Comment: Superannuation and super-sized vested interests

Australians with superannuation accounts are paying three times more in fees than other countries. (AAP)

The government’s move to freeze the Superannuation Guarantee rate is an excellent case study in how vested interests will prey upon the misconceptions of the public to stymie reform. Thankfully their attempts were not successful on this occasion.

The government’s move to freeze the Superannuation Guarantee (SG) rate earlier this month is an excellent case study in how vested interests will prey upon the misconceptions of the public to stymie reform. Thankfully their attempts were not successful on this occasion.

While it may be true that superannuation balances will be smaller as a consequence of the freeze the question of whether this will hurt or help workers is a complex one. The answer depends upon how these super increases would have been funded and on how individuals value income now compared to income later.

Not that you would get that impression from listening to the super industry lobbyists who were lining up to convince us that some workers could be worse off by as much as $100,000. The only people certain to lose from the SG rate freeze are super fund managers.

If you want to understand what the SG rate freeze means for workers it is easier to think about what might have happened if the SG rate increase had gone ahead and where the money would have come from.

Contrary to widely held misconceptions super is not a gift from your employer nor is it a cost imposed upon them. The cost of your labour to your employer is your gross (before tax and super) wage. The SG rate is the minimum percentage of this that must be placed in a superannuation account – currently 9.5 per cent.

To argue that workers would get super increases on top of wage rises is to argue that super is a gift from your employer, funded entirely out of profits. This is not the case.

These are often referred to as “employer contributions” but this term is somewhat misleading. The contribution is made by the employer on your behalf. It matters little to the employer what that rate is, your labour still costs the same.

Had the increase in the SG rate gone ahead it is more than likely that wage growth would have slowed, to reflect the annual 0.5 per cent increases in compulsory super, through to 2019-20 when the SG rate was to reach 12 per cent. While few workers would see a cut in their pay after the increased compulsory super contributions were taken out, for many their take-home pay would be lower than if the SG rate had stayed at 9.5 per cent.

To argue that workers would get super increases on top of wage rises is to argue that super is a gift from your employer, funded entirely out of profits. This is not the case.

However, not everyone will receive an increase in their take-home pay equal to the SG rate freeze. There may be structural issues in some labour markets that prevent the foregone super from being put back into wages and there may be some employers in a position to try and carve out some of this. But this is not going to be the case for most workers and these problems would exist in the absence of the SG rate freeze – or for that matter compulsory superannuation.

It is something of a contradiction for super funds to argue, on the one hand, that employers will pocket the reduced super contributions that would result from the SG freeze, and then suggest that if the SG rate increases were to go ahead they would be entirely funded out of profits rather than wages.

It is difficult to see how providing workers with a choice as to whether they want to put their money into super, or spend it now, can be conceived as a cost. Especially when they can still receive tax concessions if they elect to put it into super.

Super funds like to present their cherry picked estimates of the lower superannuation balances that might result from the SG rate freeze as a “cost” to the worker. Steve Bracks, former Victorian Premier now chairman of CBus Super, warns of the higher levels of tax that workers will pay as a result of the SG rate freeze.

It is difficult to see how providing workers with a choice as to whether they want to put their money into super, or spend it now, can be conceived as a cost. Especially when they can still receive tax concessions if they elect to put it into super.

There is nothing stopping workers from making voluntary contributions, before tax, above the SG rate. Contrary to Mr Brack’s claims these contributions attract the same concessional 15 per cent tax rate as the compulsory contributions that were mandated by the SG rate, provided they do not exceed $30,000 (for those under 50). This is what is known as “salary sacrifice”.

If workers genuinely feel that more money in super is a good thing, given their individual circumstances and preferences, there is nothing to stop them making voluntary contributions and receiving the tax benefits.

The posturing of the super funds is nothing more than a distraction from more important questions concerning our retirement incomes system. Among them: How would Australians prefer to trade-off current income for future income? Has our current super system got that balance right? What are the implications of age pension means testing for Australians incentives to save for their retirement? Should retirees who own their homes be using their home equity, rather than the age pension, to fund a higher standard of living in retirement?

Finding answers to these questions requires a government that can weight up complex policy priorities not a government that panders to the vested interests of super funds.

Matthew Taylor is a Research Fellow at the Centre for Independent Studies. He tweets @mattnomics.

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