Super isn’t a path to a bigger pay rise - Grattan Institute

Published by The Sydney Morning Herald, Sunday 2 February

After years of disappointing pay rises, Australian workers are set to see their employers’ superannuation contributions on their behalf increase from 9.5 per cent of wages today to 12 per cent by July 2025. What’s not to like?

But while employers might hand over the cheque for super, workers ultimately pay for almost all of it through lower wages. That’s the finding of our latest research paper for Grattan Institute, No free lunch: higher super means lower wages.

Using administrative data on 80,000 federal workplace agreements made between 1991 and 2018, we show that about 80 per cent of the cost of increases in super is passed to workers through low wage rises within the life of an agreement, typically two-to-three years. The long-term impact is likely to be even higher.

These findings shouldn’t come as a surprise. International studies of similar schemes also find that workers typically pay for most, if not all, of social security contributions made on their behalf. Which is why past federal governments have long assumed that compulsory super is paid out of workers’ wages, rather than by employers.

Many supporters of higher super, including former prime minister Paul Keating, argue that while past increases to 9.5 per cent were paid for from wages, future increases to 12 per cent won’t be.

After all, wages have grown by an average of just 2.1 per cent over the past five years, while the share of national income going to workers has been falling.

But low wages growth doesn’t mean higher super will be a free lunch for workers. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in compulsory super contributions?

In fact, if workers’ bargaining power has fallen, employers should be even less likely to pay for higher compulsory super than in the past.

Our previous research showed that for many Australians, the trade-off between higher super and lower wages isn’t worth it.

Compulsory super set at 9.5 per cent, together with the age pension, is already doing its job. Most retirees today feel more comfortable financially than younger Australians who are still working. And they typically have enough money to sustain the same, or a higher, living standard in retirement than when they were working.

The retirees of tomorrow are likely to be even better off. The average worker today can expect a retirement income of 89 per cent of their pre-retirement income – well above the 70 per cent benchmark used by the OECD and others.

Compulsory super is a good thing. But you can have too much of a good thing. Compulsory super shouldn’t rise, because that would force Australians to save for a higher living standard in retirement than they have while working.

That’s why the Henry Tax Review recommended against increasing compulsory super beyond its then rate of 9 per cent of wages just on a decade ago.

Lifting compulsory super would also do little to boost the retirement incomes of many low- and middle-income workers, while hurting them today.

Higher super contributions wouldn’t improve their retirement much: the extra super income would be largely offset by lower part-pension payments.

What’s more, the age pension is indexed to wages. If wages grow more slowly, pensions do too. So, Australians receiving the age pension today should be the most fervent opponents of higher compulsory super.

Our research shows that increasing compulsory super would primarily benefit the top 20 per cent of income earners. By being forced to pay more into super, they would no longer pay income tax on that income; it would instead be taxed lightly at a flat 15 per cent rate.

And raising compulsory super to 12 per cent would cost the federal budget $2 billion a year now, and well into the future.

There’s good reason to be worried about stagnating pay for many working Australians. But super isn’t a path to a bigger pay rise. It’s the opposite.

Higher compulsory super means wages will grow even more slowly in future than they would otherwise. Which is just one more reason the planned increases in the rate of compulsory super contributions to 12 per cent should be abandoned.