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Economics 101 suggests that a dollar today is worth more than a dollar tomorrow. But when it comes to retirement savings, are Australians better off pocketing a higher wage today or would a boost in superannuation contributions yield a better outcome?
Welcome to the Great Super Debate - an enduring discussion in the Australian economic and political sphere.
Since compulsory superannuation began nearly three decades ago, various governments have explored ways to move the super guarantee contribution rate closer to the 12 per cent mark. Many have also disagreed.
As it stands today, superannuation is currently at 9.5 per cent of a worker’s take-home pay. And this is where the debate begins.
As enacted by the Morrison government, the SG contribution rate is scheduled to increase to 10 per cent in July this year, with further, incremental increases planned in the years ahead.
However, since the COVID-19 pandemic pushed Australia into its first recession in 30 years, key groups have called into question the government’s intentions, with many arguing Aussies should pocket the planned increase now.
Those in favour of lifting the superannuation guarantee from 9.5 to 12 per cent point to the 4.6 million Australians who cannot fund their own retirement, arguing that lifting the rate will ultimately take the pressure off the pension system.
On the other hand, Australians who have been impacted by the COVID-19 economic slowdown need higher wages today, with those in favour of supporting wage growth pointing to the economic benefits of lifting wages over increasing superannuation.
Workers will pay for 12% super increase
One of the chief arguments against raising the rate is the concern that it will chip away at any further wage growth - which has already been at anaemic levels in Australia over recent years.
RBA governor Philip Lowe said international and local experiences have shown some 80 per cent of increases in superannuation guarantees have been paid by employers that have in turn stalled wage growth.
As Australia emerges from its first recession in a generation, the RBA is desperate to lift wages. In doing so, it hopes it will lead to higher consumer spending, which will allow the bank to hit its inflation targets.
The RBA’s economic forecasts suggest that wage growth will flatline at about 2.2 per cent from next year when the super rise kicks in, even if the jobless rate falls to below 5 per cent, which theoretically should put pressure on wage increases.
“The real challenge we have is to make wages grow at a faster rate than they have been,” Mr Lowe told a recent parliamentary committee.
RBA assistant governor Luci Ellis also recently explained that the bank has cut its workers’ pay forecasts as the legislated increase to superannuation is expected to continue to put downward pressure on wage growth.
She noted that wage growth would have gotten “a little bit of a pick-up from here”, if not for the legislated requirement for businesses to boost their superannuation contributions.
Think tank the Grattan Institute agrees. Using administrative data on 80,000 federal workplace agreements made between 1991 and 2018, it found about 80 per cent of the cost of increases in super is passed to workers through low wage rises within the life of an agreement, typically two-to-three years. The long-term impact is likely to be even higher.
According to Grattan, these findings shouldn’t come as a surprise. Pointing to international studies of similar schemes, Grattan said workers typically pay for most, if not all, of social security contributions made on their behalf. Which is why past federal governments have long assumed that compulsory super is paid out of workers’ wages, rather than by employers.
Many supporters of higher super, including former prime minister Paul Keating, argue that while past increases to 9.5 per cent were paid for from wages, future increases to 12 per cent won’t be.
The Grattan Institute also points to research showing that for many Australians, the trade-off between higher super and lower wages isn’t worth it.
According to Grattan, compulsory super set at 9.5 per cent, together with the age pension, is already doing its job, with most retirees today said to be more financially comfortable than younger Australians who are still working.
Grattan’s household finances program director, Brendan Coates, recently said that the retirees of tomorrow are likely to be even better off.
“The average worker today can expect a retirement income of 89 per cent of their pre-retirement income – well above the 70 per cent benchmark used by the OECD and others,” he said.
Mr Coates reminded that the Henry Tax Review recommended against increasing compulsory super beyond its then rate of 9 per cent of wages just on a decade ago.
And with research suggesting the benefits of the super guarantee are more nuanced than originally thought, a potential solution may come in the form of ‘opt-in’. While only rumoured at this stage Aussie workers could potentially get to choose between a pay increase today or the legislated increase in superannuation.
It’s time to lift the rate
On the other side of the Great Super Debate are those worried about what it means to be a nation with an ageing population. That is: Australians won’t have enough savings, and the public purse won’t be able to afford to cover them.
Industry funds and think tanks opine leaving superannuation at its current levels will make it harder for workers to retire comfortably, while adding to the cost of aged pension.
Industry Super Australia’s research found, if the currently legislated increase is binned and workers continue to receive only 9.5 per cent, a 30-year-old couple on median wages would lose $170,000 from their retirement nest egg.
“Some politicians want to break an election promise and cut super, forcing Australians to work longer or retire with less. It’s time for the government to leave people’s super alone,” Industry Super Australia CEO Bernie Dean said.
The government’s Retirement Income Review (RIR) report, which was released by the end of 2020, also found that Australians could potentially sell the equity in their home if they should find themselves in need of further retirement funding. But Industry Super Australia has slammed this finding.
With the increasing cost of home ownership in Australia, the ISA has argued its members cannot rely on selling their home or setting up a reverse mortgage later in life.
“Rather than getting the legislated super boost, politicians want Australians to sell their family home to fund retirement,” Mr Dean said.
Separate research by Rice Warner has also suggested reneging on the legislated increase in the super guarantee would add a whopping $33 billion to age pension costs over the period to 2058.
According to ISA’s deputy chief executive Matthew Linden, “Dumping the legislated increase in the SG will unequivocally leave Australians with less private savings at retirement and more reliant on the publicly funded age pension.”
“There is no free lunch, for every dollar taken out of super early the taxpayer has to pay back even more in higher pension costs – that’s why if the government opts-out of super it opts-in to higher taxes,” Mr Linden added.
Can members get more without lifting the rate?
But perhaps increasing the rate of superannuation is not the only way to achieve better retirement outcomes for members.
A review into Australia’s retirement system, aptly named the Retirement Income Review, concluded that Australia’s retirement income system is “effective, sound and broadly sustainable”, but room for improvement was also outlined.
Minister for Superannuation, Financial Services and the Digital Economy Jane Hume said the government is focusing on “modernising superannuation” by fixing the holes outlined in the review.
“The Protecting Your Super reforms were aimed at addressing erosion of small and inactive accounts, the accounts that were getting the worst deal from our superannuation system,” Ms Hume said.
The government plans to modernise the superannuation system by removing fees for younger Australians and by stapling them to higher performance, and interactive superannuation tools that are all aimed at achieving greater outcomes for members in retirement.
“Often, these excessive premiums eroded the balances of young people that took years and years of contributions to finally increase their balance, which is not an inspiring entrée into the world of compulsory super saving,” she said.
“The complexity of the superannuation and the lack of simple, clear and independent advice is currently holding Australians back.
“Someone entering the workforce for the first time who chooses a single well performing fund and avoids creating unintended multiple accounts could be as much as $98,000 better off in retirement.” (PULL QUOTE)
The debate continues
But there is another path for superannuation - at least in the near term. With the economic backdrop continuing to be challenging while the global pandemic persists, there could be scope to pause the increase until conditions improve.
While only a rumour at this stage, Treasurer Josh Frydenberg has hinted at delaying increasing the rate of superannuation until such a time.
Government backbenchers however, have been more explicit including outspoken ministers Tim Wilson and Andrew Bragg.
"I don't believe we should be tipping more money into a broken scheme," Mr Bragg previously said.
However, with the super debate showing no signs of subsiding, we’ll have to wait to see how the story unfolds.
The Great Super Debate continues...