The Conversation

  • Written by Brendan Coates, Fellow, Grattan Institute
Productivity Commission finds super a bad deal. And yes, it comes out of wages

Want more to retire on?

In its long-awaited final report on the efficiency and competitiveness of Australia’s leaky superannuation system, Australia’s Productivity Commission provides a roadmap.

Weeding out scores of persistently underperforming funds, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a simple list of top performers would give the typical worker entering the workforce today an extra A$533,000 in retirement.

Even Australians at present in their mid fifties would gain an extra A$79,000.

If this government or the next cares about the welfare of Australians rather than looking after the superannuation industry it’ll use the recommendations to drive retirement incomes higher.

So why the continued talk (from Labor) about lifting compulsory super contributions from the present 9.5% of salary to 12%, and then perhaps an unprecedented 15%?

It’s probably because (and Paul Keating, the former treasurer and prime minister who is the father of Australia’s compulsory superannuation system says this) they think the contributions don’t come from workers, but from employers.

To date, they’ve been dead wrong. And with workers’ bargaining power arguably weaker than in the past, there’s no reason whatsoever to think they’ll be right from here on.

Past super increases have come out of wages

Australia’s superannuation system requires employers to make the compulsory contributions on behalf of their workers. Right now that contribution is set at 9.5% of wages and is scheduled to increase incrementally to 12% by July 2025.

So, for workers, what’s not to like?

It’s that while employers hand over the cheque, workers pay for almost all of it via lower wages. Bill Shorten, then assistant treasurer, made this point in a speech in 2010:

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.

The Henry Tax Review and other investigations have found this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been.

Even Paul Keating, speaking in 2007, made this point. Compulsory super contributions come out of wages, not from the pockets of employers:

The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost […] In other words, had employers not paid nine percentage points of wages, as superannuation contributions, they would have paid it in cash as wages.

This is more than mere theory. Compulsory super was designed to forestall wage rises. Concerned about a wages breakout in 1985, then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for super contributions.

When the Super Guarantee climbed from 9% to 9.25% in 2013, the Fair Work Commission stated in its minimum wage decision of that year that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”.

The pay of 40% of Australian workers is based on an award or the National Minimum Wage and is therefore affected by the Commission’s decisions. For these people, there is no question: their wages are lower than they would’ve been if super hadn’t increased.

Where’s the evidence employers pay for super?

If wage rises came from the pockets of employers then we should see a spike in wages plus super when compulsory super was introduced, and again when it was increased. But there wasn’t one when compulsory super was introduced – a point Bill Shorten has made in the past.

When compulsory super was introduced via awards in 1986, workers’ total remuneration (excluding super) made up 63.3% of national income. By 2002, when the phase-in was complete, it made up 60.1%.

Out of the 26 countries for which the Organisation for Economic Co-operation and Development has data, Australia recorded the tenth largest slide in the labour share of national income during the period compulsory super contributions were ramped up.

Read more: The superannuation myth: why it's a mistake to increase contributions to 12% of earnings

Of course, changes in super aren’t the only thing that affects workers’ share of national income.

But the size of the fall in the labour share in Australia over the period when the super guarantee was increasing isn’t consistent with the idea that employers picked up the tab for super.

Would it be different this time?

Paul Keating argues that while in the past lifting compulsory super to 9.5% was paid for from wages, a future increase to 12% today would not be:

Workers are not getting real wage increases anywhere, and can’t get them. The Reserve Bank governor makes the point every week. So the award of an extra 2.5% of super to employees via the super guarantee will give them a share of productivity they will not get in the market – without any loss to their cash wages.

But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons current wage growth is so weak.. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in the compulsory Super Guarantee?

And while real wages (wages adjusted for inflation) haven’t grown particularly quickly, the dollar value of wages continues to grow: by 2.2% a year over the past five years. It would be easy for employers to simply reduce those increases to offset any increase in compulsory super – as they have in the past.

And no, more contributions won’t help workers

The Grattan Institute’s recent report, Money in Retirement, showed increasing the compulsory super would primarily benefit the top 20% of Australians. It would hurt the bottom half during working life a lot more than it helps them once retired.

Their higher super contributions would not improve their retirement outcomes: their extra super income would be largely offset by lower part-pensions. What’s more, the age pension is indexed to wages. If wages grew by less (as they would as compulsory super contributions were increased) pensions would grow by less too.

Lifting compulsory super would also cost the budget A$2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.

That would mean higher taxes elsewhere, or fewer services.

For low-income Australians, increasing compulsory super contributions would be a thoroughly bad deal. It means giving up wage increases in return for no boost in their retirement incomes.

A government that wanted to boost the living standards of working Australians both now and in retirement would consider carefully all of the Productivity Commission’s suggestions including this one: an independent inquiry into the whole idea and effectiveness of Australia’s regime of compulsory contributions, to be completed ahead of any increase in the Superannuation Guarantee rate .

Read more: Why we should worry less about retirement - and leave super at 9.5%

Authors: Brendan Coates, Fellow, Grattan Institute

Read more http://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638

Politics

Scott Morrison at Australia-Israel Chamber of Commerce

QUESTION: I suppose one question I'll ask is about the role of social media, YouTube, Facebook. And the sort of thought process that we’re having as a nation of how we can create that sort of societ...

Scott Morrison - avatar Scott Morrison

Delivering the rail links Western Sydney needs

The Morrison and Berejiklian Governments will ensure the Western Sydney International (Nancy Bird Walton) Airport has a metro rail line in time for its opening.   The Prime Minister said his Gover...

Scott Morrison - avatar Scott Morrison

Nancy-Bird Walton immortalised at Western Sydney Airport

Australia’s biggest aviation project will honour one of the nation’s trailblazing stars of the sky.   The $5.3 billion Western Sydney Airport will officially become Western Sydney International (N...

Scott Morrison - avatar Scott Morrison

Business News

Intense Growth As Car Next Door Launch Capital Raise

Releasing internal revenue figures for the first time, Car Next Door has achieved marketplace revenue of $10m last year and is on track to almost double that again in 2019 as it marks the start of a...

Car Next Door - avatar Car Next Door

How two 30-year old’s made 4 million in 2 years with coffee

Try ordering a “coffee” and chances are you’ll be met with a bored eyeroll and the expectation to specify “how” you’d like your coffee. Will it be, cold-drip, filter, nitro, hell let’s go old school...

Sophia Day - avatar Sophia Day

Why savvy female entrepreneurs need branding more than ever

Branding isn’t new, but it’s become a integral factor in any business success, especially for female entrepreneurs. With an oversupply of skincare, hair and beauty products, fashion accessories, hea...

Stella Gianotto - avatar Stella Gianotto

Travel

The Gold Coast is famous for fun but it is also famous for horrible traffic issues

The Gold Coast is a great place for a holiday but there are problems that tourists need to be aware of. The Gold Coast airport is a busy place. Thousands of visitors arrive every day from around the ...

Holiday Centre - avatar Holiday Centre

Older generation Australians are embracing solo travel

Allianz predicts a rise in solo travel in 2019, revealing those most likely to ‘go -it-alone’ among the 50+ age group   The popular ‘solo travel’ trend is predicted to continue in 2019 with mor...

Media Release - avatar Media Release

Fun Things You Must Do In Perth

Perth: Sun, sand and 19 beaches might seem to sum up the city, but not quite. The sunniest capital city in Australia offers so much more for you to do. Regardless of what your idea of fun is, you wi...

News Company - avatar News Company