After Labor last month doubled down on lifting Australia’s superannuation guarantee (compulsory superannuation) to 12%, the Grattan Institute has issued a firm rebuke in its pre-election Orange Book:
[Grattan] urges the next government to abandon the current plan to increase compulsory superannuation payments from 9.5 per cent to 12 per cent, which would force workers to accept lower living standards today even though they are already likely to enjoy living standards in retirement comparable to living standards while working…
…the Commonwealth Government also gives up about $35 billion a year – or 1.9 per cent of GDP – in superannuation tax breaks. Unlike most OECD countries, the budgetary cost of these tax breaks are expected to rise in coming decades to 3 per cent of GDP by 2060. The budgetary costs of these tax breaks are unsustainable. Half the benefits flow to the wealthiest 20 per cent of households, who already have enough resources to fund their own retirement, and who are unlikely to ever receive the Age Pension.
Australians pay $30 billion a year in superannuation fees, almost 2per cent of Australia’s annual GDP, and more than the $23 billion we spend each year on energy. Australian super fees are some of the highest in the OECD (Figure 10.4)…
The next federal government should as a priority establish an independent inquiry into Australia’s retirement incomes system, including the appropriate roles of compulsory superannuation and the Age Pension in providing for Australians’ retirement incomes…
Assuming that the review comes to similar conclusions to those that we have reached, The next federal government should abandon plans to increase the rate of compulsory superannuation contributions to 12 per cent…
The Super Guarantee forces people to save while they are working, so they have more to spend in retirement. But there is no magic pudding when it comes to superannuation. Higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today.
The main beneficiaries from a higher Super Guarantee would be high-income workers, who receive a much larger tax concession than low-income workers and who will receive a relatively small share of their total income in retirement from Age Pension payments. But for most low-income workers, retirement incomes would not rise materially, because lower Age Pension payments would largely erode the increase in income from savings (Figure 10.5 on the next page).
Raising the Super Guarantee doesn’t just reduce workers’ take-home pay. It also hits the Commonwealth Budget. Instead of workers receiving wages that are then taxed at full marginal rates of personal income tax, the extra compulsory contributions to their super fund are taxed at 15 per cent. We estimate that raising the Super Guarantee to 12 per cent could cost the budget $2 billion to $2.5 billion a year in additional super tax breaks.
Superannuation tax breaks will continue to cost the budget more than they save in pension payments until about 2060, according to Treasury analysis in 2013. The cumulative increase in Commonwealth public debt from a 12 per cent Superannuation Guarantee would exceed 10 per cent of GDP by 2050.
Earlier this month, the Parliamentary Budget Office (PBO) explicitly warned that raising the superannuation guarantee to 12% will necessarily lower wages:
“The increase in the superannuation guarantee to 12 per cent will likely lead to lower wage increases, shifting a greater proportion of earnings into the superannuation system”.
The Henry Tax Review also explicitly noted that compulsory superannuation is paid for by workers:
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.
And also 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.
Why has Labor chosen a policy that will unambiguously lower workers’ wages and blow a hole in the Budget?