Labor’s lackey peddles superannuation lies

Labor’s policy thinktank, the McKell Institute, has released a spurious ‘research’ report claiming that there is no evidence that previous compulsory superannuation increases eroded workers’ pay rises:

Key points

  1. There is no clear empirical evidence that increasing the superannuation guarantee directly lowers wages.
  2. Our analysis finds no evidence to suggest that increases in the Superannuation Guarantee come out of workers’ wages.
  3. The claim that a one percentage point increase in the Superannuation Guarantee will lead to a one percentage point reduction in wage growth is inconsistent with available data.
  4. Cancelling the scheduled increases in the Superannuation Guarantee will only harm workers’ overall wealth and income, and there are no conditions in place to translate such a policy into direct wage increases.

The Grattan Institute argues employees will bear the full burden of the Superannuation Guarantee increases from 9.5 per cent to 12 per cent over the period 2021 to 2025. Grattan assumes a one percentage point increase in the Superannuation Guarantee minimum contribution rate leads to a one percentage point reduction in nominal wage growth…

Yet the argument that workers will bear the full burden of the changes in the Superannuation Guarantee is inconsistent with fundamental theoretical predictions.

Employers may respond to increases in the Superannuation Guarantee by passing on the added labour costs to consumers in the form of higher prices. Indeed, in a purely competitive economy, where all firms are experiencing the same increases in labour costs through the rising Superannuation Guarantee, economic theory predicts a share of the labour cost increases will be passed through to consumers.

Employers may also absorb a share of the extra costs associated with legislated increases in the Superannuation Guarantee by accepting lower profits. The gap between productivity and a typical workers’ compensation has increased dramatically since the mid-1990s. Industries with high productivity-pay gaps are likely to be able to raise contributions to employees’ superannuation without lowering wage increases. They have the gains in high productivity to draw on for more resources.

Increases in the Superannuation Guarantee may also increase firm productivity. According to efficiency wage theory, employers can run their operations more efficiently and become more productive if they pay wages above the equilibrium level because employees are putting in more effort into their work and are less likely to quit…

The claim that a one percentage point increase in the Superannuation Guarantee minimum contribution rate will lead to a one percentage point reduction in wage growth is nothing more than speculation, as there is no empirical evidence to suggest the extent of this reduction…

Results show that the relationship between increases in the Superannuation Guarantee and wage growth over the period March 1992 – December 2016 varies, dependent on the wage measure examined. The figure below shows coefficient estimates for all specifications…

Despite some volatility in the estimates, there is no evidence to suggest that a one percentage point increase in the Superannuation Guarantee minimum contribution rate will lead to a one percentage point reduction in wage growth. In fact, there is little evidence to suggest that increases in the Superannuation Guarantee come out of workers’ wages…

And our analysis suggests that increasing the Superannuation Guarantee 2.5 percentage points will give workers a share of productivity they have not been getting in the market – with minimal loss, if any, to their cash wages.

The Grattan Institute’s Brendan Coates hit back at McKell’s ‘research’ claiming it is fatally flawed:

Brendan Coates, director of the household finances program at Grattan, said McKell’s analysis was flawed, pointing to the declining labour share of national income since 1992, when compulsory super was introduced.

“For 25 years successive governments and multiple independent reviews have concluded that higher compulsory superannuation contributions come at the expense of lower wages for workers,” he said.

“The Henry tax review in 2010 acknowledged higher superannuation was paid for by lower wages and explicitly recommended against increasing compulsory super above 9 per cent”…

Mr Coates said McKell’s work suffered a series of “fatal flaws”.

“It only tests for a wage impact from higher compulsory superannuation in the quarter in which the rise occurs,” he said.

“But most employees’ wages don’t rise in the same quarter; they rise at different points across the year.”

Mr Coates also countered the idea that bosses would absorb additional labour costs.

“Nominal wages are still rising by more than 2 per cent a year, giving employers plenty of scope to cut them if compulsory super is increased,” he said.

Coates is right. The Henry Tax Review explicitly found that compulsory super is paid for by workers through lower wages

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.

Which is why the Henry Tax Review explicitly recommended against raising the superannuation guarantee because it would adversely harm lower-income workers:

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.

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”.

And when the Super Guarantee climbed from 9% to 9.25% in 2013, the Fair Work Commission stated in its minimum wage decision that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”. This is particularly important given the wages of around 40% of Australian workers are influenced directly by minimum wage decisions. Thus, their wages would have increased by more without the increase in the superannuation guarantee.

Let’s also not forget that compulsory superannuation was initially introduced to forestall wage rises amid concerns around a wages breakout in 1985. Then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for super contributions.

This helps to explain why former Labor Prime Minister, Paul Keating, acknowledged that compulsory superannuation is paid for via lower wages:

The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost… In other words, had employers not paid nine percentage points of wages as superannuation contributions to employee superannuation accounts, they would have paid it in cash as wages.

Former Labor leader, Bill Shorten, has admitted likewise:

Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.

I mean seriously, do these Labor Lackeys suffer from amnesia?

Why would employers voluntarily absorb the hit from increasing the superannuation guarantee when workers’ bargaining power and share of national income is at 50-year lows?

If bosses currently don’t feel pressured to give real wage rises, then why would they feel pressed to absorb further increases in the compulsory Super Guarantee?

Moreover, the massive fall in the labour income share in Australia over the period when the super guarantee was increasing is inconsistent with McKell’s suggestion that employers absorbed the cost of super.

At a minimum, McKell and Labor should support the Productivity Commission’s explicit recommendation for a public investigation on whether the superannuation guarantee should be lifted:

RECOMMENDATION 30: INDEPENDENT INQUIRY INTO THE RETIREMENT INCOMES SYSTEM

The Australian Government should commission an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings, distributional impacts across the population and over time, interactions between superannuation and other sources of retirement income, the impact of superannuation on public finances, and the economic and distributional impacts of the non-indexed $450 a month contributions threshold. This inquiry should be completed in advance of any increase in the Superannuation Guarantee rate.

Let the Productivity Commission settle the compulsory superannuation debate once and for all.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Respectfully I don’t imagine that if the super guarantee was lowered it would result in wage rises for employees. Employers will suppress wages at every opportunity they can. If awards were not legally binding we all would be working for below living wages. Spare money goes to the owner not the employee.

      • Business only has one default, pay less. They are not targeting an optimal wage share vs profit share ratio. They are thinking “If today is less than yesterday, it’s a good day”.

        Now we can hypothesise wage share is insufficient to uphold the economy, and that business needs to be protected form itself…

        However in this instance, from you own post…

        “If bosses don’t feel pressured to give wage rises, then why would they feel pressed to absorb further increases in the compulsory Super Guarantee?”

        Well at the moment, employees are generally remunerated at an index of 109.5, with 100.00 going out at PAYG, and 9.5 being paid as SG… as a rule of thumb.

        Now, with legislated SG increases, means this remuneration will increase to 112.0…. now if employers aren’t going to asorb the overall remuneration to 112.0, to match 12.0 SG….. if they keep total remuneration as 109.5, while paying SG of 12.0… the by default nominal PAYG has to decrease.

        Therefore PAYG would be 97.77 and SG would be 11.73 from a remuneration index of 109.5

        Every single employee would notice a 2.23% pay cut. There’ll be pressure.

        I mean to respond with “Wages would rise by more without the scheduled SG increase than with it. That’s the argument being made here”

        We can make the same point… why would business feel pressure to not reduce wage share, even if SG remains static?”

        • “We can make the same point… why would business feel pressure to not reduce wage share, even if SG remains static?””

          Wage growth is still positive at circa 2.2% a year. They don’t need to cut nominal wages to cover SG increases. They can simply reduce real wages, which is what they will do. The wage share would just worsen more under further SG increases.

        • “They can simply reduce real wages, which is what they will do.”

          They’ve been doing it for 40 years, they don’t need SG to be the ‘straw that breaks the camels back’.

          If worker remuneration is conisdered PAYG + SG, then wage share doesn’t change, just the preserved component of remuneration.