The Assistant Minister for Superannuation, Janet Hume, has given the strongest indication yet that the Coalition will scrap the legislated increase in the superannuation guarantee (compulsory super) to 12%, as well as make superannuation contributions voluntary for those aged under 25. From The SMH:
Jane Hume urged warring industry and retail funds to “lay down their arms” and set a deadline of 2021 for an overhaul of the system – the year the superannuation guarantee is scheduled to rise from 9.5 per cent…
The first step… would make all superannuation opt-in for those aged under 25…
“If a system is compulsory and it quarantines nearly $1 in every $10 that you earn for up to 40 years, it is imperative that the government make that system as efficient as possible.
“In my mind, no government in good conscience can demand workers compulsorily quarantine more of their money. I don’t think the government can morally ask workers to give up more of their current earnings and put them into an inefficient system.”
Fantastic news. Raising the superannuation guarantee to 12% will cost the Budget more in lost personal income tax revenues (since superannuation in concessionally taxed) than it will save in Aged Pension costs.
The below chart from Grattan says it all: “both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments”:
The Henry Tax Review also explicitly acknowledged that compulsory superannuation costs the federal budget more than it saves in Aged Pension costs:
“An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs).”
Raising the superannuation guarantee would also lower wages, since super contributions are paid for by workers, not employers.
According to the Grattan Institute, increasing the superannuation guarantee to 12% would cost workers up to $20 billion a year in foregone wages once fully implemented in 2025-26, or close to 1% of GDP:
The Parliamentary Budget Office came to a similar conclusion in April:
“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”.
As did the Henry Tax Review, which explicitly recommended against raising the superannuation guarantee:
“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…
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”.
Finally, there is no sense in raising the superannuation guarantee when we know that, because of the 15% flat tax on contributions/earnings, the lion’s share of benefits will flow to higher income earners? The below chart from the ABS tells the story:
In 2017-18, total household superannuation benefits received was $112,009m. Households in the highest income and net worth quintile received 47% and 74% of total household superannuation benefits, by comparison households in the lowest income and net worth quintile received 3% and 2% of total household superannuation benefits. There was an increase in the share of total household superannuation benefits received by households in each quintile from the lowest to the highest for both income and net worth quintiles, with the increase being particularly steep from the fourth to the highest net worth quintiles. The ratio of the value of the highest to lowest quintiles was 15.5 and 45.7 for income and net worth quintiles for superannuation benefits received.
Rather than blindly raising the superannuation guarantee, as advocated by Labor and the industry, superannuation concessions should be made more progressive. This way, low income workers could enjoy a boost in their retirement savings without also incurring a reduction in their take home pay and destroying the federal budget, while also improving equity.