The legislated super guarantee increase from 9.5% to 12% by mid-2025 arguably should not go ahead given the current economic outlook. The Australian economy has deteriorated substantially since the first pandemic outbreak in March and is likely to remain depressed for the foreseeable future. Now more than ever, Australians need disposable income, not savings for spending somewhere down the line. Looking past the impact of coronavirus on superannuation, we also need to think about the retirement income system overall and whether it is due for reform.
The Superannuation Guarantee (SG) was introduced by the Keating Government in 1992 to address concerns around an increasing reliance by on the aged pension and the associated long-term fiscal problem. The policy was also motivated by a general concern that national savings were insufficient and domestic investment had to be financed by overseas borrowing, The large Current Account Deficits in the 1980s and 1990s were pointed to as evidence of a lack of national saving (Figure 1).
Figure 1. Current Account Balance in $m (LHS) and as % of GDP (RHS), 1879-80 – 1993-94
The SG rate is the amount of money that an employer is obligated to pay into an employee’s super fund in addition to the employee’s ordinary time earnings. Initially, the SG had a minimum contribution rate of 3/4%. The guarantee’s rate has not moved from 9.5% of an employee’s wage since July 2014 (i.e. if your salary is $50,000 p.a., your employer deposits $4,750 into your super account each year), but it is scheduled to rise to 12% in July 2025 (Table 1).
Table 1. Legislated Superannuation Guarantee rates, Australia
|Period||General super guarantee (%)|
|1 July 2021 – 30 June 2022||10.00|
|1 July 2022 – 30 June 2023||10.50|
|1 July 2023 – 30 June 2024||11.00|
|1 July 2024 – 30 June 2025||11.50|
|1 July 2025 – 30 June 2026||12.00|
First, there’s a public finance issue. The super system was designed to get people off the age pension, but it turns out most people still rely on the age pension despite lots of super contributions. Despite the SG being in place since 1992 the Government is still spending an ever-growing amount on the aged pension. For instance, in 1991-92, the year in which the SG was introduced, the federal Government spent 1.2% of GDP on age pensions and allowances and by 2018-19 this figure more than doubled to 2.6%. This upward trend shows that previous increases to the SG rate have not substantially improved the long-term fiscal situation. It also suggests that reforms to the current retirement income system may be needed to provide enduring fiscal sustainability.
As the Grattan Institute has found, because super contributions are taxed concessionally, the fiscal benefit is not as large as may be expected. In the February 2020 Grattan Institute No Free Lunch report, Grattan researchers noted (on p. 57):
…raising the Super Guarantee to 12 per cent could cost the budget $2 billion a year in additional super tax breaks…Super tax breaks will continue to cost the budget more than they save in pension payments until about 2060, according to Treasury analysis in 2013. The cumulative increase in Commonwealth public debt from a 12 per cent Super Guarantee would exceed 10 per cent of GDP by 2050.
Second, increasing the SG may not be beneficial for individuals. A 2019 Grattan Institute report argued that “lifting compulsory super contributions to 12 per cent would leave workers in Middle Australia poorer over their entire lifetimes” because of significant losses in aggregate lifetime earnings that would be recompensed with little or no increase in their ultimate retirement income. Significantly, Grattan found that increasing the SG is likely to have regressive effects:
[lifting the SG] provides a proportionally greater increase in the retirement incomes of high-income earners, who are ineligible for the Age Pension, than it will for low- and middle-income earners who will be subject to the Age Pension means tests in future.
This report was underpinned by an assumption whereby the higher super contributions would be offset by lower wages. This assumption is hotly contested, but past evidence consistently shows that super guarantee increases come out of employee wages. In 2007, Paul Keating was clear about the effect of super contributions on wages:
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.
Following this line of logic, a 2.5% decrease in future wage increases could be expected if the super guarantee rate were to rise to 12%. This would disadvantage those living from pay-check to pay-check. Recent data from the ABS indicates that payroll wages across the nation have already sustained significant blows from the pandemic (see Figure 2).
Figure 2. Percentage change in weekly payroll jobs and wages in Australia between 14 March and 25 July
A SG hike in this economic climate would only contribute to the pain felt by households across Australia. Furthermore, household consumption would only be stymied further by an increase in the SG, bringing about an even gloomier outlook for business.
Finally, there is an equity issue that arises from the implications of a legislated higher savings rate. Arguably, it is unfair to force low-income earners to save for the long-term by investing in a super when the best thing they could do for their long-term financial health is to save a deposit for a house so they can buy a house and not have to rent when they are retired. Along these lines, Coalition Senator Andrew Bragg has argued that super should become voluntary for workers earning less than $50,000 a year so that Australians can take charge of where their money goes depending on the circumstances.
Researchers from the ANU have also underlined the potentially punitive effects of raising the super guarantee for low-income earners who are much more sensitive to changes in income. The same ANU report found the existing rate of 9.5% to be “more than sufficient” for most Australians to comfortably retire.
The yet-to-be-publicly-released Retirement Income Review, which the Productivity Commission recommended “should be completed in advance of any increase in the Superannuation Guarantee rate”, may shed more light on the necessity of a super guarantee rate increase. The review was prepared by an independent panel, chaired by Mr Mike Callaghan AM PSM, with Ms Carolyn Kay and Dr Deborah Ralston as panel members. A public consultation paper was released in November 2019 and the final report was delivered to the Government June 2020. It is currently being considered by the Treasurer Josh Frydenberg.
What do the public think?
Superannuation was broadly accepted by Australians pre-COVID. According to a report commissioned by Industry Super Australia in 2019, 87% of respondents were in favour of lifting the guarantee above its current 9.5%.
But plenty has changed since the pandemic broke out early 2020. Perhaps the best indicator of public sentiment on superannuation can be seen through those taking advantage of the COVID-19 Early Release Scheme. APRA releases weekly statistics on the applications received for the Scheme, which show that in the week ending 9 August 2020, $31.1 billion payments have been made from a total of 4.1 million applications (including repeat applications). This has already far exceeded the $29 billion forecast by the Government in April.
The federal Opposition has criticised the Early Release Scheme as “reckless”, but the public appears to have made its stance clear in response to the economic hardships brought about by the pandemic. People want, and in most cases need, cash in hand.
The current circumstances, characterised by high unemployment and radical uncertainty, mean that Australian citizens need money now, not later. Increasing the Super Guarantee, and thereby decreasing household income and expenditure will have adverse consequences for Australian citizens and businesses in the short-term and would hinder economic recovery.
This article was prepared by Adept Economics Research Officer Ben Scott and Director Gene Tunny. Please get in touch with us on 07 3085 7417.