12% superannuation would crush working Australia

Former Labor Prime Minister, Kevin Rudd, claims “Scott Morrison’s crusade on super is the biggest attack on working Australians since WorkChoices”:

Scott Morrison’s crusade against compulsory superannuation marks the greatest assault on the living standards of working Australians since John Howard’s WorkChoices industrial laws took the meat axe to wages and conditions…

If Morrison succeeds, it may boost his popularity among neoliberal zealots. But it will entrench stark inequalities between rich and poor. With the levy frozen at its current rate, a 30-year-old worker earning $40,000 a year will have the equivalent of $10,000 less each year in retirement…

First, they claim, it will boost wages. Yet if this were true, wages would have rocketed during Abbott’s freeze. Instead, wages flatlined while company profits soared. This was a direct transfer of wealth from working people to corporate executives…

Our super system has become the envy of finance ministers, treasurers and the financial world. It protects national budgets by reducing radically the future call on the age pension.

What complete and utter tosh.

First, compulsory superannuation is unambiguously paid for by lower take home wages. Think about it from an employer’s perspective. They are only concerned about their total wages bill, not what proportion of wages is paid to employees versus paid into a superannuation account.

Therefore, lifting the superannuation guarantee (SG) to 12% from 9.5% currently will necessarily lower workers’ disposable incomes (other things equal).

If you don’t believe, here’s the findings of the Henry Tax Review, which was commissioned by Kevin Rudd:

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.

Here’s recent testimony from 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…

“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.”

Here’s recent findings from the Grattan Institute:

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 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…

Heck, even Bill Shorten as assistant treasurer in the former Labor Government admitted in 2010 that SG increases were paid for by workers through lower wage rises:

“Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.”

As did compulsory superannuation’s founder, Paul Keating:

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.

Second, lifting the SG to 12% will unambiguously increase inequality, given the lion’s share of concessions flow to high income earners, according to the Australian Treasury:

As shown above, higher income earners receive a disproportionate share of superannuation concessions.

For example, the top 1% of earners will receive more than $700,000 in superannuation concessions over their working lives, dwarfing the $50,000 of concessions received by the bottom 10% of income earners.

Therefore, Australia’s compulsory superannuation system enshrines inequality by concentrating asset ownership among the wealthy. And lifting the SG to 12% will only make the situation worse.

Third, and related directly to the above, lifting the SG to 12% will wreck the long-term sustainability of the Budget.

Because the lion’s share of concessions go to those that do not need them – i.e. high income earners – the budgetary cost of concessions outweighs any gains from lower expenditure on the Aged Pension.

Indeed, the Grattan Institute forecasted that lifting the SG to 12% would cost the federal budget an additional $2 billion a year in additional tax breaks, creating a net drain on the Budget 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 came to similar conclusions:

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”…

As did the Henry Tax Review:

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).

What part of the story does Kevin Rudd not understand? The Henry Tax Review explicitly recommended that his government not lift the SG, and yet he did so anyway. And here he is continuing to press the case based on lies.

Australia’s superannuation system is really more of a tax avoidance scheme for the rich than a genuine retirement pillar.

The only real winners from this policy are Labor’s industry superannuation mates, which get to ‘clip the ticket’ on bigger funds under management at the expense of working Australians and taxpayers.

Unconventional Economist
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  1. It’s a tax minimisation scheme for all. You won’t be happy until all working class have no tax minimisation tools. However you don’t say anything about the plumber down the road that has a company beemer that the wife drives the kids around in. Or how about getting the top multinationals to pay their fair share of the tax bill. No let’s just take away workers nest eggs and forced savings and trust the employer to pass on this so called cost to workers.

    • Lord Winchester Entwhistle

      I agree – why not have as focussed a campaign starting with Michael west’s hitlist. There’s billions of avoided tax right there that could fund tax cuts to middle income and or improved services (hospitals) right there

  2. migtronixMEMBER

    In what universe in which we have so much savings that Lowe says we’ll have low rates forever, do we need to raise the saving rate????

    • happy valleyMEMBER

      The ivory tower happy clappy universe that Lowe and the rest of the RBA nerds inhabit?

    • Exactly Mig ,

      “ a 30-year-old worker earning $40,000 a year will have the equivalent of $10,000 less each year in retirement…”

      Why do they keep making these types of estimates based on past performance, when they keep telling us past performance is no guarantee of future returns.
      Getting really fed up with this fallacious indoctrination of their narrative.

      • a 30 year old worker on $40k will live of age pension and will have as much someone in 40 years decides he will have

      • Jumping jack flash

        Not to mention that if they were to lift it from 9.5 to 12% not only would said worker’s take home decrease, but it STILL wouldn’t come close to being able to pay him the same standard of living in retirement and after 5 or 10 years tops the worker would be eating catfood along with everyone else.

        If they were lucky enough to have a PPOR to live in or cash in then it would certainly relieve their plight, but good luck getting the right amount of debt to buy one of those on 40K!

  3. Two questions:

    1) If we closed the taxation loopholes for the rich and fixed up the pensions asset test, would that change your view?

    2) If we don’t save the money for retirement through wages, how should we do it? Or do we just rely on current taxation at the time the pensions are paid?

    • I’d like to see compulsory superannuation abolished entirely and the money saved directed towards a generous universal pension. Won’t happen though. So the best we can hope for is to not make the system even worse by lifting the SG to 12%.

      Remember, this is coming from a site that offers a superannuation fund and would lose out financially. So we are talking against our book here, unlike the rest of the industry.

      • The trouble with the pension system is that it requires govts to save for the future, something they are demonstrably terrible at. The political pressure of getting elected now always beats the wisdom of putting something away for later, so govts spend up the wazoo and create huge unfunded liabilities for future generations. Hence you will never see a generous pension, only ever a subsistence pension, because govts will never be able to afford more – and be lucky to do that given the age wave we’re about to face.

        I’ve always thought super was a good idea poorly implemented. It gives a shot at providing for a retirement for many that is better than just getting by and funding it from the present rather than the future.

        • Brett JamesMEMBER

          Problem is, as stated above, Super costs us more than just paying the pension. 1% of GDP/ annum no less, figures direct from the horses mouth, i.e. fed treasury.

          So it’s not saving anything for the tax payer. We still pay pensions, and super is costing us. That’s predicted to go on for the next 40 years when at such time there is no further projected analysis.

  4. Jumping jack flash

    Superannuation is largely redundant in the age of debt.

    No realistic amount of saving from an average income is going to provide anywhere near the same standard of living for the entire duration of retirement. Additional savings, or holding assets that inflate with the debt expansion, is absolutely essential.

    In my opinion super should be used first and foremost to obtain the debt inflated asset du jour and then after that to save, or repay the gargantuan amount of debt that was necessary to keep the asset inflated, plus interest. Then upon retirement the asset can be cashed in for the current debt inflated price, or lived in to reduce total living expenses.

    Whereas super wouldnt be as useful, nor as protected in these times.

  5. Same Kevin Rudd that wants 50 million citizens Down Under. Visibly, all he cares about is the Australian Worker. At Harvard, they’re sick and tired of him going on about it. Now the IMF COVID group has to put up with it…

  6. what if all the super money went into a pool and went to people who needed it, like a shared pension plan, instead of the wealthy having the opportunity to tax minimise and keep their unneeded extra wealth.

  7. Who takes anything Rudd says seriously. His comments only gets published because it doesn’t cost Nine anything.

  8. I always wonder if companies really do look at their “total wages” bill and think “that’s what I have available to employ people”. Working in many companies and in the industries I’ve been in this is not really how they employ people (high economic rent, high ROI industries).

    – Project/work has positive ROI (5x or greater typically to even bother with the work)
    – Need X skilled people to achieve that; hire X people and price discriminate (i.e. pay each the least you can). If they cost more well the profit is still there.

    Raising super especially for high margin industries won’t reduce wages and Australia is full of rent-seeking industries that fit into this category. For cost-based price/highly competitive industries they will either raise their price, reduce margins OR lay off workers accordingly. Overall I can’t see how the worker on average will be “worse off” by a raise in super; just like I can’t see the inverse being true. If we lowered it and paid it as wages instead how they would be better off? We would get inflation in houses most likely with the extra money, higher borrowings, less assets owned overall and same standard of living without asset accumulation. If prices are also lower because of less “take home wages” standard of living doesn’t decrease all that much and at least the average worker owns some assets they otherwise wouldn’t.