The Grattan Institute has slammed the legislated increase in the superannuation guarantee (compulsory superannuation) to 12%, claiming it would rob middle income earners of around $30,000 (1%) of lifetime earnings. From The AFR:
“It’s hard to think of a policy less in the interests of working Australians than higher compulsory super contributions,” said Brendan Coates, the director of Grattan’s household finances program…
This is because each dollar they have in super will reduce how much they are entitled to receive in government-funded age pension payments.
Mr Coates said the median worker earning $58,000 today would lose about 2.5 per cent of wages each year and get less than a 1 per cent-a-year boost to their retirement incomes…
“Lifting compulsory super to 12 per cent of wages would cost taxpayers an extra $2 billion to $2.5 billion each year in super tax breaks, overwhelmingly to high-income earners. And those super tax breaks would dwarf any budget savings on the age pension until about 2060.”
Spot on. 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.
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”.
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. Reform along these lines would also improving equity.