Photo by Clem Onojeghuo on Unsplash

There is a case for not proceeding with, or at least further deferring, the legislated increase in employers’ compulsory superannuation contributions, the Superannuation Guarantee, from 9.5% to 12%. But, the Grattan Institute’s latest analysis does not make this case. Rather, it demonstrates extremely well a totally different problem with our retirement incomes system, and falsely ties this to its pre-occupation about the Superannuation Guarantee.

The problem it demonstrates is that the pension assets test, as tightened in 2017, needs to change. For a significant group of middle-income earners, Grattan shows that an increase in savings, whether through the Superannuation Guarantee or voluntarily, leads to a reduction in lifetime incomes (unless the savings are directed into their own home). A better designed assets test, preferably through a merging of the income and assets test, would ensure that increased savings would increase retirement incomes, and not reduce lifetime incomes, no matter what income the person has.

Whether an increase in savings should be compulsory via the Superannuation Guarantee is an entirely separate issue, but surely our system should not penalise thrift.

Retirement incomes should be the focus

The Grattan analysis strangely does not focus at all on the objective of the retirement incomes system, and the impact of increased savings on retirement incomes, but on the impact of increased superannuation savings on lifetime incomes.

The purpose of superannuation is surely to improve retirement incomes by better spreading of lifetime incomes, not necessarily increasing lifetime incomes (though increased national savings may perhaps increase national investment and productivity, but that is another issue). Had Grattan focused on retirement incomes it would have demonstrated the same point – not that increasing the Superannuation Guarantee is wrong, but that the assets test taper is way too high leading to reduced retirement incomes for many middle-income earners if they increase their savings.

The focus on lifetime incomes also leads Grattan into a barren debate about who would pay for an increase in the Superannuation Guarantee. It falsely accuses proponents of an increase of ‘insisting’ that this would not come from the workers, and then shows that even if that were so the impact on some middle-income earners’ lifetime incomes would still be negative. Perhaps some proponents do believe employers would or should bear much of the cost, but that is not consistent with the history of the Superannuation Guarantee, one of whose strengths has been the sustainability of its funding by not increasing the cost of labour nor adding to inflationary pressures.

Superannuation ‘tax breaks’?

Another irritating aspect of the Grattan piece is the continued presentation of superannuation tax arrangements as ‘tax breaks’.

It is true that a shift from wages to superannuation savings does, at that point in time, reduce tax revenue because of the difference between the contributions tax (generally 15%) and wage earners’ marginal tax rates (for most at least 30%). But what is the appropriate tax on savings, particularly savings that cannot be accessed until age 60?

The convention internationally is to exempt entirely contributions and the earnings they generate, but to tax in full the benefits when consumed. On the Grattan approach, that would impose a much greater immediate cost to the budget and presumably represent a greater ‘tax break’. In reality, it would involve an appropriate tax regime for those looking to spread their lifetime earnings, so long as tax was paid at the back end.

Work done a few years ago for the Committee for Sustainable Retirement Incomes (CSRI) revealed that, after the Turnbull superannuation tax reforms, our regime of a limited but progressive tax on contributions and earnings and none on benefits is very similar to the conventional (reverse) approach at all income levels. There is no ‘tax break’. Moreover, as Grattan demonstrates with its analysis of lifetime incomes, the impact of superannuation on age pensions disadvantages many people precisely because it saves the budget in the long term.

Issues of adequacy

What would really help is if Grattan articulated what it considers to be the objective of the retirement incomes system and focused its analysis on whether increasing the Superannuation Guarantee would or would not help to achieve that objective, and at what cost.

The objective surely should be to ensure that all Australians have secure and adequate incomes at and through retirement. ‘Adequacy’ here has two components:

  • Sufficient to ensure no aged person lives in poverty (the role of the age pension); and
  • Sufficient to maintain pre-retirement living standards (the role primarily of superannuation, with the age pension contributing for most people on below average incomes).

There are legitimate debates about measuring ‘adequacy’, particularly the second component: how to measure pre-retirement incomes; what net income replacement rate is appropriate at retirement given the change in lifestyles and costs; and how to adjust post-retirement income to maintain living standards.

Grattan claimed last year not only that the current 9.5% Superannuation Guarantee contribution rate delivered its measure of adequacy, but that most current retirees (who have not accumulated anything like a lifetime of 9.5% Superannuation Guarantee savings) also have ‘adequate’ protection of their living standards.

I remain convinced this is an extreme view, not consistent with international practice or analysis.

Should the compulsory rate be higher?

For those not eligible for an age pension (likely to involve at least 40% of the population of retirees into the future), maintaining pre-retirement living standards requires contributions of 15-20% (18% is the OECD average). For those eligible for some age pension, the contribution rate required will be lower but, even at median earnings, it would be more than 12% according to CSRI analysis.

Whether such a contribution rate should be compulsory is still a legitimate question. Perhaps the current low rate of wages growth warrants a longer deferral of an increase (though it will be seven years after the last 0.5% increase when the next such increase is legislated to come into force (2021), and real wages will have certainly increased much more than this in the meantime). Perhaps the burden on some young families of increasing compulsory savings would be more than their circumstances allowed (though there are other ways of assisting them).

My concern, however, is that Grattan seems to suggest not only that the Superannuation Guarantee should not be increased beyond 9.5%, but that we would not then need to encourage most workers to voluntarily save beyond that compulsory rate, including as their children grow older and more financially independent. That seems to me particularly short-sighted and accepts a greater reliance on the age pension in the future than is desirable.

Note: Andrew Podger was a member of the Committee for Sustainable Retirement Incomes until 2016.


Further reading

Super shock: more compulsory super would make Middle Australia poorer, not richer, by Brendan Coates & Owain Emslie, The Conversation, 10 July 2019.

More compulsory super hurts Middle Australia — however you look at it, Owain Emslie & Brendan Coates, Grattan Blog, 10 July 2019.

On Any View, the Case for Higher Compulsory Super Hasn’t Been Made, by Brendan Coates & Owain Emslie, Austaxpolicy, 5 August 2019.

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