In the wake of recent legislated changes improving choice of super fund, the government must not assume the job of super reform is done. Next on the chopping block should be the planned increases to the super guarantee.
The compulsory super rate, already at 9.5%, is scheduled to increase to 10% in July next year.
There is strong evidence — both empirical and theoretical — that superannuation is largely ‘paid for’ through wages forgone.
Wages growth, already weak prior to the COVID recession, simply cannot afford to suffer another hit in the misguided aim of boosting retirement balances.
Where then will the increase come from? Cutting take-home pay is one option — one that is only too real in the COVID recession. Further job losses are another potential way to pay for increased super. Neither is desirable.
The point is not that cancelling the increase will give workers a 0.5% pay rise. It is about limiting the harm that will occur by taking 0.5% from workers’ wages to pay for super. Regardless of claims to the contrary, nothing the government does with super will create, or remove, a wage increase.
While advocates of increasing compulsory super argue the point of the increase is to reduce old-age poverty, this is far more about the adequacy of the age pension than the nature of the super system.
It is worth noting it’s not actually clear the age pension is inadequate in the first place. Our research from 2014 indicated the pension was sufficient on most consumption-based poverty measures, and even fared okay on relative income measures.
Moreover, no evidence has been advanced that the compulsory nature of the system is key to generating age pension savings. The bulk of pension savings almost certainly come from those on average or above-average incomes; who would be likely to save for retirement anyway.
Of course, there is the even more fundamental point that, if anyone believes 9.5% of wages is insufficient to fund their retirement, they could voluntarily increase their contributions to 10% or 12% of their wages without forcing everyone else to do the same.
That this solution is dismissed out of hand shows that much of the motivation for the increase is really about satisfying the vested-interest vultures that feast on compulsory super.
Simon Cowan is Research Director at the Centre for Independent Studies.
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