ANU to test if compulsory superannuation lowers wages

The Australian National University (ANU) has been commissioned by the Morrison Government to test whether raising the superannuation guarantee to 12% would lower Australian wage growth:

Appearing before a Senate Estimates committee on Thursday, Robb Preston, the manager of Treasury’s retirement income policy division… said the ANU’s tax and transfer policy institute, a well-respected policy research unit headed by Professor Robert Breunig, would be providing Treasury with modelling of the relationship between wages and the superannuation guarantee (SG)…

The independent Grattan Institute has come under criticism from the super sector after it argued raising the super guarantee to 12 per cent would cost the budget $2bn a year in tax concessions, hurt low-income workers and fail to drive a meaningful increase in retirement income or result in a lower age pension bill.

Confidential Treasury modelling of the super system, obtained under Freedom of Information laws and reported by The Australian last year, is “broadly consistent” with the Grattan Institute ’s findings.

According to the documents, Treasury also warned increasing the super guarantee rate would cost workers wage rises and would exacerbate the gender income gap, a position also recently argued by the Australian Council of Social Service.

It should be obvious to everybody that lifting the superannuation guarantee would lower workers’ take-home pay.

In the overwhelming majority of cases, the federal government cannot dictate how much employers pay their workers. All the can do is direct them on how to distribute their earnings among income tax, superannuation, and take-home pay.

Think about it from an employer’s perspective. All they care about is their total employee costs. They do not care whether somebody’s income is distributed as 90.5% wages/ income taxes and 9.5% superannuation; or 88% wages/ income taxes and 12% superannuation. The cost the employer is the same regardless.

Indeed, employers pay workers’ income tax to the ATO, yet few people think the boss pays their income tax. Super contributions, from an employer’s perspective, are exactly the same.

Thus, lifting the superannuation guarantee from 9.5% to 12% will unambiguously lower take-home wage growth.

The Grattan Institute’s latest modelling came to this exact conclusion:

On average 80% of the cost of increased compulsory super contributions was passed on to workers through lower wage rises than would have been expected over the life of those agreements. The long-term impact is likely to have been higher…

It is unlikely the leglislated future step ups in compulsory super contributions will be different from the earlier ones.

Although wage growth is slower now than in the past, wages are nevertheless – by all measures – growing by more than 2% a year, offering ample room for employers to wind back wage increases in order to fund each of the five scheduled annual step ups of 0.5% in compulsory super contributions that begin on July 1, 2021.

In fact, if workers’ bargaining power has fallen recently – as some suggest – employers might feel they can push even more of the cost of higher super onto workers than in the past.

As did the Reserve Bank of Australia:

RBA assistant governor Luci Ellis said it had “shaved” its worker pay forecasts to reflect that higher compulsory super will dampen future wage growth for private sector workers, offsetting wage increase pressures from a tightening labour market.

Wage growth would have got “a little bit of a pick-up from here” if not for the legislated requirement for business to boost their superannuation contributions, Dr Ellis said.

“Historically about 80 percent of the increase in the non-cash benefit tends to show up as somewhat slower wages growth than what you would have otherwise seen.”

As did the Henry Tax Review:

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.

Hopefully this upcoming ANU modelling settles the issue once and for all.

Unconventional Economist
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  1. One of the sadder facts of life is that any big consulting firm is willing to rent their brand out for a fee.

    When I worked in a State Treasury a few years ago I would weep at the low quality analysis that rent seekers would commission to further their case. Horse racing was a doozy. Somehow one of the big 4 argued that lowering wagering taxes and increasing prize money had a positive impact (and they meant for the State, not just horse breeders!).

    The super industry will still be able to find someone to muddy the waters and claim the opposite.

  2. It’s all about giving the government cover for breaking an election promise in due course.