Craig Emerson spins superannuation fairy tales

Former Labor MP, Craig Emerson, has penned an opinion piece in The AFR claiming that scrapping the scheduled rise in the super guarantee (SG) will “expand the future welfare state and force up personal taxes”:

Reserve Bank governor Philip Lowe and the Grattan Institute, persist with the argument that workers will get a wage rise if the legislated increase in the superannuation guarantee is cancelled. These are the same real wage rises that we have been told for each of the past few years were just around the corner, but which never materialised…

Since 2013, labour productivity has grown by 1.2 per cent a year while annual real wages have not grown at all…

Businesses will allocate to profits, not workers, the labour cost savings from a cancelled increase in the superannuation guarantee.

Lowe recently told a parliamentary committee meeting: “If this increase goes ahead, I would expect wage growth to be even lower than it otherwise would be”, adding there would be less current income, less spending and fewer jobs…

Cancelling the legislated increase in the superannuation guarantee is a policy prescription for higher personal taxes and bigger government. It seems a weird move from a conservative government – but then again, we live in weird times.

Craig Emerson conveniently failed to mention that superannuation concessions cost the federal budget more than they save in aged pension costs.

The Henry Tax Review was abundantly clear on this point:

“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).”

The Grattan Institute has also shown that over “both the short and long term, superannuation tax breaks cost the budget more than they save in pension payments”:

As has actuarial firm Rice Warner:

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”…

Nor do Emerson’s claims around wages hold any weight.

While real inflation-adjusted wages have stagnated, nominal wages have grown at an average of 2.1% over the past five years:

This gives employers plenty of scope to cut take home wages if the compulsory SG is increased.

Seriously, why would employers voluntarily absorb the hit from increasing the SG when workers’ bargaining power and share of national income is at 50-year lows?

If bosses currently don’t feel pressured to give real wage rises, then why would they feel pressed to absorb further increases in the compulsory SG?

Moreover, the massive fall in the labour income share in Australia over the period when the SG was increasing is inconsistent with Emerson’s implicit suggestion that employers will absorb the cost of super.

Recall the plethora of ‘experts’ and Labor Party commentators claiming that increases in the SG are paid for by workers via lower wage growth.

Here’s the RBA:

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.”

Here’s the Australian Treasury:

Though compulsory SG contributions are paid by employees, wage setting generally takes into account all labour costs. It is widely accepted that employees bear the cost of higher SG in the form of lower take-home pay. This means there will be a trade-off between people’s income during their working lives and their income during their retirement.

Here’s 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.

Here’s the Parliamentary Budget Office:

The increase in the superannuation guarantee to 12 per cent will likely lead to lower wage increases, shifting a greater proportion of earnings into the superannuation system.

Here’s the Government paper announcing the establishment of compulsory superannuation in 1992, entitled Security in Retirement: Planning for Tomorrow Today:

A major challenge for retirement incomes policy is the need for current consumption to be deferred in favour of future income in retirement…

No loss of remuneration is involved in meeting this national challenge. What is involved, rather, is forgoing a faster increase in real take‑home pay in return for a higher standard of living in retirement.

Here’s 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 would 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..

Here’s former Labor Prime Minister Paul Keating:

The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost. Indeed, in each year of the SGC growth between 1992 and 2002, the profit share in the economy rose…

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…

When you hear conservatives these days speak of superannuation as a tax on employers they are either ill-informed or they are lying…

And here’s former Labor leader, Bill Shorten:

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.

Stop lying Craig. Increasing the SG will be paid for by workers through lower wage growth and will cost taxpayers over the long-term.

The primary beneficiaries are your industry super mates.

Unconventional Economist
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