COVID-19 has killed 12% superannuation

For years MacroBusiness has argued that Australia’s superannuation guarantee (SG) should not be raised from the current level of 9.5% to 12%.

Our arguments against lifting the SG centre around four key issues.

First, superannuation concessions are grossly inequitable and favour high income earners. This inequity is illustrated clearly by the below Australian Treasury chart, which shows that the top 1% of earners will receive roughly 14-times the taxpayer contributions to their personal superannuation accounts as the bottom 10% of income earners:

Viewed in this light, Australia’s superannuation system is more of a tax avoidance scheme than a retirement scheme.

Second, lifting the SG would come directly out of workers’ take-home wages, which poses a particular problem for low-income earners already struggling to survive paycheck to paycheck.

Third, superannuation concessions cost the Federal Budget an obscene $43 billion a year. And because they are so poorly targeted and go to where they are not needed (i.e. high income earners), superannuation costs the federal budget far more than it saves in Aged Pension costs, as confirmed by the Henry Tax Review, the Grattan Institute and actuaries Rice Warner.

Finally, Australia’s superannuation system is highly inefficient. Management fees are astronomical with Australian households spending twice as much every year on super fees than they do on electricity. The number of people employed in superannuation is also astronomical, on par with Australia’s entire defence force and dwarfing Australia’s entire welfare system.

Before the COVID-19 pandemic struck, there was already huge question marks being asked over whether the SG should be lifted.

Now with mass unemployment looming, alongside deep cuts to household disposable income, the planned lifting of the SG is certain to be jettisoned.

As shown in the next table, the SG is scheduled to rise by 0.5% every year starting from 2021-22:

Thus, it will drain wages at the same time as Australia is still trying to recover from its biggest economic downturn since the Great Depression.

The federal budget is also likely be in a deep hole and there will remain a large demand deficit across the Australian economy.

Therefore, the absolute last thing the Australian economy will need is to have billions of dollars of disposable income garnished from the very people that have the highest marginal propensity to consume (i.e. lower income earners).

Lifting the SG to 12% would act like a tax increase on lower income earners, obliterating disposable income and consumption at the very worst time for the economy.

Unconventional Economist
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  1. I agree with the general sentiment, but why not lift it from 9.5% to 10% — since 10% is a nice round figure and makes ‘top of the head’ calculations easier.

  2. The Government (via the RBA) can create as much demand as it wants right now.

    Not sure why super needs to be enlisted into that particular objective.

    • Creating money and creating demand might be two different things.
      An ageing demographic doesn’t need to spend ( they already have one of everything they need) and those in the younger groups are likely to have been scarred by this financial near-death experience, brought on by the amount of entrenched debt they have and job insecurity.
      We all now know that what we have about us at the moment can re-arrive at any time in the future and are likely to bolster household finances against that.
      So, demand? For saving, yes. But no matter how much the RBA etc does from here on in, consumerism as we knew it, is dead.

      • Government deficits create public savings/deposits

        Velocity is falling because M2 is increasing

        Velocity = GDP/money supply

        • Yeah exactly. More money is being created which isn’t being spent and isn’t creating demand. Central banks can’t create demand, any government that still cares about public debt also can’t, sustainably.

          • I don’t think that’s true

            My point is money velocity is not really a useful indicator of anything , since it’s a calculation dependent on GDP but also on M2

            Government deficits will boost GDP: that is demand

          • Much of the money printing isn’t going towards government deficits, but stuff like RMBS, overnight repos, etc. Much of the government deficit is increasingly interest on existing debt, or other random spending that goes to plutocrats to be stashed in the Caribbean.

            The point is that central bank printing is not ever really going to create much demand which is how they do it without creating inflation. Which we can confirm through velocity of money constantly going down, because newly printed money doesn’t reach the hands of normal people.

          • I was saying government deficits lead to demand
            Central bank printing “facilitates” government deficits (not really, but let’s roll with it)

            I dont see how velocity of money is a useful measure of anything – it goes down because the denominator goes up (M2), but no one would claim that rising M2 reduces demand

          • Velocity of money shows that most new M2 money is not contributing to GDP.

            That’s super useful. It shows us that central bank money printing is going to places that don’t contribute to GDP. I would hate to be unaware of that and think that hyperinflation is imminent or something.

          • It just shows that M2 is increasing at a greater RATE than GDP

            GDP still increases, just less than M2

            The original statement still stands – the government can create as much demand as it wants to since there is no limit to M2

          • Yes exactly, M2 increases but doesn’t go to GDP, hence no inflation, no problems increasing M2 as long as you don’t let it go anywhere near the real economy. Government can increase M2 all they want as long as they don’t use it to increase demand. Then you would get inflation and fast if that M2 money going to GDP grew anything like M2 money going to bonds and tax havens.

          • Well, some of it goes to GDP
            Just not all of it (or its not as multiplicative as it would be normally)

            So if you deficit spend enough it will certainly cause inflation

            Just depends on government will, as you say

          • “inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output.”

            Milton Friedman

            ie if M2 increases to a greater extent than GDP
            -money velocity falls according to the equation
            -inflation increases according to Friedman

            They’re not necessarily mutually exclusive

  3. Also, have Superfund actually shown themselves to be responsible custodians when a few redemptions in some funds from recent policy has them at their knees from heavily investing in illiquid assets? Why give more money to these funds if they can’t even handle a small % withdrawal of total funds?

  4. I am still shocked that concessions flow to people who are actually paying mountains of tax anyway.
    You could change your modeling to an ideal 60% or 80% tax rate on incomes over $300,000 per annum and make those government “gifts” to high income earners look even bigger.
    You seem to struggle with the notion that if you pay little or no tax and/or are a welfare rent seeker then it is inevitable that no concessions from an arbitrarily set personal income tax rate will accrue to you if the rate is reduced in the superannuation system.

  5. I still say the RBA should be given that lever.
    Bump it up when things are on fire.
    Drop it down times like now.