A legislated plan to increase compulsory superannuation contributions from 9.5 per cent to 12 per cent by 2025 would strip up to $20 billion from workers’ wages each year, or nearly 1 per cent of gross domestic product (GDP), according to the Grattan Institute.
The move, which is supported by both major political parties, would save the federal budget about $2 billion a year if it goes ahead.
But modelling from the Grattan Institute suggests by the time it was fully implemented in 2025-26, a 12 per cent super guarantee would result in a $20 billion cut to workers’ wages, and low-to-middle income Australians would be worst hit.
Grattan Institute fellow Brendan Coates called on both major parties to rethink the increase.
“For an election that’s all about stagnating wages it’s remarkable that both sides have this policy,” he told ABC News.
“It’s particularly remarkable for Labor, which is staking its case on the fact that wages haven’t been rising.”
The Productivity Commission recently looked at the issue and suggested further research be carried out before the increase is implemented.
Move will leave workers ‘poorer’: Coates
Mr Coates said the policy would take wages from workers today without them getting substantially higher retirement incomes.
“It actually makes them poorer over their lifetime,” he said. “They lose 2.5 per cent of wages each year and get and less than 1 per cent a year boost to their retirement incomes.”
Mr Coates said middle-income Australians would be particularly hard hit for two reasons.
First, the pension is benchmarked to wages. “If wages grow less, which they will if super contributions rise, then the pension grows by less,” Mr Coates said, adding pensioners should be outraged.
The second reason, he said, is the pension is means tested.
Mr Coates said more superannuation did not translate to more retirement income as most of it would be clawed back by the age pension asset test, especially for middle-income Australians.
“Someone on about $45,000 a year median income working a full working life [37 years] will start their life on a part age pension,” he said.
“The extra income they have from super is $50,000 but they lose over their lifetime about $40,000 in pension payments. So the boost to their retirement income is microscopic.”
The Grattan Institute has previously argued that reducing fees charged on Australians’ superannuation funds would do more to boost retirement incomes.
In any case, Grattan has previously done projections showing most Australians, except women who rent, are already on track to have adequate retirement incomes.
Super industry modelling ‘flawed’
Mr Coates said modelling commissioned by the super industry which suggested Australians did not have enough to retire on was based on flawed assumptions.
“Industry Super Australia points to the higher super balances workers will have at retirement if compulsory super contributions are increased,” he said.
“But it’s a misleading story. More super at retirement is only useful if it actually translates to higher incomes in retirement. And for most low- and middle-income-earners, it won’t help much.”
A full-time worker on the minimum wage could already expect a retirement income 20 per cent higher than their after-tax wage when working.
“Even workers in their 40s and 50s today — many of whom didn’t benefit from the present high rate of compulsory super contributions for their entire working lives — can expect a retirement income of more than 70 per cent of their pre-retirement incomes,” Mr Coates said.
Further, he said, in the long term the change would not save the budget money because super tax breaks exceed pension savings.
“Super tax breaks will exceed any decline in pension spending until at least 2060,” Mr Coates said.
The Grattan’s estimate of a $20 billion hit to workers’ wages is based on projecting forward the hit to wages to 2025-26 arising from an increase in the Superannuation Guarantee to 12 per cent as scheduled, from 9.5 per cent today.
“We take estimates of compulsory super contributions today from the ATO, project them forward to 2025-26 using nominal GDP forecasts in the budget papers, accounting for the extra compulsory super contributions that will arise from a 12 per cent Superannuation Guarantee rate,” Mr Coates said.