12% superannuation guarantee ignores key issue

Superannuation industry pundits remain at odds over whether the federal government should follow through with the planned legislated increase in the superannuation guarantee from 9.5% to 12%.

QIC CEO Damien Frawley has called for more flexibility regarding the compulsory superannuation guarantee. He argues that some employers and people on low incomes cannot afford the legislated increase to 12% by 2025, so there should be scope for the superannuation guarantee to have multiple tiers, such as 7.5% and the current level of 9.5%:

“If lower earners can’t afford to put 12 per cent away, or an employer can’t afford 12 per cent, let them stay on 9.5 per cent or drop it to 7.5 per cent,” he said…

He suggested “slicing and dicing” the system, acknowledging that there were some employers and employees who might be able to afford to increase their super contribution to 12 per cent, while lower earners might not be able to.

But he did not support allowing people to opt out of the system altogether as this would create a pension burden later.

However, Australia’s largest not-for-profit super fund has demanded the government stick to its legislated increase to 12%, but has urged that the inequitable concession structure be addressed:

Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck said low-income earners would be hurt by a super freeze.

“Those who oppose the 12 per cent or indeed compulsory super on the basis that it will leave low-income earners worse off are attacking the wrong target,” Ms Scheerlinck said…

“It’s the taxation of super that needs adjusting, not the superannuation guarantee rate,” Ms Scheerlinck said. “Adequacy and equity are two separate issues that have been conflated into the one argument by those who are either defeatist or lack the political will to tackle the elephant in the room, which is that we need to better target the super tax concessions which disproportionately benefit the very wealthy.”

“We need to keep our super strong – we need 12 per cent.”

Meanwhile, The SMH’s Nina Hendy claims that compulsory superannuation has been successful in reducing reliance on the Aged Pension:

It has been 27 years since the introduction of compulsory superannuation… The average consolidated super balance for a typical couple starting retirement today is $400,000, according to Challenger retirement income research…

Less than half (45 per cent) of new 66-year-old retirees accessed the age pension in 2018, the latest data available, while a quarter (25 per cent) were drawing a full age pension, the data also revealed.

While in 2002 the age pension represented 2.9 per cent of Gross Domestic Product and was forecast to keep climbing until the middle of the century, recent projections show that the success of the super system appears to be reversing the government’s pension liability…

As previously revealed by The Australian, Treasury’s new modelling system, known as MARIA (Model of Australian Retirement Incomes and Assets), found projections of the share of GDP that Australia spends on the age pension is “consistent” with a fall to 2.7 per cent last year, and is expected to drop to 2.5 per cent by 2038.

There’s a several overlapping issues here that need to be unpacked.

First, lifting the superannuation guarantee would unambiguously lower wage growth (other things equal). Industry Superannuation Australia admitted this last week, thus confirming the findings of the Henry Tax Review, the Grattan Institute, the Parliamentary Budget Office, and employer groups.

Second, the current structure of superannuation concessions is highly inequitable:

And this has resulted in higher income earners receiving the lion’s share of benefits:

Accordingly, the superannuation guarantee costs the federal budget more than it saves in Aged Pension costs, according to both the Henry Tax Review:

“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).”

As well as the Grattan Institute, which estimates that over “both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments”:

Therefore, the first best solution is to reform the superannuation system to make concessions more equitable and sustainable.

In particular, the 15% flat tax on contributions/earnings should be replaced with a flat-rate refundable tax offset (e.g. 15%):

This way, everyone that contributes to superannuation would receive the same concession, the system would be made progressive, and lower income earners would retire with far bigger superannuation balances without needing to contribute more (and without suffering lower wage growth).

The long-term cost to the federal budget would also be lowered, since lower income earners would become less reliant on the Aged Pension.

Reforming superannuation concessions should be the key priority for reform and should take place before any further increase in the superannuation guarantee rate.

Because lifting the superannuation guarantee in isolation would merely heighten inequities already rife across the system, would rob younger (and lower paid) workers of much-needed disposable income, as well as worsen the long-term sustainability of the federal budget.

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  1. Hahaha, muppets both sides…

    “The average consolidated super balance for a typical couple starting retirement today is $400,000”

    For the Age Pension assets test for means testing purposes … https://www.humanservices.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test/assets#assetstestlimits

    For a couple who own their home… the ceiling before a reduction based on the assets test is $394,500
    For a couple who don’t own their home… the ceiling before a reduction based on the assets test is $605,000.

    A home owning couple with $400,000k super balance and no other material assets, is barely getting a reduction…. So this says it’s not making a difference at all, other than getting their FULL age pension topped up by the earnings on their super balance.

    Look, I’m against MB’s misinterpretation of “12% SG means lower wages”, because I oppose them being wrong, not oppose the age pension.

    Real reform of the age pension involve two components

    Baby Boomers & no longer spending other people’s money….

    Nothing gets in the way of boomers of spending other people’s money, but I don’t endorse arguing something that’s wrong (MB’s position) to try and avert it.

    • Tassie TomMEMBER

      I’d lean toward agreeing with you there Rusty Penny.

      Anything paid as wages rather than preserved as super will only inflate house prices even further anyway, so nobody will be better off except for the land barons, the banks, and the 2-percenters who own the majority of the banks’ shares.

      So I’m all for an increase in SG as opposed to giving the extra wages to the banks (and at present the question is dichotomous), and I’m completely against the current way that super is taxed, and indeed the tax system in general.

      • “Anything paid as wages rather than preserved as super will only inflate house prices even further anyway”.

        So you are you against wage rises too, as this would only inflate house prices? I assume, then, that you also support wage cuts, given this would make house prices fall?

        • A person is currently remunerated at an index 109.5, with 100.0 being PAYG and 9.5 being SG. It is legislated to be 112.0, with PAYG being PAYG, and 12.0 being SG.

          Your arguing an employer with volunteer to pay 102.5, if SG remains at 9.5.

          I’m saying the remuneration package received by an employee is not influenced, what so ever by the proportion of SG, and more to do with the bargaining power of the employee.

          Employers will pay the minimum they can get away with, or conversely, pay as much as they need to, to obtain a employee.

          labour force participation does much more to harm PAYG wages than a slow crawl to 12.0% SG. In fact wages have been close to flat since the 1970’s, particularly in the USA, long before SG, or even in labour markets that don’t have compulsory super.

          Your argument would hold more weight if markets without compulsory super increased by rates in excess of ours, due to this superannuation contribution disparity.

        • Tassie TomMEMBER

          Sorry I forgot – “The only macroeconomic problem in Australia is IMMIGRATION, and cutting immigration will solve everything.”

  2. Glad to see MB taking up this issue. The Henry Review recommendation here makes perfect sense, yet the media doesn’t seem aware of it. Hopefully this will put it on their radar.