Let Productivity Commission decide if superannuation robs wages

New research by the Australian Institute’s Centre for Future Work, commissioned by Industry Super Australia, claims that wages have generally increased at a higher rate in years when the superannuation guarantee rate has also risen. The Australia Institute’s report also warns that shelving the legislated increase in the super guarantee is likely to result in a further fall in wages relative to GDP:

New research from the Centre for Future Work shows that scheduled increases in employers’ minimum statutory superannuation contributions would have no negative effects on future wage growth, and that Australia’s economy can afford both higher wages and higher employer contributions to superannuation.

The research refutes claims made by some commentators and lobbyists that higher superannuation contributions would automatically lead to lower wages, and hence would be self-defeating. The new research finds no statistical evidence for that claim in Australian empirical data.

The paper reviews economic statistics from the introduction of superannuation to the present. On average, wages were more likely to accelerate and grow at a faster rate when the superannuation guarantee (SG) rate was increased, than to decelerate or grow more slowly. This indicates a slight positive correlation between wages growth and changes in employers’ minimum SG rate…

The paper concludes that current record-low wage growth in Australia cannot be “fixed” by abandoning scheduled increases in the SG rate (which is currently legislated to grow from 9.5% of wages to 12% over a five-year period, beginning 1 July 2021). Abandoning those increases would only further suppress the total compensation received by workers, which has been falling steadily as a share of GDP for decades. Instead, weak wage growth should be tackled with direct wage-boosting policies; the determination of wages and superannuation contributions are largely independent policy decisions.

Again, the first thing to note about this paper is that it was commissioned and paid for by Industry Super Australia (ISA):

Thus, it’s results should be taken with a huge pinch of salt, since they are likely to reflect the interests of ISA.

Secondly, TAI’s central claim is based on the fact that average Australian wage growth was higher in the years when the superannuation guarantee was increased than otherwise:

In the 18 years when the SG rate was not increased, it was just as likely that wage growth fell below average as above. Clearly, therefore, freezing the SG rate should provide no confidence of strong wage growth. Perhaps more surprisingly, in years when the SG rate was increased, it was twice as likely that wage growth would be above average, as below it. In six of the ten years when the SG rate was increased, wage growth exceeded its post-1992 average. In only 3 years (1993, 1996 and 2014) was an increase in the SG rate accompanied by wage growth that was below its post1992 average rate…


Across the full period, average annual wage growth was slightly higher (4.2%) in years in which the SG rate was raised, than when it was unchanged (3.9%). Once again, the assumption that increases in the SG rate will automatically be reflected in lower wage growth is not consistent with observed history.

This is meaningless, since it ignores everything else going on across the economy over those years.

The key question here is whether wages would have risen by more without the superannuation guarantee increase. Or put another way, does raising the superannuation guarantee lead to lower wage growth than would otherwise occur.

Several independent analysts (i.e. not commissioned by industry) have concluded that raising the superannuation guarantee lowers wages growth (other things equal). These include:

  • The Henry Tax Review;
  • The Grattan Institute;
  • The Parliamentary Budget Office;
  • The Australian Treasury; and
  • Fair Work Australia.

On the other side, we have reports commissioned by the superannuation industry claiming that wages are largely unaffected and that workers would be made worse-off if scheduled rises in the superannuation guarantee are delayed.

To settle the debate once and for all, let’s have the Productivity Commission (PC) undertake an investigation. The PC is not captured by any vested interest and would do the analysis properly.

What are our federal politicians waiting for?

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. claims that wages have generally increased at a higher rate in years when the superannuation guarantee rate has also risen

    A.k.a. Proof by correlation of cause.

    This is one of the logical fallacies that is committed by partisan supporters.

  2. I’m not sure if this is provable either way given that there is no parallel universe where we can measure wage rises without super.

    If I had to guess I’d bet the truth is somewhere in the middle — super does to some degree ‘eat up’ wage rises though not to the full extent that some claim. But who knows.