The case for higher compulsory super hasn’t been made

by Brendan Coates

Published by the Australian Financial Review, Monday 22 July

Nearly three decades after the introduction of compulsory superannuation in Australia, and with compulsory super set to rise to 12 per cent of wages by 2025, it’s time to take stock of what the system has achieved, and where to go from here.

At the heart of the policy stoush over compulsory super sit big trade-offs that the industry rarely acknowledges. 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.

That’s why the Productivity Commission recommended an independent inquiry into the role of compulsory super in our retirement incomes system before compulsory super is lifted, a recommendation the government has embraced.

Recently, the Grattan Institute published new research showing that higher compulsory super contributions wouldn’t be in the interests of many working Australians. It would mean middle-income workers giving up wages of up to 2.5 per cent while working, in exchange for less than a 1 per cent boost to their retirement incomes.

Despite the ‘magic’ of compound returns, just about all of the extra income from a higher super balance at retirement would be offset by lower pension payments, due to the pension assets test.

Pension payments themselves would also be lower under a 12 per cent super regime, because they are benchmarked to wages, which would be lower if employers had to put more into super.

We calculate that lifting compulsory super from 9.5 per cent of wages to 12 per cent would make the typical worker up to $30,000 poorer over their lifetimes.

And higher compulsory super would cost the federal budget $2.5 billion a year. These budgetary estimates are not based on some theoretical treatment of tax breaks, but rather how Treasury has treated actual changesin compulsory super in previous budgets. Its true compulsory super today has lowered pension spending. But past Treasury projections have also shown that the tax breaks from compulsory super would dwarf any budget savings on the age pension as far out as 2060.

And one other thing: our 2018 report, Money in Retirement, showed that higher compulsory super isn’t actually needed, because most Australians can already look forward to a better living standard in retirement than they have while working.

The response from Australia’s peak superannuation lobbies to our latest research has been as predictable as it is disappointing.

Industry Super Australia suggested our modelling doesn’t include women. Wrong: it covers all Australian workers. The Association of Superannuation Funds of Australia claimed we’d ignored the personal income tax workers would pay if their wages stayed in their pockets instead of being channelled into super. Again, dead wrong.

Others industry criticisms skirt around the real issues. Industry Super Australia says the maximum rate of the pension would fall by less than we expect (but still fall), because many people are already making super contributions of 12 per cent or more. We do account for this. But beyond not affecting our core claims, it’s striking that one of Australia’s peak super organisations is comfortable suppressing the real value of the pensions received by some of the most vulnerable Australians.

And while the claim that more compulsory super largely comes at the expense of workers’ wages is apparently controversial today, historically it hasn’t been. It was the view of the Henry Tax Review when it recommendedto not increase compulsory super above 9 per cent. It used to be the view of Paul Keating and Bill Shorten. And it’s exactly the position the Fair Work Commission adopted in 2013 when compulsory super was increased from 9 per cent to 9.25 per cent of wages – it determined that minimum wages went up by less than they would have, hitting the pay of the 40 per cent of Australian workers affected by the commission’s decisions.

Some claim that workers today can have higher super without any loss in wages. But that’s difficult to square with concerns that workers’ weak bargaining power is one of the reasons for current low wages growth. If employers aren’t willing to give wage rises, why would they absorb an increase in the compulsory super contributions? Nominal wages are still rising, giving employers plenty of scope to cut them.

In any case, higher compulsory super will make middle-income Australians poorer over their lifetimes even if just half of the extra contributions come from workers’ wages.

The industry’s claims betray another agenda: that compulsory super must rise, the consequences be damned. People worried about pensioners living in poverty should be calling for a big increase in rent assistance for the growing numbers who don’t own their home. But it seems that tackling poverty in retirement only matters to the super lobby when it aligns with their own interests.

Australians deserve a robust debate before we channel another 2.5 per cent of workers’ wages into compulsory super. That debate should centre on what’s in their interests, not those of Australia’s $2.8 trillion super sector. On that basis, the case for higher compulsory super hasn’t been made.