Industry Super Australia bigwig and former union strongman, Greg Combet, has gone on another propaganda tirade against calls to freeze Australia’s superannuation guarantee (compulsory superannuation) at the current 9.5%:
As the cornerstone of Australia’s retirement income system, compulsory superannuation is one of our greatest success stories. It has created a significant pool of capital that is now benefiting our economy and financial system, it is a key mitigant against wealth inequality, and it is enabling people to have a better living in retirement…
More than 4 million Australian workers will end up with less money at retirement, and we’ll all end up paying more in tax to support even more people on the pension. Australia would create a large underclass of people outside the super system, and to assert that their lost super would be replaced by higher wages denies real world experience.
…modelling by ex-Treasury officials for Industry Super Australia shows that for a 30 year old male worker earning $50,000 a year – let’s call him John – opting out of super and choosing to take it as wages would not only see John miss out on more than half a million dollars in super by retirement, he would also pay more than $100,000 in additional income tax over his working life…
John would then reach retirement age with close to nothing in his super account and would most likely be entirely dependent on the pension, while the extra tax John paid for the best part of 40 years meant he ended up keeping far less of his hard-earned wages than if he had kept receiving super contributions.
These numbers are pretty staggering. They highlight the folly of those that argue low income earners would be better off not saving for their retirement, and taking the money now.
Greg Combet’s claim that compulsory superannuation “is a key mitigant against wealth inequality” is complete bunkum. If anything, superannuation has increased inequality.
The reason is simple: the 15% flat tax on superannuation contributions and earnings ensures that those on higher incomes receive larger tax concessions, whereas those on lower incomes receive few tax concessions or are penalised. The below table illustrates this state of affairs clearly:
It is true that Division 293 of the Tax Act mitigates this inequity for very high income earners – i.e. those earning over $250,000 per year – by lowering their superannuation tax concessions to 15%. But even then, the retirement system remains far more generous to higher income earners than lower income earners, thanks to the inequitable distribution of superannuation tax concessions on contributions and earnings:
There is also the important issue of wages. Wage growth in Australia has been anaemic for many years and the superannuation guarantee is paid for by workers through lower take-home pay.
Thus, raising the superannuation guarantee would lower workers’ disposable incomes, whilst also worsening the present inequities already present in the superannuation system – a highly undesirable outcome.
For these reasons the Henry Tax Review 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”.
The Grattan Institute has come to the same conclusions and has also recommended against lifting the superannuation guarantee:
Even slower wage growth will be the result of increasing compulsory superannuation contributions from 9.5 per cent to 12 per cent…
If compulsory super contributions go up, wages will be lower than they would otherwise. And the cut to wages from raising compulsory super is big. Really big. By the time it’s fully implemented in 2025-26, a 12 per cent Super Guarantee will strip up to $20 billion from workers’ wages each year, or nearly 1 per cent of GDP…
The Parliamentary Budget Office this year also acknowledged that compulsory superannuation is paid for by workers through 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”.
As did Fair Work Australia in 2013, which explicitly stated that its minimum wage decision was “lower than [it] otherwise would have been in the absence of the superannuation 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.
Even the architect of Australia’s compulsory superannuation system, Paul Keating, has admitted that the superannuation guarantee lowers 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.
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.
Thus, the evidence is unambiguous: raising the superannuation guarantee to 12% would lower workers take-home pay. How is this desirable in an era of anaemic wage growth?
Greg Combet’s claim that “we’ll all end up paying more in tax to support even more people on the pension” also ignores that the superannuation guarantee costs the federal budget more than it saves in Aged Pension costs.
Again, the Henry Tax Review was explicit on this point:
“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).”
The Grattan Institute has also shown that over “both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments”:
If Greg Combet was genuinely concerned about improving equality and outcomes for Australian workers, he would abandon increasing the superannuation guarantee in favour of making the concession system progressive.
This could be done by replacing the 15% flat tax on contributions and earnings with a 15% concession that is subtracted from one’s marginal tax rate. The below table illustrates how this concession scheme would work:
Under this reform, everybody that contributes to superannuation would receive the same tax concession (15%), the system would be made progressive, and lower income earners would get a better deal.
But lifting the superannuation guarantee in isolation would simply heighten inequities already present across the system. It would rob younger (and lower paid) workers of much-needed disposable income and worsen the long-term sustainability of the Budget.
About the only winners from such a policy would be the superannuation industry rent-seekers like Greg Combet’s Industry Super Australia, which would ‘clip the ticket’ on more funds under management and earn even fatter fees.
For an ex-union guy that is supposed to care about the welfare of Australian workers and equality, Greg Combet has clearly sold-out.