Should Australia abandon its superannuation increases? Grattan thinks so

superannuation

Are workers paying for higher super contributions? Economists over at The Grattan Institute think so.

Why? In short, employers have historically passed on the economic cost of the superannuation guarantee (SG) to workers, and there’s no good reason to think they won’t continue to do so.

The Melbourne-based think tank on Sunday called for the planned increase in compulsory superannuation contributions to 12% by 2025 to be abandoned, arguing about 80% of super increases have historically been passed onto workers within the typical life of an enterprise agreement.

The paper, which analysed 80,000 federal workplace agreements over the last 27 years (1991-2018), bolsters the stable of critics arguing for an overhaul of planned super increases, including business owners who could be tasked with withholding higher proportions of worker pay packets.

But the research is contentious, with Industry Super Australia lining up to criticise the findings on Monday morning, claiming Grattan “cherry-picked” the facts.

Under current laws, employers are required to make superannuation guarantee payments at least four times a year, currently at a 9.5% rate, which is slated to increase to 10% in 2021-22 before gradually moving to 12% from 2025-26 onwards.

But Brendan Coates, Grattan’s household finance program director, says the increases aren’t worth it for workers.

“This trade-off between more superannuation in retirement but lower living standards while working isn’t worth it for most Australians,” Coates said in a statement circulated Sunday.

“This new empirical analysis reinforces that the planned increase in compulsory super, from 9.5 per cent now to 12 per cent July 2025, should be abandoned.

“Most Australians are already saving enough for their retirement.”

Why are workers paying for higher super?

As the Grattan paper notes, the idea workers pay for super increases is nothing new — Australia’s superannuation industry was founded on the premise of an explicit trade-off with wages.

The theory is fairly simple: increases in super guarantee payments increases the cost of employment, which businesses pass on in the form of lower wages, higher prices or lower profits.

In the case of superannuation guarantee increases, this could merely mean employers respond by holding their wage costs constant.

Varying assumptions about ubiquitous rationality aside, the ‘expectation’ is the more workers value superannuation, the more they’ll work for the same wage as contributions increase.

Further, if the willingness of employees to work is less sensitive to wage changes than employers’ willingness to hire more people, then workers can be expected to bear more of the economic cost of higher superannuation contributions.

Employers pass it on

So, is this what happens in Australia? Grattan says yes, leaning on workplace agreements data it says demonstrates the theory.

Finding the vast majority of superannuation increases are borne by workers, Grattan explains employers utilising enterprise agreements have historically passed the cost of higher contributions onto workers through lower wages at a rate of about 80.05%.

“Consider a worker with pre-superannuation wages of $100,000. If the SG is 4 per cent, the total labour cost to the employer is $104,000,” Grattan researchers detail in the paper.

“If the SG [Superannuation Guarantee] increases by 1 percentage point to 5 per cent and the employer passes this cost fully to the employee — i.e. maintaining labour costs at $104,000 — the worker’s wage will decrease 0.952 per cent to $99,047.”

“They will be paid 5 per cent SG on top of their wage, i.e. $4,952, for a total labour cost of $104,000.”

At least this is the case for workers not covered by Australia’s minimum award rates, which are set by the Fair Work Commission (FWC).

However, Grattan researchers also noted higher super contributions are likely to lead to slower minimum wage growth, as the FWC references super contributions in its deliberations.

Grattan’s conclusion isn’t that SG increases eliminate wage growth, but that they cause wages to grow slower than they otherwise would have.

Will it be different next time?

Grattan’s thesis is contentious — especially in the halls of Australia’s superannuation industry, which benefits from higher contributions, and among the brains trust of politicians who drew up the current system, former Primer Minister Paul Keating included.

Bernie Dean, chief executive of Industry Super Australia, had some choice words for the think-tank in a statement circulated Monday morning.

“Grattan came to this flawed conclusion last year, and have now come back with cherry-picked information to support a pre-conceived fantasy view of the world that ignores women, the self-employed and periods outside of the workforce,” he said.

Grattan concluded its report by noting that in the absence of any explicit agreement with employers to prevent the passing on of future superannuation increases, no one should expect a different outcome.

“It’s possible that employers may be able to afford to pay higher compulsory super contributions without reducing wages growth.

“But proponents of this view do not explain why employers will choose not to pass on the cost of higher compulsory super, unlike in the past.”

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