The Budget would be forecasting rising real wages if it weren’t for compulsory super – Grattan Institute

It’s been years since most Australians had a decent pay rise. The average worker’s real wages have risen by just 0.3 per cent each year in the five years heading into COVID. In this years’ Federal Budget the Morrison Government confirmed that Australians still have a while yet to wait for their next pay rise.

The recent Federal Budget forecasts nominal wages to grow sluggishly over the next four years (Table 1). In fact Australian workers’ wages are forecast to go backwards this year and next, since inflation is expected to outpace growth in wages, tantamount to wages falling in real terms. Real wages aren’t forecast to start rising again until 2024-25, and even then by just 0.25 per cent.

Table 1: Budget forecasts on wages, inflation, and unemployment

2019-20 2020-21 2021-22 2022-23 2023-24 2024-25
Wages price index (WPI) 1.8 1.25 1.5 2.25 2.5 2.75
Inflation (CPI) -0.3 3.5 1.75 2.25 2.5 2.5
Unemployment rate 6.9 5.5 5 4.75 4.5 4.5

Source: Budget 2021-22, Budget Paper 1, Table 1.2.

Real wages would be rising if compulsory super wasn’t increasing

The rate of compulsory superannuation contributions is legislated to rise from 9.5 per cent to 10 per cent next month, and continue rising on 1 July each year until it reaches 12 per cent of wages by 1 July 2025.

Speaking at Senate Estimates today, Treasury Secretary Dr Stephen Kennedy confirmed that the legislated increases in compulsory super is a significant factor keeping expected wage growth below inflation:

“Roughly speaking a 0.5 [percentage point] increase in the super guarantee means wages are less by about 0.4 [percentage points].”

That means that without the increases in compulsory superannuation, Australian workers would likely see increases in their real wages next year. Given increases in compulsory super, their real wages will continue to fall.

This shouldn’t come as a surprise. Reserve Bank Governor Phil Lowe has also said higher super will result in lower wages growth.

Our recent paper, No free lunch, showed that higher super means lower wages, finding that that 80 per cent of the cost of super comes via lower wages within 2-3 years. And the long-term impact could be as high as 100 per cent. That’s what international studies of similar schemes typically find.

Independent research commissioned for the Federal Government’s Retirement Income Review also found that changes to the rate of compulsory superannuation causally lower wages growth, with a pass-through of close to 100 percent.

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

Which is why legislated increases in compulsory super beyond 10 per cent should be abandoned. Alternatively, workers should have the option of “cashing out” any extra employer contributions above that level each year when submitting their personal income tax returns.

Super isn’t the only driver of slow wages

Of course superannuation isn’t the only driver of slow growth in wages. Australia is still recovering from the COVID recession, and wages were growing slowly well before that.

The Budget forecasts that we are still three years away from unemployment falling to 4.5 per cent, the bottom of the 4.5-5 per cent band which Treasury now believes constitutes full employment. In contrast, the Reserve Bank estimates that unemployment may need to fall further to about 4 per cent (or below) before we see wages growth pick up. There’s more than government could do to support a faster a return to full employment, which would see wages will start to grow faster again even sooner.

But it’s clear that increases in compulsory super reduced the pace of wages growth relative to where it otherwise would’ve been. And for Australian workers today, that’s the difference between seeing their wages rise faster than inflation next year, or go backwards.