New South Wales

The legislated increases in compulsory super contributions should...

Australia's top economists oppose the next increases in compulsory super: new poll





Wes Mountain/The Conversation, CC BY-ND

Peter Martin, Crawford School of Public Policy, Australian National University

The five consecutive hikes in compulsory super contributions due to start next July should be deferred or abandoned in the view of the overwhelming majority of the leading Australian economists surveyed by the Economic Society of Australia and The Conversation.

Two thirds – 29 of the 44 surveyed – want the increases deferred or abandoned. Only 13 think they should proceed as planned.

An even larger majority, including some economists who want the increases to proceed, believe they will hit wage growth. Several are concerned they will hit employment.

Compulsory superannuation contributions are paid by employers.

But ahead of the most recent increase in compulsory super, from 9% of salaries to 9.5% in 2013 and 2014, the then Labor superannuation minister Bill Shorten said the increase would cost employers nothing because it would be taken from wage rises.





Source: Australian Tax Office

“A portion of what would have been employees’ increases will go into compulsory savings,” he said.

That conventional wisdom has since been challenged in work funded by the superannuation industry and has been examined extensively in the retirement income review at present with the government.

The two most recent increases in compulsory superannuation in 2013 and 2014 were small by design – 0.25% of salary each.

The next five increases, originally due to due to begin in 2015 but postponed to start in July 2021, are much bigger – 0.5% of salary each – at a time when wage growth is much smaller.

In 2012 Shorten was expecting wage increases of 3-4% and “assuming that a quarter of a per cent of that 3% to 4% may well go into your compulsory savings”.

Wage growth has since slipped to 1.8%, the lowest on record. If the best part of 0.5% is taken out of that each year for the next five years it is unlikely to climb.


Wage growth has slipped to 1.8%




Wage Price Index annual growth, public and private, all industries, seasonally adjusted.
ABS 6345.0

The 44 members of the Economic Society’s 57-member panel who responded include Australia’s preeminent experts in the fields of microeconomics, macroeconomics economic modelling, labour markets and public policy.

Among them are former and current government advisers and a former head of the Australian Fair Pay Commission and member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.





Read more:
5 questions about superannuation the government's new inquiry will need to ask


 

Each was asked whether the legislated increases in compulsory super contributions should proceed as planned, be deferred or be abandoned.

Only 13 of the 44 thought the increases should proceed as planned. 29 thought they should be deferred or abandoned, nine of them preferring they be abandoned altogether.



Charts showing that of 44 economists asked


Economists Society of Australia/The Conversation, CC BY-ND

Those who thought they should be deferred argued that now is “not a time to encourage saving”. In the current circumstances we should be “far more worried about spending power today than in the golden years of present-day workers”.

Economist Saul Eslake said he had changed his mind. The latest evidence (which will be updated in the retirement income review) suggests that the current 9.5% so-called super guarantee will be enough to provide most people with an adequate income in retirement .

“In saying that I acknowledge that there is still a significant problem with regard to the adequacy of superannuation savings for women relative to men, but I don’t see how raising the super rate for everyone to 12% solves that problem,” he said.

“Not a time to encourage saving”

Economic modeller Janine Dixon said it was not clear that the optimal contribution was 12% rather than 9.5%. The increase would force some households into greater debt. While this would pose a risk to economic stability at any time, Australia could “not afford to let the household sector weaken further at present”.

Economist Geoffrey Kingston said anyone who felt 9.5% was not enough remained “free to make voluntary contributions”.

Among those believing the increases should proceed as planned were two former politicians, Labor’s Craig Emerson and former Liberal leader John Hewson.

Emerson said 9.5% was “considered inadequate by the burgeoning retiree population”. Without an increase, that population “would successfully demand increased pension levels from the Commonwealth”.

Opponents more confident

Hewson said compulsory super had become a fundamental part of an effective retirement incomes strategy and, COVID and economic collapse notwithstanding, we should “finish the job”.

Sue Richardson, a former member of the Fair Work Commission’s wage panel, believed any deferral might lead to another deferral and be “hard to recoup”.

The economists were asked to rate their confidence in their responses on a scale of 1 to 10.

Unweighted for confidence, 20.5% of those surveyed wanted to abandon the increases altogether. When weighted for confidence, that proportion climbed to 21.6%. The proportion that wanted the increases either deferred or abandoned climbed to 67.1%



Weighted responses to the question,


Economists Society of Australia/The Conversation, CC BY-ND

Asked whether the increases were likely to be largely paid for via slower wage growth than otherwise, 30 of the 44 economists agreed. Only eight disagreed.

Economist Nigel Stapledon said this “should not be controversial”.

Private sector economist Michael Knox said: “unless one lives in an unreal world, increases in superannuation guarantees are funded by employers out of the total wage the worker might otherwise receive”.

Super and wages come from the same pool

Several enterprise bargains explicitly make a trade-off between wages and superannuation, providing for wage increases that will be 0.5 points higher should compulsory super contributions not climb by 0.5 points.

Economist Alison Booth said if employers weren’t able to trim wage rises to pay for the scheduled increases in super contributions, they might “attempt to adjust on other margins”.

In a recession, when workers lack bargaining strength, “employers could coerce them to accept other adjustments to their contracts”.



Responses from 44 economists to the proposition:


Economists Society of Australia/The Conversation, CC BY-ND

Two of the eight economists who disagreed with the proposition that the increases in compulsory super would come at the expense of wages thought that employers wouldn’t grant wage rises anyway. Increases in super contributions might be one way for employees to get something.

A concern among both those who agreed and disagreed was that if the increase didn’t come at the expense of wages, it would push up the cost of hiring and come at the expense of jobs.

“Inflation is very likely to be very, very low and wages to be sticky,” said government advisor Matthew Butlin.

A drag on jobs if not wages

“Higher superannuation payments in an environment where wages are unlikely to rise and cannot fall will raise real labour costs and reduce the incentive to employ.”

Economic modeller Janine Dixon said that while over time the increase in contributions would probably come from wages, the immediate impact would be to increase the cost of hiring, “which is an unacceptably large risk in the present climate”.

When adjusted for confidence, the proportion of those surveyed expecting the increases to largely paid for via slower wage growth climbed from 68.2% to 71%. The proportion disagreeing fell from 18.2% to 17.8%.



Weighted responses to the proposition:


Economists Society of Australia/The Conversation, CC BY-ND

Individual responses

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 


Responses (44)


 

A Abigail Payne

Proceed as planned

7

While many of us are facing severe financial constraints with COVID-19, I have to be optimistic that these constraints will end in the short-medium term. Saving for retirement and having a strong financial base is a long term plan. We should not give up on goals of ensuring stronger financial stability in our post-retirement years.


 

Alison Booth

Be deferred

10

Now is not a good time to introduce these changes, with an employee?s redundancy probability likely to increase (and/or his or her hours of work reduced) if this reform is brought in when currently scheduled. I would recommend delaying for a year or two until the economy is in better shape.


 

Beth Webster

Proceed as planned

8

Deferring the 2.5% employment cost is unlikely to affect wages. It is more likely to reduce employment costs by 2.5% on what would otherwise would be the case. The question then becomes: Do slightly lower employment costs stimulate jobs? Many empirical studies suggest no. The biggest factor in hiring new people is the confidence people have that investment and exports are on the rise and this depends on how well the (Federal) Government and exports will stimulate the economy.


 

Brian Dollery

Be deferred

5


 

Chris Edmond

Proceed as planned

7


 

Craig Emerson

Proceed as planned

10

A Superannuation Guarantee rate frozen at 9.5 per cent would provide a retirement income that is considered inadequate by the burgeoning retiree population. With its strong voting power, the retiree population would successfully demand increased pension levels from the Commonwealth. This would require increased taxation as a percentage of GDP, which would have to be funded by increased personal tax on working-age Australians or a large increase in the GST rate towards the 20-25 per cent of European economies. With population ageing we are heading towards just 2.7 working-age Australians earnings the incomes and paying the taxes to support each retiree, down from 7.3 in the mid-1970s. Freezing the contributions rate at 9.5 per cent is a policy for an expanded welfare state.


 

Danielle Wood

Be abandoned

9

Before COVID-19, there were good reasons to abandon the planned increases in compulsory super. COVID-19 is just one more reason. Compulsory super shouldn?t rise, because that would force Australians to save for a higher living standard in retirement than they have while working. Grattan modelling shows that many low income Australians will already have a higher standard of living in retirement than they have currently - forcing them to save more will further squeeze them in the here and now. That?s why the Henry tax review recommended against raising compulsory super beyond it?s then rate of 9 per cent. Higher super costs the budget more in extra super tax breaks than it saves in lower age pension spending for decades to come. It?s a $2 billion a year hit to the budget once super hits 12 per cent, and those extra super tax breaks skew heavily to the wealthiest 20 per cent of Australian workers.


 

Deborah Cobb-Clark

Be deferred

9


 

Emily Lancsar

Proceed as planned

7

If the purpose is to encourage savings then effective way to do that. The impact on wages is relevant in current climate, but I am keen to see the empirical evidence (historical/international), rather than assumption, on whether or not it does in fact result in lower wage increase. The review of approaches to taxing super is also relevant and timely.


 

Flavio Menezes

Be deferred

9

The increase in compulsory super is good policy ? with positive long-term implications for individuals, public finances and the sustainability of our safety net for the aged. The only issue is timing. The economic incidence of the increase in compulsory super will be shared by employers and employees. This will mean lower take-home pay for employees at a time when it is crucial to sustain incomes (and, therefore, aggregate demand). It also means a higher cost of employment at the time of high unemployment. Regardless of whether the increase in compulsory policy ?will be paid for? mostly by employees via slower growth in wages or by employers, postponing it is, to use the language of game theory, a dominant strategy.


 

Garry Barrett

Be deferred

8

In light of the deep recession we are currently in, I would defer increasing forced savings measures such as the Superannuation Guarantee. Individuals and families can undo some of the forced savings (through dissaving on other margins) though the liquidity-constrained are least able to do so. Current cyclical conditions are so serious I would defer addressing the structural, life-cycle saving measures associated with increase the Superannuation Guarantee.


 

Geoffrey Kingston

Be deferred

7

Easier access to super was allowed earlier this year. On that occasion Michael Rice, the distinguished actuary, made the point that super needed to play some part in helping us cope with the economic consequences of the virus. The same holds true for the legislated increase in the compulsory contribution rate. There needs to be a pause until we are clearly on the other side of the crisis. This would help support employment in the short run. Also, people remain free to make voluntary contributions to super if they consider that the contributions from employers are inadequate for their retirement needs.


 

Gigi Foster

Be abandoned

6

In the present circumstances, we should be far more worried about spending power today than in the golden years of present-day workers. Increasing the super guarantee would also put more money into the hands of super fund managers, while our focus right now should be on those at the other end of the income spectrum - low-income workers. To help these people have a decent retirement we should opt for changes to the age pension instead of changing rules around superannuation. Leaving more money in their hands (rather than squirreled away for their retirements, with a fraction paid to fund managers) will not only be better for their standard of living today, but also promote higher aggregate demand, due to their higher propensity to spend compared to higher-income workers.


 

Guay Lim

Be deferred

7


 

Harry Bloch

Proceed as planned

8

The 12% super contribution rate is designed to provide an adequate retirement income for the average wage earner employed over an average working life. Anything less exposes the majority of the working population to a lower standard of living or depending on whatever standard of living is provided to future generations through an old-age pension. Further, the larger the proportion of the population who can't provide from themselves in retirement, the more difficultly future governments will have in financing the old-age pension at a reasonable level. Sound public policy is best served by ensuring most of the population can provide for themselves in retirement.


 

Hugh Sibly

Proceed as planned

6


 

Ian Harper

Be deferred

8

Raising the cost of hiring workers is ill-advised at a time when measured unemployment is set to hit 10% of the labour force or possibly higher. It is also a time to prioritise current over future consumption. Saving is already rising (i.e. consumption is falling) as people brace for the possibility of losing their jobs and possibly even their homes. Slowing wages growth (or even lowering average wages) by raising compulsory superannuation contributions will force further deferral of consumption when the opposite behaviour is required to promote faster recovery from the downturn.


 

James Morley

Proceed as planned

8

It is doubtful that COVID-19 has changed the fact that many people do not voluntarily save enough for retirement. This change will help ensure that more people save enough given longer expected lifespans.


 

Janine Dixon

Be deferred

5

The superannuation system has played an important role in maintaining Australia's savings rate and ensuring retirement incomes for a generation of Australians, however, the optimal rate of super is not clear, so it is not clear that 12 per cent is better than 9.5 per cent. An increase in super is likely to crowd out other forms of savings. As Giesecke and Nassios argue (https://theconversation.com/heres-another-reason-not-to-boost-compulsory-super-itll-ramp-up-debt-142571 and https://theconversation.com/heres-how-superannuation-is-already-financing-homes-76159), "the complex chain by which some savings that would have been home deposits end up financing the same homes via debt means a fair proportion of them is lost along the way in fees, expenses and profit margins." In other words, the beneficiaries of household debt being higher than it needs to be are the administrators of super funds. While high household debt poses a risk to economic stability at any time, we cannot afford to let the household sector weaken further at present. We will require a strong household sector to lift the economy out of the present recession, after lockdowns are lifted.


 

Jeffrey Sheen

Be deferred

7


 

joaquin vespignani

Be deferred

9

This is not a time to encourage saving. It would be a contradiction to have unprecedented expansionary monetary and fiscal policy while increasing superannuation contribution. On the contrary, I think that superannuation contributions should be temporarily suspended until this unprecedented economic crisis subside (perhaps for 6 to 12 months). This will boost the economy in such an unprecedented crisis and will not significantly affect individual superannuation funds in the long run.


 

John Freebairn

Be abandoned

8

The superannuation guarantee is a form of compulsory reallocation of current income to be saved for retirement consumption. Its rationale is to offset behaviour economics failures of current consumption time preferences. But, it comes at costs including: other forms of desirable saving for retirement, including owner occupied housing; precautionary and flexible saving such as riding out the current pandemic, unemployment and poor health. Arguably, these other savings needs mean the super guarantee has gone far enough. Further, there are more important required reforms. First and foremost, the excessive fees charged by super funds should be reduced to world best practice, and in this way generate greater retirement incomes rather than via an increase in the levy rate. Second, the vertical inequity of taxation of superannuation, and high effective tax rates associated with means testing of the Aged Pension, should be higher on the for-reform list.


 

John Hewson

Proceed as planned

9

Compulsory super has become a fundamental element in an effective national retirement incomes strategy - need to finish the job. While there is a populist temptation in the circumstances of COVID and our economic collapse - and, in particular, its impact on unemployment, job security, and wages - to delay or forgo any planned increase, there are other opportunities and imperatives to develop a beneficial longer-termrecovery strategy, that will secure employment and deliver wage increases.


 

John Quiggin

Be deferred

3

Superannuation is still a mess. We need to wind back tax concessions and get a coherent income support policy for all age groups before going any further down this path.


 

Julie Toth

Uncertain

5

The current economic crisis is extraordinary in every way. Its effects will be long-lasting and complex. The scheduled increase to compulsory superannuation contributions must be reviewed.


 

Ken Clements

Be abandoned

8


 

Kevin Davis

Be deferred

7

Longer term, under our current retirement incomes arrangements, an increase to 12% makes sense to ultimately reduce the call on budget finances for the age pension. In the midst of an economic crisis, deferral makes sense.


 

Lisa Cameron

Proceed as planned

8

The arguments against proceeding are the same that are levelled against increases in the minimum wage - that it will raise employer costs and so reduce employment. As is the case for minimum wage increases, the evidence of this happening is shaky. A further argument is that it will result in downward pressure on take home wages. This is possible but also far from certain and any welfare costs in terms of reduced take home wages today need to be balanced against the significant benefits of people being better able to support themselves in old age (particularly given the recent policy of allowing people to withdraw funds from super due to COVID-19 hardships.)


 

Margaret Nowak

Uncertain

6

In the longer term the increase to 12% would have upside for the economy and retirement incomes. However, the timeframe legislated is quite short given current conditions arising from Covid and could have a marginal impact on investment and employment decisions.


 

Matthew Butlin

Be deferred

9


 

Michael KNOX

Be abandoned

9

Unless one lives in an unreal world , increases in superannuation guarantees are funded by employers out of the total wage the worker might otherwise receive. Thus higher superannuation guarantees mean either lower wages than would other wise be the case OR lower employment than would otherwise be the case. This then worsens the ability of workers to save for housing purchases and repayments of loans. We can actually see this in action in practice where refunds in superannuation during the pandemic appear to have almost all been directed to repaying of loans such as mortgages. A higher superannuation guarantee where met by the employer would increase real wages and reduce employment . A higher superannuation guarantee where met by the the worker would reduce take home wages and worsen the ability of workers to save in other ways including through housing.


 

Nigel Stapledon

Be abandoned

10

The super scheme has been good for full-time, high income workers but has not met, and cannot by design, meet the needs of low-income and part-time workers. These inherent design flaws mean it actively discriminates against women and is of minimal value to low income households. The better policy would be to increase the safety net provisions - e.g. pension AND aged care support - and reduce means testing and pay for that by reducing the tax benefits to super in the accumulation phase, if compulsory are tax incentives required. In the retirement phase, put it on a par with private savings and (as per the Henry Tax Review) lower and simplify the (complex) taxes on private savings. The Henry Tax Review exposed most of these flaws and the nonsense that Australia's scheme is a world best scheme touted by some. Now, however, having created this scheme and a whole raft of vested and political interests (in this case mostly on union/ALP side), the voices against a sensible debate on this make reform incredibly difficult.


Paul Frijters - Comment

I regard Cameron Murray as one of the main experts on this now. Several public sector and private sector reports over the last 10 years, as well as our joint work in the booklet "Game of Mates" showed that compulsory super is largely a scam. The overhead is so large as to easily take 30-50% off people's super, straight into the pockets of the union bosses and employers running the schemes as directors of these compulsory funds. The main way it works is that the union bosses and big employers coordinate on the funds they "allow" their workers to choose from, as well as the particular defaults and charges in those funds, herding the workers into the fleecing stations. Expansion of the compulsory super element is thus a straightforward grab by corrupted groups for an even bigger slice of the wages of the population. Their running excuse is bogus, which is that people cannot look after themselves or that the scheme could not be run much cheaper. Both are simply untrue.

9


 

Peter Abelson

Be abandoned

7

In the medium term, super contributions are paid mostly out of wages rather than as add-ons to wages. Thus a compulsory increase in the contribution would lower take home wages. The preferred option is to raise take home wages and allow workers to choose whether to add some additional super.


 

Peter Sheehan

Proceed as planned

8

This is a fundamental long run change that should continue to be implemented, and not deferred or abandoned because of changing circumstances. With the serious decline in housing ownership among younger Australia's, together with economic trends favouring older rather than younger people, many now below 45 years facing daunting problems post retirement, with no housing assets and limited super. The steady move to 12% is important.


 

Be deferred

8

The slow wage growth which marked the Australian labour market in recent years is likely to persist in a post-COVID economy. Unfortunately, any increases in compulsory superannuation contributions in the near future will most likely cost workers in terms of wage increases. The proposed plan to increase compulsory super contributions should, in my view, be deferred until the economy stabilises.


 

Rana Roy

Be deferred

8

I have difficulty in answering this question. The difficulty consists in this. In the context of the worst global recession since the 1930s, it is desirable to avoid the damage to workers? welfare and to the macro-economy that would follow from proceeding as planned with an increase in compulsory superannuation contributions at the cost of a reduced growth in wages, let alone a reduction in real wages. On the other hand, it is also desirable to avoid the damage to social trust that might follow from abandoning the bipartisan commitment to increase superannuation contributions on which the present Parliament was elected. This is a trade-off that is inherently difficult to quantify. Given this difficulty, I have selected the option to ?defer? rather than to ?proceed? or to ?abandon?. This would avoid the breaking of promises and the resulting risk of damaging social trust. And it would ensure that any increase in superannuation contributions is triggered only when it would do less damage to workers? welfare and to the macro-economy than it would do today: that is, only after the current recession is well and truly over, and a strong and self-sustaining recovery has commenced (which last I consider unlikely to obtain by July 2021). Please note that I have refrained from presenting my own judgements on the principle of compulsory superannuation and its practice in Australia, or citing any part of the library of reference materials that informs these judgements. I have done so in the hope that those of my fellow-economists who are more supportive of compulsory superannuation than I am can agree with me on this single proposition: it is not a good idea to reduce workers? wages and current consumption in the midst of a once-in-a-century recession for the sake of projected benefits that are obtainable only in the long term.


 

Renee Fry-McKibbin

Be deferred

8


 

Richard Holden

Be deferred

10

An increase in the superannuation guarantee trades current consumption (wages) for future consumption (retirement savings). Now is a very bad time to do more of that. In addition, the current system is extremely costly in terms of tax concessions but still results in around 70% of Australians retiring on the aged pension. As the Grattan Institute and others have pointed out, the "bang for the buck" of the current system is completely unclear. I favor reforming the system through having low-cost index funds (rather than high cost stock pickers) and taxing on the way out (at the marginal rate including capital gains discounts) not the way in. But absent that we should not be increasing mandatory contributions.


 

Robert Breunig

Be deferred

10


 

Be abandoned

8

If I'd been asked this question three years ago, I would have answered it differently. I changed my mind after reading the Grattan Institute report authored by John Daley and Brendan Coates [LINK: https://grattan.edu.au/report/money-in-retirement/] , which persuaded me that the current super guarantee contribution rate was enough to provide an adequate income in retirement, and that further increases in the rate would likely be at the expense of wage increases. In saying that I acknowledge that there is still a significant problem with regard to the adequacy of superannuation savings for women relative to men: but I don't see how raising the SGC rate for everyone to 12.5% solves that problem. And I accept that the decision to allow people to withdraw up to $20K from their superannuation savings will result in some people having lower retirement incomes than otherwise: but again I'm not persuaded that raising the super guarantee contribution rate rate for everyone is the best way of resolving that problem, either.


 

Sue Richardson

Proceed as planned

8

9.5% is not enough to have the desired effect of providing an adequate retirement income. It is unlikely that there would be an equivalent rise in wages should the increase be deferred. Small steady increases are better than occasional large ones, so a deferral would be hard to recoup. Compulsory super would be much improved by making its benefits less concentrated at the top end of incomes.


 

Tony Makin

Be deferred

9

The original rationale for introducing superannuation was to minise the cost of the old age pension to future federal government budgets. Paradoxically however, previous studies, including the Henry Tax Review, have shown that the cost to the budget of increasing mandatory super contributions exceeds the savings in age pensions because of the associated tax concessions. On top of that there are the huge fees paid to super fund managers. Hopefully the yet-to-be released retirement income review will quantify the net cost of the current super arrangements. Until it is definitively shown that the benefits of super to the budget exceed its costs, there is no strong case for increasing contributions that could otherwise be paid as higher wages, the state of the economy permitting. Should super contributions increase, many employees could be just as well off investing their saving themselves and/or using the extra money to pay off home loans sooner.


 

Uwe Dulleck

Proceed as planned

8

Given that for the majority of Australians saving for retirement is mainly done via the compulsory contribution to super, an increase in contributions is beneficial for this majority. Research, as I see it, indicates that income replacement ratios offer super at retirement seems to be too low for most people - showing that other instruments to increase this voluntarily seem not to work. It is also unclear what the incidence of the increase in contributions will be, i.e. even in this time part of this increase are likely to be paid by employers.

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