Fact check: Tony Abbott incorrect on impact of superannuation changes on workers

Updated

Prime Minister Tony Abbott says delaying a mandated increase to compulsory superannuation contributions is "a good deal for workers" because it will keep more money in their pockets.

Under legislation introduced by the former Labor government, employer contributions were to rise gradually from 9.5 per cent to 12 per cent by 2019. Now the rate will stay at 9.5 per cent until 2021 and will not reach 12 per cent until 2025.

Mr Abbott has defended the delay. "It's not an adverse change. No-one is going backwards. No-one is going backwards," he told ABC's 7.30.

ABC Fact Check examines whether the delay to super increases will leave employees worse off.

The claim: Tony Abbott says delaying an increase to compulsory superannuation contributions is "not an adverse change" and that "no-one is going backwards".

Tony Abbott says delaying an increase to compulsory superannuation contributions is "not an adverse change" and that "no-one is going backwards". The verdict: Workers are unlikely to receive in wages what they will lose in superannuation. Even if workers did receive higher wages, many would pay tax at a higher rate.

The super deal

In March 2012, Parliament passed into law a Labor measure for annual increases to the then compulsory super contribution of 9 per cent. It rose to 9.25 per cent in 2013 and to 9.5 per cent in 2014.

On September 2, the Coalition government joined with the Palmer United Party to pass laws reversing the mining tax, and as part of the package, delaying the next legislated super increase until 2021.

The Financial Services Council, which represents members including retail and corporate superannuation funds, estimates the decision to defer the scheduled increases will cost workers $128 billion by 2025. Industry Super Australia, representing 15 industry funds, suggests that figure could be $150 billion. Treasurer Joe Hockey has repeatedly rejected those assertions.

Mr Abbott and senior members of the Coalition have repeatedly stated that the change is not an adverse one, because employers pay lower wages when the government requires them to make compulsory super contributions.

They have said their decision not to increase compulsory super contributions means the money that under existing legislation would have been paid by an employer into a worker's super account will instead go into the worker's take home wages.

"I can confirm, in response to the Leader of the Opposition, that money that would otherwise be squirrelled away in superannuation funds will instead be in the pockets of the workers of Australia," the Prime Minister told Parliament on September 3.

"I want to see for the next 10 years this money stay in the pockets of the workers of Australia. If the workers of Australia wish to invest that money in superannuation they are perfectly free to do so but, as far as I am concerned, for the next 10 years that money should stay in the pockets of the workers of Australia," he said.

Is super paid in lieu of direct wages?

On September 2, Mr Abbott told Parliament that Opposition Leader Bill Shorten, as minister for financial services and superannuation in November 2010, had said: "Analysis suggests that, over time, superannuation guarantee increases have come out of wages, rather than [the employer's] profits."

The 2009 federal tax review chaired by Ken Henry had already said as much. It stated in its 2010 final report: "Although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth".

After Labor's changes came into law in 2012, Australian Industry Group (AIG), which represents employer businesses in industries including manufacturing, construction and automotives, lobbied the Fair Work Commission to award lower wages in its annual minimum wage decisions to take account of higher compulsory super contributions.

In 2013, the first year that Labor's super increase became effective, the Australian Council of Trade Unions argued the opposite to the commission, saying wages should not be reduced to take into account the employer's obligation to pay a higher super contribution.

The commission rejected that argument and said the increase in minimum wages it awarded "is lower than it otherwise would have been in the absence of the superannuation guarantee rate increase".

There is evidence to support Mr Abbott's point that the introduction of compulsory superannuation in 1992 has resulted in lower wage increases. However, that does not necessarily prove his second claim that employers will pass on savings from the superannuation freeze to workers.

Will total employer savings be passed on to workers?

Education Minister Christopher Pyne said on Adelaide radio the day after the Coalition's changes were announced that the employer savings would be passed on to workers in full.

"What this will mean is the superannuation contribution will stay at 9.5 per cent in the foreseeable future, and the extra that would have gone up to 12 per cent will stay in their pay packets every week," Mr Pyne said.

"They can make the decision about whether they invest in their mortgage or whether they invest it in superannuation or whether they spend it on living expenses now and I think that’s a much better outcome."

The same day, during an ABC RN interview, Treasurer Joe Hockey contradicted Mr Pyne. Asked by host Fran Kelly to guarantee that the money saved from freezing super would go back into workers pockets in equal amounts to the slated super increase, Mr Hockey said: "That's a negotiation between employers and employees."

When pressed, he acknowledged that the money might not go to workers at all.

"Either it comes into workers' pockets or it goes into superannuation, it's one or the other," he said.

"Or it stays with the employer," Kelly said.

"If it stays with employers, the best way to grow superannuation in Australia is to have a stronger economy," he said.

Employers are not going to say, 'well look, we don't have to make this mandatory improvement in super contributions so therefore we are going to give the equivalent amount to workers' - that's not going to happen. Former Reserve Bank governor Bernie Fraser

Leading business and industry representative groups have said there is no expectation the super savings will be passed on to workers at all, or in full.

The day the Coalition's changes were announced, Australian Chamber of Commerce and Industry chief executive Kate Carnell said in a media release that delaying the super increases was "particularly significant to business because it will reduce costs and make it easier to invest and employ".

The following day she said: "It's an increase in the future that now won't happen, which is a fantastic outcome because we know that particularly small to medium businesses are doing it very tough."

She was also quoted as saying employers who were not required to pay increased compulsory superannuation would have greater capacity to pay higher wages, but the correlation would "obviously not be linear".

AIG chief executive Innes Willox expressed a similar view. He said there was some basis for an argument that had the original schedule of super increases not been put in place in 2012, wages would have adjusted upwards by more than they did.

"However, over the next couple of years we wouldn't expect wages to rise to completely offset the postponement of the superannuation guarantee [SG] increases," Mr Willox said.

"With labour market weakness forecast to continue for some time, it is very unlikely that markets will bear an increase in wages equivalent to the loss of what was a legislated increase in the SG."

Chartered Accountants Australia ​and New Zealand head of superannuation Liz Westover told Fact Check the biggest negative impact from the super guarantee delay will be felt by workers paid a set hourly rate. Employers are required to pay superannuation for part-time workers and some casual or contract workers who earn more than $450 a month and are over 18, or who are under 18 and work more than 30 hours a month.

​Ms Westover said after the Coalition's change, the "in hand" rate for these workers is even less likely to be increased than for workers on salary packages, meaning they are likely to lose more of the money they would otherwise have received in increased super payments between now and 2021.

Former Reserve Bank governor Bernie Fraser, who has sat on the board of industry super funds, told ABC Radio on September 10 that unions did not have the power to press for wage increases to make up for the lower super contributions.

"Employers are not going to say, 'well look, we don't have to make this mandatory improvement in super contributions so therefore we are going to give the equivalent amount to workers' - that's not going to happen," Mr Fraser said.

The tax impact

Even if the Government were to make a law requiring employers to pass all super savings through to employees in wage rises, most workers would still be worse off because compulsory super contributions are taxed at 15 per cent, while wage income for workers above $18,200 is taxed at 19 per cent or higher.

Labor emphasised this favourable tax treatment when it introduced the staged increase to 12 per cent. Mr Shorten said in a radio interview in March 2012: "You don't get the dollar in the hand, but what you do get is you get proportionally more of your pay in your superannuation account, because it's not paying as much tax," he said.

Superannuation has further favourable tax treatment relating to earnings on savings - for example dividends earned when the super fund invests them in shares or interest earned when the super fund invests them in bank deposits - and when the savings are paid to the worker on retirement.

Ms Westover said the changes to the super guarantee would mean anyone earning more than the tax free threshold, that is, being taxed at 19 per cent or higher on their marginal incomes, would be worse off because they will have a smaller proportion of their income that attracts the super tax benefits.

​Finance Minister Mathias Cormann said during an ABC interview that workers will have "more of their own money available to them pre-retirement" and could choose whether to put it into voluntary super contributions​, or use it to pay down debt, such as a mortgage. Senator Cormann said another option was using it "to deal with cost of living expenses".

Former Labor prime minister Paul Keating, who introduced compulsory superannuation in 1992, wrote on ABC's The Drum that the Coalition's argument that it was a good deal for workers to have cash in hand now rather than in their super failed to take into account the benefit to workers from the compounding effect of various types of favourable tax treatment.

"Their superannuation contributions become compound savings - where the earnings on their accumulations are, in tax terms, permitted to earn further," Mr Keating said. "That is, earnings on the earnings - compound earnings which, over a lifetime, grow exponentially to support a person in retirement".

The verdict

The change announced on September 2 will not alter the compulsory superannuation employees currently receive. However workers are no longer legally entitled to increases in those contributions until July 2021.

There is no guarantee that wages will be increased in compensation. The Coalition has not introduced a law to guarantee universal, annual, wage rises to match dollar for dollar what workers will lose from the superannuation freeze. Employer groups say workers are unlikely to receive in wages what they will lose in superannuation.

Even if workers did receive higher wages, many would pay tax at a higher rate than the tax applying to employer superannuation contributions.

When Mr Abbott says it is not an adverse change and no-one is going backwards, he is incorrect.

Sources

Topics: abbott-tony, superannuation, business-economics-and-finance, federal-government, work, liberals, australia

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