An interesting debate emerged at The AFR yesterday with regards to Australia’s compulsory superannuation system.
Pitcher Partners director, Brad Twentyman, proposed allowing workers to cash out half of their superannuation contributions over the next 18 months in order to lift disposable income and save the federal budget around $10 billion:
[It] would be “one of the most effective ways” to support households and the economy without increasing government debt…
“With the super guarantee halved, this would equate to a $10 billion boost to the federal budget, assuming all Australians who currently contribute to super participated,” Mr Twentyman said.
By contrast, Mercer senior partner, David Knox, argued that the COVID-19 economic meltdown reinforces the need to lift the superannuation guarantee (SG) from the current 9.5% to 12%:
[Knox] said with long-term investment returns set to fall from inflation plus 4 or 5 per cent, down to 2 or 3 per cent, the government should forge ahead with the scheduled increase, which was set to lift the SG by 0.5 per cent next year.
“In the post COVID-19 environment things are going to be different,” Dr Knox said.
“If we’re earning 5 per cent then money doubles in 14 years. But if we’re earning 3 per cent money doubles in 22 or 24 years.”
Compulsory superannuation is paid for by workers via reducing their take-home pay. Therefore, reducing the SG would lift disposable income, whereas raising the SG would lower it (other things equal).
For example, the Grattan Institute forecast that raising to SG to 12% would cost Australian workers $20 billion a year in foregone take-home wages once fully implemented in 2025-26:
The Henry Tax review and the Reserve Bank of Australia have also concluded that raising the SG would lower wages (other things equal).
Lifting the SG would also have a detrimental impact on low income earners struggling to make ends meet and living paycheck to paycheck. This is why the Henry Tax Review explicitly recommended against it:
“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”.
There is also the huge cost to the federal budget.
As noted in The AFR article:
About $30 billion flows into the $3 trillion super system each quarter, or about $120 billion a year. Compulsory superannuation contributions are taxed at concessional rates, resulting in foregone budget revenue worth $19 billion a year.
An additional 15 per cent concessional rate on investment earnings results in the system costing $43 billion in tax concessions each year.
The Grattan Institute forecasts that lifting the SG to 12% would cost the federal budget an additional $2 billion a year in additional tax breaks and would also cost the budget more than it saves in Aged Pension costs over the long-run:
The purpose of superannuation is to save for the future and reduce future age-pension payments. In both the short and long term, though, superannuation costs the budget more than it saves, because the tax breaks cost the government more than the pension savings.
Actuarial firm Rice Warner said that lifting compulsory super contributions to 12% would not have much impact on the age pension for many years, and would save the budget only about 0.1% in lower age pension spending in the second half of this century.
In contrast, extra super tax breaks from higher compulsory super would cost an average of 0.22% of GDP “through this century”…
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).
Clearly then, lifting the SG to 12% is unambiguously bad policy given it would: 1) lower take-home wages; and 2) worsen the long-tern sustainability of the federal budget.
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.
It’s over, and they want to pump the drugs, no thanks.
haroldusMEMBER
In light of this, do we think they will allow super for home deposits?
DominicMEMBER
What a conundrum for Scotty – how can he serve two masters??
AaronMEMBER
Simple answer YES and in an indirect way they already have through the Wu-Flu early access process. I’m a case in point. I pulled the first $10k and boosted my deposit. Planning to grab the next $10k and do same.
If they allow a drawn down specifically for fhb’s I will max it. There’s a first mover advantage to be had.
karlooMEMBER
Super is not so bad system. Ok, it needs some tweaks, but not so bad. What is the alternative?
Intergeneration sacrifice like in some counties ( 70% of income last 5 years and minimum working 35-40) funded again from labour mainly?
The age pension is not enough for a dignified retirement and doesn’t reward previous effort ( work or contribution ). Whatever system there is, it must reward previous work and sacrifice.
The Age pension should be promptly renamed into something called: Welfare for older citizens or something similar because the word “pension” carries some sort of entitlement and something deserved.
drsmithyMEMBER
What is the alternative?
Comprehensive public services (particularly healthcare and transport) and a liveable pension.
The Age pension should be promptly renamed into something called: Welfare for older citizens or something similar because the word “pension” carries some sort of entitlement and something deserved.
It is an entitlement, just like all welfare is. You’re entitled to it because you’re a citizen.
karlooMEMBER
“It is an entitlement, just like all welfare is. You’re entitled to it because you’re a citizen.”
The problem with that is that people will do anything to get it. I know three cases where they sold all IPs and bought big houses before the age of 60, just to get that pension. The result is that in my suburb around the quoter of houses are one or two people households in mainly 4 bedroom homes.
Spending super on OS trips or big cars and caravans is another one. Everything over 400 K must be destroyed because of that entitlement.
drsmithyMEMBER
Most people won’t do that because they’re not wealthy enough.
You’re using the actions of a small minority to justify excluding the vast majority.
(And I really struggle to believe people with that kind of money are taking the massive hit in lifestyle that would come with moving from their previous income to a pension.)
karlooMEMBER
“And I really struggle to believe …”
That’s because you are a nice person. Most people are not.
Tassie TomMEMBER
Compulsory savings are a fundamentally a good thing and have significantly improved the quality of life for millions of retirees. Superannuation’s major problems are:
1) that the tax concessions are too great (for some),
2) that the tax concessions are not aligned with personal tax rates, and
3) that the Sydney finance economy siphons off a huge amount of the national nest egg – equal to about 25% of every Australians’ life savings over their lifetime.
Fundamental labour market principles are that the employer judges whether the expense they plan to spend on putting on a worker is worth the extra income that that worker will produce, and the potential employee judges whether what they are going to get paid is worth getting out of bed for. If the answers are “yes” and “yes”, then a job will be created. If the answers are “yes” and “no”, or “no” and “yes”, or “no” and “no”, then a job will not be created.
Anything that widens the gap between the employer’s expense and the employee’s take-home pay minus their expenses will reduce the efficiency of the labour market hence cost jobs. Income tax is probably the biggest labour market inefficiency. Other inefficiencies include payroll tax; Workcover premiums; employee transport costs; employee relocation costs; childcare costs; employer accounting costs; and yes compulsory superannuation too.
Company tax is not a labour market inefficiency, as it is profit-based, hence will only cost the employer extra if profits are increased.
drsmithyMEMBER
The biggest problem with Superannuation is simply that most people don’t earn enough in their working lifetimes that their surplus can sustain them for another 20-30 (or even 10) years afterwards, regardless of whether that surplus is saved voluntarily or forcefully.
The fundamental premise is broken.
Tassie TomMEMBER
It has never been stated that the primary purpose of superannuation was to substitute the age pension – it has always had a stated dual purpose of this plus improving the quality of life of retirees.
I agree that it has done and will continue to do a miserable job of replacing the age pension, I contend that it actually does a very good job at improving the quality of life of most retirees.
People like my late parents-in-law – single income, blue collar – yes their first house only cost them $11,000, but they retired with a house (worth about $350K today) and about $150K of super and not much else.
Living off the age pension can actually be done with a reasonable quality of life for day-to-day and month-to-month expenses if one owns their PPOR outright, but that $150K allowed them to buy a couple of new cars and go on trips interstate or to Bali (where my brother-in-law lives) when they needed to. They dipped into their “nest egg” appropriately when they needed to do these things, and I would suggest that without compulsory super they wouldn’t have had this option.
Olaf
About $30 billion flows into the $3 trillion super system each quarter, or about $120 billion a year. Compulsory superannuation contributions are taxed at concessional rates, resulting in foregone budget revenue worth $19 billion a year.
That is amazing. Exactly 15% foregone revenue eachbyear. Does this mean every taxpayer not paying division 293 tax who is receiving super has a marginal income tax rate of 30%?
And everyone subject to 293 tax has an effective marginal rate 15% higher than their 30% contributions tax?
Or are these numbers a bit less authoritative than they sound?
SwampyMEMBER
yes please i’ll take half and lay waste to our mortgage.
PeachyMEMBER
Hey swampy. I was going to laugh at your suggestion and call you names.
But then I realised that you’re right.
Compulsory superannuation contribution sin a world where shelter is 4x income is one thing.
In a world where shelter is 8x income, it’s quite a different thing.
Of course the problem is mostly not superannuation, but mostly housing (and low low rates), but we find ourselves in the world where we are and we don’t get a choice about that.
JasonMEMBER
Speaking of budget, apparently Treasury stuffed up their numbers and JobKeeper is only going to cost about $70 billion.
It’s over, and they want to pump the drugs, no thanks.
In light of this, do we think they will allow super for home deposits?
What a conundrum for Scotty – how can he serve two masters??
Simple answer YES and in an indirect way they already have through the Wu-Flu early access process. I’m a case in point. I pulled the first $10k and boosted my deposit. Planning to grab the next $10k and do same.
If they allow a drawn down specifically for fhb’s I will max it. There’s a first mover advantage to be had.
Super is not so bad system. Ok, it needs some tweaks, but not so bad. What is the alternative?
Intergeneration sacrifice like in some counties ( 70% of income last 5 years and minimum working 35-40) funded again from labour mainly?
The age pension is not enough for a dignified retirement and doesn’t reward previous effort ( work or contribution ). Whatever system there is, it must reward previous work and sacrifice.
The Age pension should be promptly renamed into something called: Welfare for older citizens or something similar because the word “pension” carries some sort of entitlement and something deserved.
What is the alternative?
Comprehensive public services (particularly healthcare and transport) and a liveable pension.
The Age pension should be promptly renamed into something called: Welfare for older citizens or something similar because the word “pension” carries some sort of entitlement and something deserved.
It is an entitlement, just like all welfare is. You’re entitled to it because you’re a citizen.
“It is an entitlement, just like all welfare is. You’re entitled to it because you’re a citizen.”
The problem with that is that people will do anything to get it. I know three cases where they sold all IPs and bought big houses before the age of 60, just to get that pension. The result is that in my suburb around the quoter of houses are one or two people households in mainly 4 bedroom homes.
Spending super on OS trips or big cars and caravans is another one. Everything over 400 K must be destroyed because of that entitlement.
Most people won’t do that because they’re not wealthy enough.
You’re using the actions of a small minority to justify excluding the vast majority.
(And I really struggle to believe people with that kind of money are taking the massive hit in lifestyle that would come with moving from their previous income to a pension.)
“And I really struggle to believe …”
That’s because you are a nice person. Most people are not.
Compulsory savings are a fundamentally a good thing and have significantly improved the quality of life for millions of retirees. Superannuation’s major problems are:
1) that the tax concessions are too great (for some),
2) that the tax concessions are not aligned with personal tax rates, and
3) that the Sydney finance economy siphons off a huge amount of the national nest egg – equal to about 25% of every Australians’ life savings over their lifetime.
Fundamental labour market principles are that the employer judges whether the expense they plan to spend on putting on a worker is worth the extra income that that worker will produce, and the potential employee judges whether what they are going to get paid is worth getting out of bed for. If the answers are “yes” and “yes”, then a job will be created. If the answers are “yes” and “no”, or “no” and “yes”, or “no” and “no”, then a job will not be created.
Anything that widens the gap between the employer’s expense and the employee’s take-home pay minus their expenses will reduce the efficiency of the labour market hence cost jobs. Income tax is probably the biggest labour market inefficiency. Other inefficiencies include payroll tax; Workcover premiums; employee transport costs; employee relocation costs; childcare costs; employer accounting costs; and yes compulsory superannuation too.
Company tax is not a labour market inefficiency, as it is profit-based, hence will only cost the employer extra if profits are increased.
The biggest problem with Superannuation is simply that most people don’t earn enough in their working lifetimes that their surplus can sustain them for another 20-30 (or even 10) years afterwards, regardless of whether that surplus is saved voluntarily or forcefully.
The fundamental premise is broken.
It has never been stated that the primary purpose of superannuation was to substitute the age pension – it has always had a stated dual purpose of this plus improving the quality of life of retirees.
I agree that it has done and will continue to do a miserable job of replacing the age pension, I contend that it actually does a very good job at improving the quality of life of most retirees.
People like my late parents-in-law – single income, blue collar – yes their first house only cost them $11,000, but they retired with a house (worth about $350K today) and about $150K of super and not much else.
Living off the age pension can actually be done with a reasonable quality of life for day-to-day and month-to-month expenses if one owns their PPOR outright, but that $150K allowed them to buy a couple of new cars and go on trips interstate or to Bali (where my brother-in-law lives) when they needed to. They dipped into their “nest egg” appropriately when they needed to do these things, and I would suggest that without compulsory super they wouldn’t have had this option.
About $30 billion flows into the $3 trillion super system each quarter, or about $120 billion a year. Compulsory superannuation contributions are taxed at concessional rates, resulting in foregone budget revenue worth $19 billion a year.
That is amazing. Exactly 15% foregone revenue eachbyear. Does this mean every taxpayer not paying division 293 tax who is receiving super has a marginal income tax rate of 30%?
And everyone subject to 293 tax has an effective marginal rate 15% higher than their 30% contributions tax?
Or are these numbers a bit less authoritative than they sound?
yes please i’ll take half and lay waste to our mortgage.
Hey swampy. I was going to laugh at your suggestion and call you names.
But then I realised that you’re right.
Compulsory superannuation contribution sin a world where shelter is 4x income is one thing.
In a world where shelter is 8x income, it’s quite a different thing.
Of course the problem is mostly not superannuation, but mostly housing (and low low rates), but we find ourselves in the world where we are and we don’t get a choice about that.
Speaking of budget, apparently Treasury stuffed up their numbers and JobKeeper is only going to cost about $70 billion.