A panel of leading commentators give their verdict on the merits of the plan to lift compulsory superannuation to 12%

The great superannuation debate: raise it, freeze it or do away with it altogether

The federal government is conducting a major review of retirement income, which will among other things look at the role of superannuation.

The compulsory superannuation guarantee is set to rise from 9.5% to 12% in five annual increases starting from July 2021. However, with some Liberal backbenchers lobbying to freeze the guarantee at 9.5%, or even to make superannuation voluntary, we ask economists, unions and thinktanks whether the existing system is working as intended.

Also, we ask whether the increase from 9.5% to 12% should go ahead as planned, and whether super should remain compulsory for low income earners.

Scott Connolly, ACTU

In 1985 John Howard said that a superannuation deal struck by the ACTU “represents all that is rotten with industrial relations in Australia”.

That was 34 years ago and now Australians have over $2.7 trillion invested in their retirements.

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But as the recent commentary around the already legislated 12% superannuation increase has shown, the federal government, the big business lobby and right wing thinktanks remain as determined to undermine superannuation today as Howard was in 1985.

Superannuation is once again under attack, now with the confected argument that the increase will leave workers short-changed in an era of low wage growth.

Coming from the federal government and big business, this new-found concern for workers’ wages will strike many Australians as astonishingly hypocritical.

Scott Morrison has repeatedly supported cuts to penalty rates. In the face of a national wage theft epidemic, the Morrison government’s response has been impotent.

The Liberals oppose any significant increase to the minimum wage, while big business opposes any significant increase past the rate of inflation.

This has occurred against a background of historically low wages growth, and soaring company profits.

To help low-income earners, we should increase the generosity of the pension, rather than stripping money from them when young. Gigi Foster

With this appalling track record, it’s hard to believe the Liberals and business community when they say their opposition to super increases is in the best interests of workers.

Superannuation is derived from both workers’ wages and payments from employers. An Australia Institute report this week demonstrated that historically, increasing superannuation contributions have in fact correlated with increasing wages.

As super is an additional payment from employers, more investment capital is generated from each dollar spent.

The problem with super is not that it is too high – it’s that Australians do not have enough.

The average Australian will run out of super 10 years before they die and 70% of women have balances under $150,000.

If the government was serious about retirement incomes, it would close the cracks in the system and proceed with the legislated 12% superannuation increase, which will provide millions of Australians with the dignified retirement they deserve.

In 1985, the Liberals and the business community were wrong about superannuation. They’re still wrong now.

• Scott Connolly is an assistant secretary at the Australian Council of Trade Unions and spent 16 years with the Transport Workers Union

Gigi Foster, economist

The classic argument in favour of making super contributions compulsory for low-income earners is that it is just such workers who are most likely to need funding in their retirement. In the absence of a legislated compulsion to save, such workers would be more likely than higher earners to spend their money now and have nothing left to build a nest egg. (In economics, we say such workers have a lower “propensity to save” than higher income earners.)

The problem with this argument is that the reason such workers don’t save much is that they need most, if not all, of every dollar they earn to support themselves and their dependents today. Without compulsory super, low-income earners could use more of their already thin wages to spend on food, healthcare, and other necessities. As a bonus, extra spending power in the hands of people predisposed to spend will boost aggregate demand – always useful when the economy is looking shaky.

Make no mistake: the business plan is to do away with universal superannuation altogether. Jim Stanford

Why does extra spending by low-income earners today not necessarily imperil their futures? Because low-income earners are targeted by our flagship income-support program for the elderly, the aged pension. To help low-income earners in retirement, we should increase the generosity of the pension, rather than stripping money from them when young with the misguided goal of increasing the fraction of their retirements that they will be able to self-fund.

By contrast, who should we expect to be able to self-fund their retirements? The rich. Hence, compulsory super contributions for higher earners should remain, since it’s exactly those workers whom we want to encourage to be self-reliant in their sunset years.

Moving to the question of whether the super guarantee should be raised to 12%, it depends. Lower income earners could use this extra help. Higher earners don’t need it: they’ve got enough of their own money already. So instead of setting a blanket rate for everyone, a more palatable super guarantee policy would vary the rate depending on income level or marginal tax rate of the worker. One might worry about a depressive effect of this variation in the costs of employment on employers’ demand for low-skilled workers. To mitigate this, the difference in rates should not be too great; 10% (for high earners) versus 12% (for low earners) seems reasonable given current policy settings.

• Gigi Foster is a professor in the School of Economics at the University of NSW, and co-host with Peter Martin of the Economists on ABC RN.

Emma Dawson, Per Capita

Making superannuation optional for any workers, including low-income earners, effectively destroys universal super. The argument against compulsory super for low income earners rests on the idea that it comes directly and automatically from wages. This was effectively debunked by research from Jim Stanford this week. Wage growth in Australia has been stagnant for years. As Stanford notes, wages are determined by power and regulation, not by market clearing.

Evidence abounds that low and middle-income workers do not save without compulsion, leaving them worse off in retirement. The US has a retirement savings crisis, and some commentators are suggesting compulsory savings is the way to address it. Our universal super system means Australia has avoided such a predicament.

Even if regulation to make super optional ensured that an equivalent amount of money went into the pay-packets of workers, they would then have to pay more income tax at a higher effective marginal tax rate, leaving many with lower lifetime incomes and the loss of the compound interest that makes superannuation such an effective savings tool.

Research by Per Capita has found that the age pension fails to provide a decent standard of living for approximately 1.5 million older Australians who rely on it as their main source of income. Given the treasurer’s comments that our ageing population is an “economic time bomb” that people will need to worker longer into their old age, any meaningful increase to the age pension seems highly unlikely.

Other arguments against universal super cite the high fees charged (primarily by retail funds) and the cost to the federal budget of the excessive tax concessions that overwhelmingly favour high income earners and those with lots of capital wealth. These are arguments that support effective reform of the superannuation system to return it to its original purpose: that of augmenting or replacing the age pension and increasing workers’ standards of living in retirement, rather than serving as an estate planning tool for the wealthy. They are not cause for the abolition of universal super.

Compulsory super allows workers to pool their retirement savings and obtain the kinds of returns on investment previously only available to the capital class. To address the problems of fee gouging and the cost of tax concessions by cutting the lowest paid workers loose from the system while leaving the egregious fees for fund managers and tax concessions high income earners in place would be the worst possible outcome of the Retirement Income Review. It would drastically increase inequality in our society.

Increasing the superannuation guarantee to 12% will be of most benefit to workers on award wages who receive it. Many higher income earners in professional fields already receive employer super contributions of more than the guarantee – for example, workers in the tertiary education sector typically receive 15% under their Enterprise Bargaining Agreements, as do many public service employees and government staff.

Upcoming research from Per Capita will show that a worker on the median wage has lost over $7,000 in super since the SG was frozen at 9.5% by the current government, compared to what they would have received had the SG increased in line with the previous Labor government’s legislated timetable. Over the same period, that worker’s annual salary has actually gone down by over $100, when adjusted for inflation.

• Emma Dawson is the Executive Director of Per Capita

Jim Stanford, Centre for Future Work

There weren’t many things the two major parties agreed on in the 2019 election campaign; one was a bipartisan plan to increase superannuation contributions by employers. Even the Coalition reaffirmed the long-standing plan to raise the rate from 9.5% to 12%, starting in 2021.

Suddenly, all bets are off. Backbench Liberals are floating trial balloons about cancelling the scheduled increases, and even making superannuation voluntary for some workers (like young people or low-wage earners). Business lobbyists and some thinktanks are jumping on the bandwagon.

It’s just like the Coalition’s approach to industrial relations. They didn’t breathe a word about IR during the election – as thousands of workers marched to “Change the Rules”. But after the election, they’ve launched a no-holds-barred attack on what’s left of union power and labour standards.

If governments want to boost retirement incomes, increasing compulsory super appears the worst way to get there. Brendan Coates

New debates about superannuation must be considered in that context: as just one dimension of a broader, forceful attack on progressive labour regulation. Employers have always resisted compulsory superannuation. For them, employers’ obligation to their workers starts and ends with each hour of active productive work. Labour is simply a productive input: best purchased on a just-in-time basis, no strings attached.

The argument that super should be voluntary – perhaps initially for low-income workers, but soon for everyone – is the thin edge of the wedge. Make no mistake: the business plan is to do away with universal superannuation altogether. International evidence is overwhelming that voluntary pension systems do not work. Bribing desperate workers to trade off retirement security for a bit of desperately needed cash right now is hardly an adequate response to the wages crisis gripping Australia’s labour market. And the claim that workers don’t actually “need” any more pension income is rose-coloured and elitist.

The plan to raise super contributions to 12% of earnings was based on analysis about what would be required to underpin decent retirement income. Persistent low interest rates, flat wages, and growing life expectancy make that argument even stronger. The party in power promised this plan; they have no legitimate right to change it now.

There are many flaws in Australia’s retirement system. A universal public pension funded from current revenues (rather than accumulated financial accounts) would be best. And the existing inequities of super must be fixed, and fast: rolling back super tax benefits for high-income earners, preventing super evasion by employers, supporting low-income workers with tax offsets, and banning wasteful retail funds altogether.

None of those problems will be fixed by abandoning the principle of an adequate, compulsory, universal system. Labour compensation has lagged behind productivity for a generation; Australian employers can well afford to both raise wages and boost super contributions. They shouldn’t be let off the hook for either.

• Jim Stanford is economist and director of the Centre for Future Work, and the author of a new report, The Relationship Between Superannuation Contributions and Wages in Australia.

Brendan Coates, Grattan Institute

At the heart of the debate over compulsory superannuation sit big trade-offs. Boosting retirement incomes inevitably comes at a cost: either people have lower living standards while they’re working, or governments give up more revenue for super tax breaks, or taxpayers pay more for pensions.

Grattan Institute research has shown that compulsory super set at 9.5%, together with the age pension, is already doing its job.

Most retirees today feel more comfortable financially than younger Australians who are still working. And they typically have enough money to sustain the same, or a higher, living standard in retirement than when they were working.

The retirees of tomorrow are likely to be even better off. The average worker today can expect a retirement income of at least 89% of their pre-retirement income – well above the 70% benchmark endorsed by the OECD.

Siphoning more money into the hands of the financial sector is always going to be bad news for the economy. Cameron Murray

But you can have too much of a good thing. Compulsory super shouldn’t rise, because that would force Australians to save for a higher living standard in retirement than they have while working.

If governments want to boost retirement incomes, the planned increase in compulsory super appears the worst way to get there. Our work shows that raising compulsory super to 12% would reduce wages today and do little to boost the retirement incomes of many low and middle-income workers tomorrow.

Higher super contributions will not improve their retirement income: the extra superannuation income will be largely offset by lower part-pension payments.

What’s more, the age pension is indexed to wages. If wages grow by less, pensions do too. Instead, the big winners from higher compulsory super would be the wealthiest 20% of Australian earners, who would benefit from extra super tax breaks and would be unlikely to receive the age pension anyway.

Higher compulsory super would cost the federal budget about $2bn a year now, and in the long term. It is true compulsory super today has lowered pension spending. The trouble is that the extra tax breaks from higher compulsory super cost the budget even more.

Most importantly, higher super wouldn’t tackle the biggest challenge facing our retirement incomes system: retirees who rent. They are at severe risk of poverty because rent assistance is inadequate. Our research shows more retirees will rent in future because home ownership is falling fast.

Grattan recommends boosting commonwealth rent assistance by 40% – roughly $1,400 a year for singles. This would lift out of poverty many retirees who rent, at a cost of $1.3bn a year.

Higher compulsory super doesn’t confront this challenge – and its budgetary costs would make it harder for governments to adopt other policies that would.

• Brendan Coates is the household finances program director at the Grattan Institute.

Cameron Murray, economist

The superannuation system is not a retirement income system. It has none of the insurance functions to share risks and ensure low-income earners are supported in retirement. It is, in fact, a massive drain on economic activity. It siphons money out of the real economy to the financial industry. Instead of people using their wages to buy new goods and services, stimulating economic activity, more than $100bn (6% of GDP) is redirected into asset markets to buy bonds, equities and property from people who already own them — all for a $37bn per year fee.

This is madness. We get our military – the army, navy and airforce – for a lower cost each year.

The whole federal welfare system costs less per year to run, and that includes all types of income and disability support. It is laughable to pay more to run a system that is a part tax break for the wealthy, part drain on economic activity, and zero parts retirement policy.

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Super was not designed for retirement. It was designed to reduce economic growth and limit wage increases, and that is what it does. As Peter Martin explains: “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.”

Even the OECD notes that private individual account savings systems such as super increase the need for state intervention in the pension system rather than decreasing it, because they amplify inequalities into retirement.

For the bottom quarter of households, the age pension is a pay rise. It makes no sense to make these households poorer when they are working and poor, so they can be slightly richer when they are retired and rich. That is the opposite of what a pension system should do.

In terms of raising the rate from 9.5% to 12%, siphoning more money into the hands of the financial sector is always going to be bad news for the economy. You can see this in the corrupting influence super has had on the Labor party, which now lobbies to have its members’ wages given to the world’s most expensive fund managers rather to their members. Imagine being a union member trying to support a family and having your political representatives tell you that you are too stupid to spend your own money: you don’t deserve your wages. Instead, a fund manager downtown should look after the money you sweated for … and you have a one-in-six chance of dying before getting your hands on it. Unwind the system and give people their money back.

• Dr Cameron Murray is a post-doctoral research fellow, Henry Halloran Trust, at the University of Sydney and the author of Game of Mates: How Favours Bleed the Nation.