12% compulsory superannuation would lower lifetime incomes

The full report of the review commissioned by the federal government into retirement income will be released on 20 November, but its key findings have been made known.

Importantly, the report suggests that lifting the compulsory superannuation rate to 12% could disadvantage low-income earners and reduce workers’ lifetime incomes:

“A rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower-income earners,” an extract of the report, provided by the government, says. “This is based on the view, supported by the weight of evidence, that increases in the super guarantee rate result in low wages growth, and would affect living standards in working life.

“The weight of evidence suggests the majority of increases in the super guarantee come at the expense of growth in take-home wages. The view is based on empirical research, economic theory, evidence across a number of countries and the original policy intent of superannuation guarantees.

Australia’s compulsory superannuation system already exacerbates inequality by handing the lion’s share of tax concessions to high income earners:

According to the retirement income review, inequality will worsen if the superannuation guarantee is lifted to 12%:

“Increases in the superannuation guarantee rate will increase lifetime government support for higher-income earners by more than lower- and middle-income earners.”

Thus, retirement income review has arrived at similar conclusions to MB, which has opposed lifting the superannuation guarantee to 12% because:

  • It would suppress future wage growth and disposable income, adversely impacting lower-income earners already struggling to make ends meet.
  • It would increase inequality, since higher income earners receive the bulk of super concessions.
  • It would worsen the long-term sustainability of the federal budget, given the cost of superannuation concessions outweighs the benefits from lower pension outlays.

Ultimately, the main beneficiary from lifting the superannuation guarantee to 12% would be super funds themselves, because it would provide them with more funds under management and enable them to earn fatter fees to the detriment of taxpayers and workers.

Lifting the superannuation guarantee to 12% was always bad policy and should be dumped.

Unconventional Economist
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    • Agree with this. I understand the intellectual arguments and the way the system benefits the rich re tax avoidance. But I have mates on the award wage. They get an increase each year that is pathetic. You are saying the pathetic increase each year will be lower because of the super increase. My mates and I are of the opinion that now they will still get the “same” pathetic increase each year and the extra super. Time will tell.

  1. That chart is, in a nutshell, why it is probably in the interest of the majority of Australians to simply blow the superannuation system away and tell working Australians ‘you are on your own apart from a pittance in your dotage’

    “Workers bear 71% to 100% of the cost of increases in compulsory super”

    Super makes basically no sense for anyone under about 50-55

    I thought it a magnificent national bequest when Hawke Keating brought it in. But its perversion into a tax avoidance ‘wealth creation’ platform means it is time to end it. The 1% can fend fine for themselves without a government mandate enforcing the rest of the populace provide a human shield for their speculation whims, and capital to treat as a plaything or subordinate shareholding class

    • Jumping jack flash

      “Super makes basically no sense for anyone under about 50-55”

      Super makes basically no sense when we have an economy that is based on debt growth, but that debt growth doesn’t do much to the value of super.

    • Agree blind Freddy and an financially illiterate 21 year old could see the super scam way back in 1991 at its inception:)

  2. Jumping jack flash

    By the time I draw on my super, it will be a drop in the ocean of the amount of money I will need for a totally pension-free retirement.

    As it stands right now, with about 1/2 of my working life behind me, earning above average income and super paid to me for the entire time, if I earn even 3x the amount of super I have presently I will have about 5 years TOPS of average income when I retire. Maybe if I’m frugal I could perhaps get 10 years out of it, but that’s nowhere close to the 20 years of income I will need on average. And this is not considering the rise in living costs over the next 40 years.

    So a part pension will be absolutely necessary for me, at the very least.

    However if I used my pathetic amount of super to purchase a portfolio of houses which double in value every 7 years I will easily reach the amount required to live like a veritable king in retirement.

    This is why super is irrelevant at any percentage in a debt economy, and while they probably shouldn’t scrap the idea of forced savings, they should allow it to be used to purchase something that’s actually going to help in retirement, like a ton of houses using house-of-cards equitymate borrowing to become rich on others’ debt mountains when it comes time to liquidate.

    • This seems to be the point that is missed by all the discussion. Other than for the rich Super is never going to be enough to retire on. Having been in the workforce for 20 years, with this including 10 years at 15% super contributions I have just under a year of my current salary in super. 10% over a 40 year period gives you 4 years of your average salary for your working life to a first approximation, and that isn’t a lot.
      Investment returns I hear everyone start screaming. Sorry but I really don’t see how EVERYBODY can be getting returns on their investments exceeding inflation without causing inflation to increase to that return, as there will be more money chasing the same goods.

      • Jumping jack flash

        Investment returns, sure, but shocks to the system where most super is deposited seem to be increasing in frequency and amplitude. I expect this to continue as the debt grows and stretches the envelope of sanity and prudence.

        Especially if they all panic if this latest can-kick actually works to get the debt growing at the correct rate, like it started to back in 2006-07 and they pulled the pin for some unknown reason.

      • A few observations.
        People who extended their superannuation in the 1970s did well because they had their own funds which earned inflation plus a bit as the economy grew. Those on aged pension suffered due to high inflation and government chipping them by not increasing pension at same rate.
        Keating extension made that available to many.
        This assumes a moderately high investment return is available to invested capital, and therefore individuals can co-fund their retirement with the government, with extra protection from being dudded by inflation on the aged pension.
        Yes 10%pa over 40 years gives you 4 times average salary plus investment returns historically CPI plus 3-4 as economy grew, (productivity plus population growth) plus maybe another 1-2 if you overweight equities.risk in capital structure. Which might end up at 4 times current salary given the last 20 years typically has much less promotion than the first 20 years.

        Problem now is that the world has completely changed, the liquidity flood means all that invested capital gives very little income, and therefore the idea of a self-funded retirement for decades will be lost as you are forced to eat into your capital faster than you wanted..
        And therefore in this world putting aside 3%pa additional income into a superannuation structure with minimal earnings on it makes it difficult to justify the deferral of gratification. Especially if they are poorly paid to begin with.
        Personally if I have enough income to be able to save I would still prefer to do so as I value the government’s pension obligations with a higher discount rate than others to reflect expected partial default when inflation returns. I don’t believe the current adverse investing environment will be around forever, and I would rather have the capital to protect and then deploy in a more favourable environment, as opposed to trying to build it up quickly when investing conditions are better.

        • How much of the “current adverse investment environment” is a result of ever increasing amounts of “superannuation” being invested? A percentage of people can get Real investment returns above inflation. Everybody can’t as who loses out in this situation?

  3. There is a small opportunity here for Joshy to try to do some sort of mini-Accord with employers. Say that they will lift SG to 10% and stop there but get the employer groups etc to agree that they will not use that increase when arguing about future wages in front of Fair Work (as they do now).

  4. Leith, in your opposition to compulsory super, have you given much consideration to the likelihood that any reduction in compulsory super (whether it is scrapping the legislated increases, reducing minimum contributions, allowing withdrawals) will be that a very large proportion of this extra “take home pay” goes into housing?

    That seems to be the alternative. The Coalition is certainly already using this report to argue that young people should be able to withdraw their super to buy a house, given apparently the report has found that home ownership is a much better retirement pillar than super.

    Is it a better outcome in your view? I am genuinely interested in the MB position on this.

    • “The Coalition is certainly already using this report to argue that young people should be able to withdraw their super to buy a house, given apparently the report has found that home ownership is a much better retirement pillar than super.”

      That’s overstating it I think. A group of backbenchers wanting to make their mark are saying this – the usual suspects – Patterson, Wilson, Bragg, Falinski etc. I don’t think even ScoMo would go that far. And the Callaghan review was very clear in saying that compulsory super plays an important role for middle income earners and their ability to save for retirement.

      • Yeah but you know which direction it will go in right? “Use the house for retirement and super to get you one” has a ring to it…

        From the AFR:
        The Morrison government will use evidence from the latest retirement income report to help retirees unlock equity from the family home and possibly allow first-time home buyers to tap their super early.
        A growing group of Liberal MPs have already asserted that home ownership should be a cornerstone principle of the retirement system.
        Treasurer Josh Frydenberg cited the retirement income report’s emphasis on home ownership as a key foundation for a healthy retirement system.

        • Yeah I read that. I just don’t think it will be as simple as “use your super to buy a house”. There might be some enhancement of the First Home Saver Scheme maybe by allowing a one off transfer of up to, say $10k, from your super account to your FHS account which would then be available for you to use in due course.