ESSA

ESSA

Not so super


Olivia Robins

By

October 13th, 2014


Olivia Robins challenges whether we are actually better off with less superannuation.


In between studying, I work part time at a clothing store. Every week, I receive my payslip, and towards the bottom, I see a (very small) amount of money put into my superannuation. When I retire – many, many years from now – I hope that super will have grown into something to support myself. Unfortunately, in a deal with the Palmer United Party, the government has passed a policy freezing superannuation growth for five years.

Under the previous Labor government, the superannuation rate was to rise in increments of 0.25 per cent each year to reach 12 per cent by 2019/2020. But, under the legislation passed by the Coalition with the help of the PUP, these increases will be paused, not restarting until 2021. Therefore, with annual increases of 0.5 per cent, the 12 per cent target will not be achieved until July 2025.

This policy turn-around is detrimental for Australians, as it means workers effectively earn less money than they otherwise would have. Labor has claimed that the average 25 year old earning $55,000 per annum would be worse off by $9,000 by 2025. Similarly, the Financial Services Council estimated that Australians in total would accumulate $128 billion less by 2025.

Industry Super Australia stated that this halt in superannuation rises could cost the average 25 year old approximately $100,000 over their life, after accounting for compound interest. This is important: interest on interest (otherwise known as compound interest) generates a lot of money in the long term. With compound interest, increases in savings rise exponentially. Therefore, stopping increases in super not only takes away future potential superannuation from Australians, but also the interest gained from it as well.

AIG Chief Executive Innes Willox thinks that the halt in superannuation increases will not be completely offset by rises in wages. How are we to know whether employees will be compensated through wage rises? Disagreements have arisen amongst Coalition frontbenchers alone as to whether the savings in superannuation will be passed onto workers. While Christopher Pyne has stated that the savings will be fully passed onto workers, on the other hand Treasurer Joe Hockey, when pressed in a radio interview with Fran Kelly, implied that savings may not go to employees at all.

However, even assuming that employees’ wages will rise to counterbalance the postponement in super increases, Australians will still be worse off. Why? Taxes, of course. If there is more money in workers’ pockets now, more will be paid in tax. Income on wages for those earning about $18,200 per annum is 19 per cent or higher. But compulsory super contributions are taxed at only 15 per cent. So, from a disposable income perspective, this leaves employees worse off. This issue has not been addressed by the government. (It is important to note that despite being taxed more, Australians may be better off assuming the revenue raised will be spent responsibly by the government on services to improve public welfare.)

The true dilemma of course is how workers are supposed to support their retirement if their potential superannuation shrinks. With smaller super in retirement, more Australians may need the support of the aged pension. But the Coalition supports the idea of small government: it does not want too many Australians on welfare payments. This is a blatant contradiction of their ideology. The policy will put more pressure on aged pensions, contradicting the small government ideal. But if they cut pensions and halt rises in compulsory superannuation contributions, then the government is leaving many Australians with few options. Compulsory superannuation was introduced by Paul Keating in order reduce the shackle hold of many Australians to the pension. So, if the Coalition wants to reduce welfare payments, superannuation should not be targeted. With an ageing population, the aged pension will already be under much pressure in the coming decades. Hopefully, in the future, Australia will make the right decision to alleviate this.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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