Survey: Superannuation increase will crush wage growth

Herbert Smith Freehills partner Michael Vrisakis says there is nothing preventing an employer from offsetting an increase in the superannuation guarantee (SG) on 1 July by reducing take-home pay, so long as their employees’ remuneration packages are inclusive of super.

He was commenting on a survey by Mercer which found that 63% of organisations which pay staff in such a way intend to offset at least part of the super guarantee increase by cutting employees’ take-home pay.

From The AFR:

“For employees on a contract where the remuneration is inclusive of superannuation, the absorbing of the superannuation guarantee increase into the package without any increase [in the total package] is legally possible absent any contrary term of the contract and subject to any contrary voluntary decision by the employer”…

Mercer’s report comes against the backdrop of a growing body of evidence that suggests workers – not employers – pay for higher superannuation through lower wages.

The Australian Treasury’s Retirement Income Review, released last year, explicitly noted that that lifting the compulsory SG rate to 12% would lower wage growth, disadvantaging low-income earners and reducing 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…

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.

The Henry Tax Review came to exactly the same conclusion more than a decade ago and explicitly recommended against lifting the SG:

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.

Whereas the Reserve Bank of Australia last year estimated that lifting the compulsory SG to 12% would reduce wage growth by 1.75% and the Grattan Institute estimates that 80% of the cost of superannuation comes via lower wages within two to three years.

From the outset, MB has argued against lifting the compulsory SG to 12% since:

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

The main beneficiaries from raising the SG to 12% are superannuation funds, which will earn bigger management fees at the expense of workers and Australian taxpayers.

Sadly, the powerful superannuation industry has won the debate in the court of public opinion, which means the scheduled increase in the SG will go ahead.

Unconventional Economist
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Comments

  1. Hmmm… a direct pay cut. Not just threat of raising taxes. A real vote winner this one?

  2. peterbruceMEMBER

    So why don’t you campaign against the Super concessions? You did that for years in the past, but sadly no more.

  3. The Govt needs to kneecap the industry fund sector.

    A Govt super fund to become the “default scheme”

    Free of fees for any balances below $500k.
    Investment options include ETFs (ASX and overseas)
    Unlisted Australian infrastructure assets
    Govt bond debt portfolio

    DO IT. DO IT NOW.

  4. Raging giantMEMBER

    Bit of hyperbole really. It is hard to crush zero. Wage rises are a thing of the past at the moment.