12% superannuation hangs in the balance

The federal government will release the findings of its review into retirement incomes on Friday. Amongst other things, the review is believed to support a recent warning from Reserve Bank governor Philip Lowe that the legislated increase in the superannuation guarantee (SG) will reduce wages and economic growth.

The SG is slated to rise from 9.5% to 10% in mid-2021, but the government is set to delay a decision on proceeding with this increase until it hands down the Budget in May.

From The Australian:

The Australian understands the review warns that ballooning tax concessions in the super system would outstrip the cost of the Age Pension, currently costing the budget almost $70bn a year, by 2050. It also warns that raising the super guarantee to 12 per cent by 2025 as scheduled would deliver an intolerable equity gap between men and women.

The review is believed to strongly argue the case that wage earners and women would end up paying for an increase in the current 9.5 per cent rate.

The Prime Minister signalled in August that he was no longer wedded to lifting the super guarantee, acknowledging that it could suppress wages and cost jobs, despite promising at the 2019 election to continue with the scheduled increase to 12 per cent.

So, it appears that the retirement income review has come to similar conclusions to MB, which has opposed lifting the SG 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.

Basically, the only parties to benefit from lifting the SG are the super funds themselves, as it would provide them with larger funds under management and enable them to earn fatter fees to the detriment of workers and Australian taxpayers.

Unconventional Economist
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Comments

  1. Here are some scenarios to consider in the debate using a ASICs super calculator on the default settings.

    1. 30 year old on 70k per year contributing 9.5% SG with a current balance of 20k and retires at 67 – Final balance $439,708
    2. 30 year old on 70k per year contributing 12% SG with a current balance of 20k and retires at 67 – Final balance $451,117

    or

    3. 30 year old on 70k per year contributing 9.5% with a current balance of 20k and retires at 68 – Final balance $455,824

    So we’re really talking about 1 year of extra work if you want that larger balance or you can chose to increase you’re own contributions if you don’t want to work that 1 extra year.

    So 9.5 or 12 it does jack all to your final outcome compared to just working an extra year or two.

    My personal view, it should be raised to 10%. 9.5 is just a dumb number.

  2. @ Byron:

    It’s even worse than that. The analysis assumes that the additional 2.5% magically comes out of the goodness of the employers heart. So of course the worker is better off at 12% because it’s free money.

    But if you assume that the 2.5% is an alternative to an increase in wages, then the analysis gets even closer because it would need to take into account the additional money the worker gets outside of super. In fact, the only benefit is from the tax rate differential between the marginal tax rate of 32.5% and the superannuation rate of 15%. That is probably easily offset by increased admin fees of investing via the super system compared to say the worker investing the extra post tax salary into the identical ETFs that the MySuper fund will typically invest in.

    • Well two points here. First, yes if you accept that the bucket loads of research is correct it’s coming from the employees pocket not the employer then as an employee you can argue for the increase right now. Because if they pause it we aint getting pay rises (those of us still employed) for a while… Second, will we ever see a mysuper fund at 10bps total fees and costs? I’m being generous here. 1-2bps for investment costs if you’re just buying the index. That leaves 8-9bps for admin. 🙂

      • Second, will we ever see a mysuper fund at 10bps total fees and costs? I’m being generous here. 1-2bps for investment costs if you’re just buying the index. That leaves 8-9bps for admin

        I think we both know the answer to that!

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