No free lunch: higher super means lower wages

by Brendan Coates, Matt Cowgill and Will Mackey

Workers overwhelmingly pay for increases in compulsory superannuation contributions through lower wages.

This working paper uses administrative data on 80,000 federal workplace agreements made between 1991 and 2018 to show that about 80 per cent of the cost of increases in super is passed to workers through lower wage rises within the life of an enterprise agreement, typically 2-to-3 years. And the longer-term impact is likely to be even higher.

The trade-off between more superannuation in retirement but lower living standards while working isn’t worth it for most Australians.

Our new empirical analysis reinforces that the planned increase in compulsory super, from 9.5 per cent now to 12 per cent July 2025, should be abandoned. Most Australians are already saving enough for their retirement.

The paper directly measures the super-wages trade-off for nearly a third of Australian workers – those on federal enterprise agreements. But it shows that other workers are also likely to bear the cost of higher compulsory super in the form of lower wages growth.

Despite the claims of some in the superannuation industry, it is unlikely that future super increases will be different from past increases.

It’s true that wages growth has slowed in recent years, but nominal wages are still growing by more than 2 per cent a year, so employers have plenty of scope to slow the pace of wages growth if compulsory super contributions are increased.

And none of the plausible explanations for lower wages growth – whether slower growth in productivity, technological change, globalisation, an under-performing economy, or weaker bargaining power among workers – helps explain why employers would foot any more of the bill for higher compulsory super this time around.

If employers aren’t willing to offer large pay rises today, it’s hard to imagine why they would pay for higher super. In fact, if workers’ bargaining power has fallen, employers are even less likely to pay for higher compulsory super than in the past.

Grattan’s 2018 report, Money in retirement: more than enough, found that the conventional wisdom that Australians don’t save enough for retirement is wrong.

Now this working paper finds that the conventional wisdom that higher super means lower wages is right.

Together, these findings demand a rethink of Australia’s retirement incomes system.

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