They say in every history lesson it is impossible to avoid talking about economics and politics. Unfortunately, the same is true when talking about the future. With the upcoming Federal election now only weeks away, there are a number of sticking points between the major political parties that are polarising voters depending which wing you sit on.
However, in a situation becoming increasingly less common, there is one policy both parties tend to agree on, and the short-term implications aren’t great for us. The Australian Labor Party has promised to lift compulsory superannuation contributions from 9.5% to 12% in five annual steps between 2021 and 2025, and this has the support of the Coalition as well.
Of course, in the long-run this is a fantastic initiative with positive implications for the working public. More contributions into Super means more money invested and accumulated for retirement. Sounds great, right?
Well, in order to achieve this, 0.5% of our wages will be taken out each year for five years to increase mandatory Super contributions. Besides lightening our back pockets, this proposition will impact the Federal Budget too because Super contributions are taxed less than wages.
Right now you’re probably thinking, “I thought the government requires employers to pay Super on top of salary, not out of their pockets?”
Though this is true, the overwhelming evidence is that higher super contributions are paid for by lower wages. The Henry Tax Review and other concluded that increases in the compulsory super contributions have led to wages being lower than they otherwise would have been. The Parliamentary Budget Office came to the same conclusion earlier this month.
A staggering publication by The Conversation earlier this month suggested as much as $20 BILLION from workers wages each year – that is close to 1% of Australia’s GDP – will be cut to wages from raising compulsory super from 9.5% to 12%.
What’s more alarming is that these changes may not even be justified in the first place. Grattan Institute’s latest retirement income projections show that most Australians are already on track for adequate retirement incomes. Most workers today can expect a retirement income of at least 87% of their pre-retirement income if compulsory super contributions remain at 9.5%, which is well above the Organisation for Economic Co-operation and Development’s 70% benchmark. Currently, a full-time worker on the minimum wage in Australia can expect a retirement income almost 20% higher than their present after-tax wage. As such, lowering immediate income to increase retirement savings will leave low-income workers worse off overall.
Superannuation lobby groups are pushing to lift compulsory super contributions to 12% to increase retirement balances for workers. However, more super at retirement is only useful if it actually translates to higher incomes in retirement. For most low and middle income earners, this won’t be the case. This is because for most Australian workers, lower age pension payments would largely offset the increase in their retirement income from super savings, leading to little or no change.
Furthermore, because the age pension is indexed to wages, increasing mandatory super contributions would suppress wages growth and make the age pension climb more slowly, in turn affecting both retirees in the future and retirees today.
Australians who are currently on the age pension as well as many Australian workers sacrificing a greater share of their wages in exchange for no noticeable increase in their retirement incomes will leave them with lower lifetime incomes than they otherwise would have. This means less disposable income to enjoy a holiday, or to invest, or to leverage for a loan.
It is expected that increasing compulsory super would primarily boost the retirement incomes of the top 20% of Australians who would benefit from extra super tax breaks, whilst costing the majority of Australia’s workforce up to $20bn per year in lost wage rises as well as diminishing the Federal Budget by approximately $2bn per year. The Conversation calculates it won’t be until 2060 for the money lost through super tax concessions to be outweighed by money saved on pensions.
In summary, there are very few logical benefits to increasing compulsory Super to 12%, to Australia’s labour force, retirees and the federal government. Both Labor and the Coalition should carefully consider the bigger picture here, and you should too. Whilst an increase to compulsory Super contributions may seem like a favourable idea on face value, there are some negative repercussions beneath the surface we should all know about.