Amidst the economic recovery currently underway in Australia, the federal government has an important decision that will decide the retirement outcomes for all Australians. This decision is whether or not to stop the planned increases in the Superannuation Guarantee (SG) rate. The rate currently stands at 9.5% (of earnings). It represents the minimum contribution that employers have to pay their workers in superannuation. The contributions rate was scheduled to increase by 0.5% each financial year until July 2025, when it will stay at 12%.[i] However, there is debate as to whether increasing the SG rate is the right move, ahead of the first scheduled increase in July.
The Rudd government first announced plans to increase the super rate to 12% in 2010[ii]. There was a slight increase to 9.5%, but further rises have been on hold since 2014. The Rudd government believed that a higher contributions rate would benefit “over two million lower-income earners”. When the superannuation rate is higher, Australians are better off in retirement. Everyone who qualifies for the Superannuation Guarantee will retire with a higher lump sum. But what are the trade-offs that the government, retirees and taxpayers will have to face with increasing superannuation payments?
What are the costs of higher superannuation?
Logically, the extra superannuation contributions don’t just come from nowhere. In this case, the additional contributions come from employers. Super payments are an expense to employers. The costs arising from higher super payments will likely be passed on, either in part or in full, back to employees in the form of lower wage growth in coming years.[iii] Lower wage growth adversely affects low-income households, who would otherwise use wage rises for additional consumption. Keynesian economics suggests that consumer spending is essential to restart the Australian economy through the multiplier effect.[iv]
Another subtle downside to increased superannuation is the cost to the government. The tax rate on super contributions and earnings are typically lower than income tax rates. Higher super balances will cost the government more in the form of lost tax revenue.[v] Although some of the losses are recouped in lower-aged pension requirements, the government may need to implement higher taxes elsewhere to stabilise the national budget.
The Callaghan Retirement Income Review suggests that a SG rate of 9.5% is adequate if there is efficient use of retirement savings.[vi] The same report also found that retirees are not currently using their savings effectively.[vii] Suppose the federal government does decide to leave the SG rate at 9.5%. In that case, they will have to find incentives for Australians to draw on their superannuation balances throughout their retirement.
What options are worth considering?
Although there are costs involved with increasing the SG rate, it all comes down to the trade-off between better living standards in retirement and better living standards today. A gradual step-up to 12% will ensure that more lower-income earners can retire with confidence. However, this path also raises the issue of inequality. Do those already well off really need more super?
One suggestion is to raise the SG rates for lower-income earners and higher-income earners disproportionately (12% and 10%, respectively).[viii] By setting a higher rate for low-income earners, some of the inequality that would otherwise arise will be alleviated. At the same time, this policy will also provide improved retirement incomes for all.
Another possible option is to push back the scheduled increase in the SG rate for a year until the economy is better positioned to handle the increase. This option is a controversial one because the Coalition committed to the planned increases to the SG rates before the 2019 federal election.[ix] Given the unexpected recession in 2020-2021, breaking this election promise may be justifiable.
Of course, the government could scrap the planned hikes altogether and stick the rate at 9.5%. However, this option seems the most unlikely due to pressure from the ALP and some super funds.[x]
The superannuation sector is complex, and there is no definitive solution to this debate. A higher SG rate will increase retirement benefits but also lead to greater inequality in the system. A lower rate may not be enough for everyone to have a comfortable retirement. It is up to the government to decide where the balance between equality and retirement living standards lies.
[i] Key superannuation rates and thresholds. (2021). Retrieved 12 March 2021, from https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage
[ii] Parliament of Australia. (2010). Stronger, fairer, simpler: a tax plan for our future [Ebook] (p. 3). Retrieved 13 March 2021, from https://parlinfo.aph.gov.au/parlInfo/download/media/pressrel/KSQW6/upload_binary/KSQW6.pdf;fileType=application%2Fpdf#search=%22media/pressrel/KSQW6%22.
[iii] Coates, B., Cowgill, M., & Mackey, W. (2020). No free lunch: higher super means lower wages. Grattan Institute. Retrieved 13 March 2021, from https://grattan.edu.au/report/no-free-lunch/.
[iv] Keynesian Multiplier – Overview, Components, How to Calculate. Corporate Finance Institute. Retrieved 13 March 2021, from https://corporatefinanceinstitute.com/resources/knowledge/economics/keynesian-multiplier/.
[v] Coorey, P. (2019). Super tax breaks outweigh pension payments. Australian Financial Review. Retrieved 13 March 2021, from https://www.afr.com/politics/federal/super-tax-breaks-outweigh-pension-payments-20191122-p53d13.
[vi] The Treasury. (2020). Retirement Income Review [Ebook]. Retrieved 13 March 2021, from https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-udcomplete-report.pdf.
[vii] Vickovich, A. (2020). Retirement ‘adequacy’ is a problem for Australia. Australian Financial Review. Retrieved 13 March 2021, from https://www.afr.com/companies/financial-services/retirement-adequacy-is-a-problem-for-australia-20201026-p568rj.
[viii] The great superannuation debate: raise it, freeze it or do away with it altogether. the Guardian. (2019). Retrieved 13 March 2021, from https://www.theguardian.com/australia-news/2019/nov/24/the-great-superannuation-debate-raise-it-freeze-it-or-do-away-with-it-altogether.
[ix] Seeto, T. (2019). What Have The Major Parties Promised On Superannuation This Election?. Canstar.com.au. Retrieved 13 March 2021, from https://www.canstar.com.au/superannuation/superannuation-policies-election/.
[x] Khadem, N. (2020). ‘Vested interests have their hands in your pocket’: Super increase faces growing opposition. Abc.net.au. Retrieved 13 March 2021, from https://www.abc.net.au/news/2020-09-22/superannuation-guarantee-increase-has-growing-opposition/12684662.
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