? Household savings rates were higher pre super, so I don’t see how your assertion of “get rid of super and have no back up or savings” holds up.
        “Imagine tax rates above 50% for every one!” – where did I imply that?
        “The contributors have to make up their minds wether they are about business or socialism.” – how about fairness and ensuring that rent-seeking is not the dominant business model. One the topic of super, how is it fair that the wealthiest households get the lion’s share of tax concessions?

  2. If it’s not going into super, it’ll go into higher house prices, higher rents and groceries.

    Better to save than feed the ponzi. Lift it to 20%.

    • Agree in principle only if/when they get rid of the parasite that has their grubby hands all over it. Make all super accounts default to a government run 100% cash and low fee account and force people to opt into retail or industry super funds. All employers by default have to start the employee on the default option, once again until the employee opts in.

    • Better to create artificially high-paying jobs in the funds management industry than go to the guy currently working 20 hours a week trying to get to 30.

  3. I like the idea of forcing people to save through bigger super contributions. Takes away funds from leverage and speculate game.

  4. But people wont spend the money the way the financial industry want them to.
    How are they supposed to get thier mega bonueses if people are not forced to put money into super.
    Obviously the average person is too stupid to spend thier money the way they want to. Those super CEO’s they have mansions and collector cars to maintain

  5. Time has passedMEMBER

    The best period of time to have raised the super contribution was during the period of 2002 – 2007. At that time the economy was starting to heat up with the proceeds of the mining boom. Instead the government gave further tax cuts that resulted in more income being spent then and there further heating things up and higher interest rates at the time. The higher rates led to a higher dollar killing a lot of other industries in the process. Increasing the super guarantee is a great way to take current wage/inflation pressure out of the economy, therefore workers get the gains but it doesn’t fuel inflation. However we are not in that environment atm, hence we should not increase the super contribution until such time as such an environment returns.

  6. CycleSeasoning

    Humans don’t generally do too well at delaying gratification.

    Can you imagine that without compulsory superannuation, people would have otherwise saved and restricted that additional 6%-7% in post-tax wages ? I don’t think so. Think even higher house prices, or even more of our economy given over to discretionary retail spending.

    So, given the nature of humans, forcing them to save (or otherwise making the incentives so strong that it would otherwise cost your budget just as much) is pretty pragmatic policy.

    Perhaps we could improve the public education system to improve their holistic thinking, make them better citizens, with enough understanding of economic trade-offs that they don’t whinge continuously about 9.5% of their pay being restricted against their future liabilities, which would otherwise have to be paid for via higher taxes.

  7. ” 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. ”
    That is not true and has previously been demonstrated to not be true. I can’t get a reference for the stats right now but in the past it has not been true.
    Secondly – some will get their Super and their pay rises – those with industrial muscle that can deprive the populace of an essential service ; are in the union making large donations to the Labor Party; are employed by corporations that can screw the rest of the populace with higher prices without external competition. Every other poor battling b….rd has to pay up even more out of their wages by way of higher taxes and prices.
    There is too much simplistic BS written about this stuff.

    From a macro viewpoint where does the extra money come from? Then where does it go to? A portion of it is taken from productive, competitive, externally facing industries. The Super Funds redirect back through housing and commercial shopping centres. From there it gets spent on imported goods and appears as foreign debt. This country is just going ahead in leaps and bounds!!!

  8. ErmingtonPlumbingMEMBER

    It’s shouldn’t go up beyond 10%,…same for GST.
    How the Hell I’m I supposed to work out my GST if to goes to 12.5%!
    I can cope with moving decimal places and adding up, to work out the GST on my invoices.
    But 12.5%,…how the Fk do I do that!,…I’m not bloody Steven Hawking!

    • EP
      This is a TRUE story. At a stage in the past my son worked at the RBA. So he goes out for lunch with a girl (RBA economist). On the way they stop at a shop and she looks at a bag for $90. On being informed that there is 10% discount she turns to my son and says “(Name)! You are good at maths how much is that?”
      And then we sometimes wonder why the country is in a mess….and NO! It wasn’t Lucy despite the damning evidence to the contrary.

    • You actually pay GST? I thought you were smarter than that. Isn’t the ‘cashie’ the meal ticket to a house on the water?

    • drsmithyMEMBER

      Ermo, I thought you old guys were supposed to be good at this sort of practical math and knew how to use fractions ? 😛

      12.5% is 1/8th. Just halve it four times.

  9. I just wish emigrants were able to actually take the money with them. I have a bundle in Super that I can’t do anything with except putting in the lowest cost fund – doomed to follow Australia’s economic stagnation while the rest of the world moves on. When I’m 65 it will be a tiny fraction of my retirement savings.

    • Even StevenMEMBER

      Why do you need to follow Australia’s economic stagnation? You can presumably invest in international equity, property, or fixed interest?

  10. Even StevenMEMBER

    “Unambiguously bad policy”?

    That is too definite, by far. Reserve the “unambiguous” terminology for where it genuinely is that. It may be bad policy but it’s not clear cut.

    The principle behind superannuation is saving for one’s retirement. From a macro-economic perspective, the rationale behind this is that people will make better utility maximising decisions if they are saving for their own retirement (or have their own money at stake). This makes sense. And perhaps supports an increase to superannuation guarantee contributions.

    Unfortunately, your comments on superannuation sector also skimming fees are correct. Not to mention a multitude of other problems.

    I just object to the “unambiguous” part.

    • drsmithyMEMBER

      People used to save for their retirement before superannuation.

      Superannuation is there – other than lining the pockets of the finance industry – to gloss over the fact that most people won’t earn enough to be able to save enough for their retirement and provide an excuse to cut and/or eliminate the pension (along with all other forms of welfare), rather than properly funding it.

      • Even StevenMEMBER

        Yes. Too few people would save for their retirement. That’s the point.

        Many aspects of the superannuation system should be reformed, but it doesn’t invalidate its core purpose.

      • drsmithyMEMBER

        Everybody who could, would save for their retirement, regardless of superannuation. Like they did before superannuation.

        The problem is most people don’t earn anywhere near enough to do so (and as wage suppression continues apace, this situation is only worsening, combined with the inevitable outcomes of automation, it will become catstrophic).

        That’s the point.

        With that in mind it becomes obvious the core purpose of the superannuation system is to provide tax dodges for the wealthy (who have spare money to save) and gravy for the finance industry.

      • Even StevenMEMBER

        “Everybody who could, would save for their retirement, regardless of superannuation. Like they did before superannuation.”

        Unsubstantiated claim. I will accept that those who are wealthy(er) would have saved anyway without super as they would not have accepted age pension as sufficient. And those who were poor(er) would not have bothered with super as they didn’t have the money to put aside and were always likely to be dependent on age pension.

        However, this leaves the middle-income bracket in a more ambiguous position where they may be ‘induced’ (through availability of super) to put more away for their retirement.

        I accept your point that the wealthy are using super as an effective tax dodge / estate transfer mechanism. It has provided minimum benefit to the public purse to support these people.

        I say again though, it does not invalidate the core (intended) purpose of super even if it has been abused.

      • drsmithyMEMBER

        Unsubstantiated claim.

        Say what now ? Super has been around for quarter of a century. What do you think humans have been doing for the other tens of thousands of years they’ve been around ? The phrase “saving for a rainy day” dates from the 16th century, FFS.

        I will accept that those who are wealthy(er) would have saved anyway without super as they would not have accepted age pension as sufficient. And those who were poor(er) would not have bothered with super as they didn’t have the money to put aside and were always likely to be dependent on age pension.

        LOL. I love the way you phrase it as “not have bothered” like it’s being too lazy to fix a hole in your sock, rather than not being able to because every cent earned is spent on living.

        However, this leaves the middle-income bracket in a more ambiguous position where they may be ‘induced’ (through availability of super) to put more away for their retirement.

        You mean try to take advantage of the same tax dodges used by the wealthy ? Talk about cutting off your nose to spite your face.

        And we haven’t even touched on how in a generation or two probably half the population will be unemployed and unemployable, and another generation or two after that it’ll be more like four fifths. Superannuation ain’t going to help them.

      • ErmingtonPlumbingMEMBER

        I’m with you 100% Smithy on this one,…It’s a Scam.
        Forcing youg people to be “investors” for over 50 years of their lives, with the inability to access “their” money has been an almost unbelievable slight of hand and enormous gift to a rapacious and largely courpt financial services industry,…forcing everyone to Gamble theur chips in the Global casino,….for most of their lives!
        The Plutocrats must be in hysterical laughter at how easily the plans have been conned.
        All income should be taxed exactly the same.

      • Even StevenMEMBER

        @smithy

        I think you missed my point. Unsubstantiated claim that it applies to all people. As I explained, there is good reason to assume the existence of super has not materially changed the propensity for people to save for their retirement in the wealthy or poor brackets, but there is good reason to think it may have for the middle income brackets (yes, because of the tax benefits).

        Therefore, the intent of super (I.e. people to save for retirement, relieving the public purse of some of the burden) is valid. The implementation of it has been very poor however. It is poorly targeted and it is far more costly than it should be. But the concept itself is sound.

        Yes ‘bothered’ was a poor choice of words. I meant ‘bothered considering they have far more pressing concerns like putting food on the table’.

      • drsmithyMEMBER

        […] but there is good reason to think it may have for the middle income brackets (yes, because of the tax benefits).

        I think this would fall into the category of “unsubstantiated claim”.

  11. Unless I’m missing something I’m not quite sure about this; especially when hiring people isn’t exactly cost constrained in the current economy’s setting but demand-side constrained (i.e. lack of consumers, lots of household debt)? Companies/capital is still making quite a lot of money in terms of overall GDP with corporate share of GDP at a high; on the whole if wages rise it isn’t as much of a factor in whether to employ/fire people all that much in this context. In other words its still worth employing you if that industry still has growth prospects and/or a need to invest. Employers mostly negotiate based on take home pay that they know people will accept and how much value that employee will bring – since wages are sticky somewhat wages won’t come down too much. It’s a payrise forced in advance effectively and if the super system were not a rort would go into investment rather than consumption. If the boss needs you and see it to be worth it they will pay you the minimum they can reasonably get away with; since super money isn’t accessible I don’t think it matters that much in a pay negotitation expect in cost sensitive industries. In many industries wages are not cost-priced. I know in my industry when people offer “packages” everyone looks at the expected take home pay to see whether taking the job is actually worth it. If it actually slows wage growth it won’t be quite uniform; different industries will have different effects.