Superannuation steals from the pension

Industry Super Australia (ISA) continues to lobby the federal government to increase the superannuation guarantee (SG), arguing that if the super rate increase was abandoned, it would “heap pressure on the pension”:

ISA said it was vital the legislated increases in the superannuation guarantee – from 9.5 per cent to 12 per cent of wages – go ahead as planned.

“Ditching the legislated increase would heap pressure on the pension and be a cruel blow to those who had to make the tough choice to sacrifice retirement savings to get them through the pandemic downturn,” ISA CEO Bernie Dean said…

“Ripping [the super guarantee rise] away from [young workers] would be a cruel double blow,” Mr Dean said.

“It would leave them with far less at retirement and saddle these young workers with a whopping pension bill they pay for through higher taxes.”

As usual, ISA is conveniently looking at only one side of the equation – the cost to the Aged Pension – while ignoring entirely the massive budgetary costs of superannuation.

The Treasury’s 600-page Retirement Income Review Final Report slams the ISA’s approach and shows unambiguously that lifting the SG to 12% would cost the federal budget far more than it saves in Aged Pension costs [my emphasis]:

Government expenditure on the Age Pension as a proportion of GDP is projected to fall slightly over the next 40 years to around 2.3 per cent [from 2.5 per cent]. Higher superannuation balances reduce Age Pension costs. The cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of Age Pension expenditure by around 2050. This is due to earnings tax concessions. The increase in the SG rate to 12 per cent will increase the fiscal cost of the system over the long term…

The sustainability of compulsory superannuation is best assessed by looking at its full budgetary impact and not just the reduction in Age Pension expenditure as the superannuation system matures. The cost of superannuation tax concessions also needs to be taken into account.

…as the superannuation system matures, the cost of superannuation tax concessions is projected to grow as a proportion of GDP such that by around 2050 it exceeds the cost of Age Pension expenditure as a per cent of GDP (Chart 12). This is the result of growth in the cost of earnings tax concessions…

Across the income distribution, the lifetime cost of superannuation tax concessions is projected to outweigh the associated Age Pension saving (Chart 13)…

Modelling by actuary firm Rice Warner also showed unambiguously that lifting the SG would cost the federal budget over both the short and long-term:

“Our modelling shows that the legislated increase in the SG will not have much impact on the Age Pension for many years but will reduce it by about 0.1% of GDP in the second half of this century on current means testing settings. Conversely, the tax concessions from the increase are more immediate and they will average about 0.22% of GDP throughout this century”.

As did the Grattan Institute:

And 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).”

Let’s also remember that superannuation concessions cost the federal budget $43 billion a year and are very poorly targeted to high income earners, who receive the lion’s share of taxpayer assistance:

The already excessive cost of superannuation concessions necessarily means there are less funds available in the federal budget to lift the Aged Pension.

If budget sustainability and equity in retirement outcomes was the true goal, there is a strong case to abolish superannuation altogether and to channel the immense budget savings into lifting the Aged Pension.

Because it is the high cost of superannuation concessions that is preventing the pension from being lifted. Lifting the SG to 12% would only make the situation worse.

Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. I’m all for #noliftforyou AS LONG AS that legislated 2% is legislated to pay packets….
    otherwise, rrrrrright to the bottom line of business

    • Totes BeWokeMEMBER

      Exactly. Or taken as wages and geared twenty times into housing.

      Take the money and make it grow in super or it’ll turn to dust via everything it inflates.

      • Jumping jack flash

        Grow in super? My super has been flat for at least 5 years now. I lost a stack with one mob and got absolutely sick of it, switched over to another who seems a lot better, but still no gains. Just less loss.

        Super makes no sense in a debt ecomomy. Much better to use the asset du jour to attach your money to and then let government mandated debt expansion do the rest.

  2. The even greater economic cost is the fees, upward of $30 billion a year.

    That’s not just $30 billion of cash. Aside from the economic rent earned by the industry, that $30 billion represents resources that might have been employed elsewhere.

    And for what?? What does it produce?

    Superannuation is – and always was – a make-work scheme for Sydney fund managers.

    It’s the equivalent of manufacturing protection for the 21st century. Except that at least manufacturing gave you the security of domestic supply in times of crisis. Funds management produces nothing at all.

    The next time there’s an epidemic – or a war – we can’t all eat funds management. We can’t live in funds management. Funds management won’t make our cars go.

    We have no comparative advantage in funds management.

    • Good to have you back again, do stay awhile

      I mean, lots of fund managers are pretty chubby, they might roast up ok?

    • There’s is some funds management in Melbourne as well – not *just* a Sydney industry. Brisvegas was also trying to hustle in on it but Blue Sky has set back that state for a little while …

    • Strange Economics

      The fees are not a cost. Don’t knock them. . They are an essential support to Vaucluse and Toorak house prices. How can you get a 5 mill mortgage without a fundie salary of 500K a year. Super is an essential support for the Australian dream houses.

      Gosh you’d have to pay at least that to get someone to cleverly decide to invest your super 50% in CBA, 25 % in BHP and 23 % in Rio, and 2 % in investment fees. .

        • Strange Economics

          Well it might take them 8 hours heavy thinking at 5000 an hour to decide that, followed by a wagyu and shiraz dinner. These guys are smart. Why over 50 % of active funds beat an ASX 200 ETF. (Of course 50% of them are worse than doing nothing or that a passive 0.2% fee ASX 200 ETF). Still 100% of them will say they are better than average.

  3. Christopher Kennett

    The solution is to raise the Super age to match the pension age. Doing so you could probably even *reduce* the super Guarantee and put more money into house prices.

    At the very least give people the option – 10% super at age 60, or 6% Super at age 67.

    • No way. It’s people’s money, they should be able to enjoy some good years in good health to enjoy their retirement.

      Why should they have to wait till 67 to access their money? In most cases they’ll only have 10 or so healthy years left to spend it.

      I can see why the parasitic super industry would love it though.

  4. So super will cost the budget more than the pension. It is disturbing if that is the excuse for not proceeding with the SG increase. It feels like rewarding the previous bad behaviour of the Howard/Costello government who introduced the super rorts. Instead of giving up on the SC increase, how about limiting the super tax expenditures? Super is ridiculously broken, but don’t use that as an excuse to limit its growth just because the LNP don’t want to fix it.

    • Strange Economics

      Super mainly rewards high income earners, who benefit from the 30% tax saving.
      Tax rate Should be 15% less than the marginal rate, not a flat 15%.

      • If you’re referring to the contributions tax, it’s 30% for higher income earners (those who remuneration is $250K+).