Superannuation Guarantee Increases will Strain Australia’s Economy

Criticism has erupted over suggestions by Labor that the planned increases in employer superannuation contributions from the current 9.5% to a targeted 12%  by July 2025 should be accelerated. The underlying rationale of Labor’s aspiration is to provide more opportunity for retirees’ to achieve greater independence in retirement and mitigate the future burden and reliance on government age pensions by an increasingly aging population.

Under current legislation, employer superannuation contributions will remain at 9.5 per cent until July 2021, after which contributions will increase steadily until reaching the targeted 12 per cent in 2025.  The prospect of fast-tracking this increase has led Financial Services Minister, Kelly O’Dwyer, to come out strongly in opposition to this suggestion:

“It would [not be] right to think that the super-guarantee particularly benefits low income earners…Far from it. In fact, many low income earners are being forced to save for a higher standard of living in retirement than they can afford while they are working.”

Reinforcing Minister O’Dwyer’s position, the Grattan Institute found that scrapping the planned increase to 12% would save the Federal Government almost $2 billion annually – “money that would be better spent boosting rent assistance for vulnerable retirees, mainly single women”, the Grattan Institute Report says. 

There is also a common misconception that increases to the superannuation guarantee would be paid by employers out of profit. Brendan Coates, a fellow of Grattan Institute, believes that;

Higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today. Therefore, increasing the super guarantee to 12 per cent will hurt the living standards of low-income earners, the bulk of whom are women.”

Similarly, the Henry Tax Review Report also found that the superannuation guarantee rate should not be increased. Given the relative taxation on income vs superannuation, pouring more money into superannuation over salary will have a significant negative impact on the Federal Government’s budget.

For pre-retirement low income earners, the impact of the superannuation guarantee would be severe.  According to Coates,

“We know that home ownership is falling rapidly among the young and the poor, so raising the super guarantee to 12 per cent at a time when young Australians are already struggling to afford housing -and in particular overcoming the deposit hurdle seems like a bad idea.”

The table below provides an outline of the effects of the income disparity:Notes: Tax calculation do not consider Medicare Leve, Medicare Levy Sucharge, Low Income Tax Offset and Repayment Income Thresholds. Superannuation Guarantee (SG). 

Assumptions: The calculations provided in the table assumes one SGC increase from 9.5% to 12%, rather than a gradual increase. Our calculations do not include any Medicare levy, and Medicare surcharge.

In reality, not all organisations would pass the super increase to their employees directly through smaller wage increases.  Companies that are currently paying at or above 12% would not need to consider how to fund such increase. However, a significant number of companies in the private sector will need to confront the reality that they must apply a proportion of budgeted salary increases to the superannuation increase.

For example, if a company has a 2.5% budget for salary increases and the superannuation guarantee moves to 10% of ordinary time earnings, they will assign a proportion of that salary budget to pay for superannuation.

The net result is lower increases for the employees in an environment where cost of living is rising faster than salaries, thus reducing the standard of living for low-wage earners even further.

Zoe Lockyer, a Principal at Egan Associates comments,

“When the amount was increased from 9% to 9.5% between 2012 and 2014, many companies used a portion of their annual salary increase budgets to absorb the difference. In the current environment where annual salary increases are already at subdued levels, any increase would add further pressure to annual salary review budgets”.

The reality for pre-retirement low income earners is that they need income in their hands to pay for day-to-day essentials, such as housing, energy and school fees. An increase in the superannuation guarantee will negatively impact the financial capacity of many in this demographic, reducing disposable income and having a knock-on effect across society and the economy.

Overall, the likely negative effects of superannuation guarantee increases will decrease living standards in Australia and place further strain on an already challenged economy.

Click here to find out more information on workforce.

Comments are disabled