In the wake of recent legislated changes improving our choice of super fund, the government must not assume the job of super reform is done. Next on the chopping block should be the planned increases to the super guarantee.
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The compulsory super rate, already at 9.5 per cent, is scheduled to increase to 10 per cent in July next year.
There is strong evidence - both empirical and theoretical - that superannuation is largely "paid for" through wages forgone.
Wages growth, already weak prior to the COVID-19 recession, simply cannot afford to suffer another hit in the misguided aim of boosting retirement balances.
The wage price index for the June quarter was basically flat and, with inflation currently negative, it is hard to see either nominal or real wage gains of substance over the next 12 months, even absent the super increase.
Moreover, even if you were to wrongly argue that businesses pay for super from their profits, it's not like business can bear further imposts during a recession either.
Where, then, will the increase come from? Cutting take-home pay is one option - one that is only too real in the COVID-19 recession. Further job losses are another potential way to pay for increased super. Neither is desirable.
The point is not that cancelling the increase will give workers a 0.5 per cent pay rise. It is about limiting the harm that will occur by taking 0.5 per cent from workers' wages to pay for super. Regardless of claims to the contrary, nothing the government does with super will create, or remove, a wage increase.
These practical limitations are an important reason to reconsider the increase, but there are bigger issues at stake as well.
The first is the lack of a purpose to the superannuation system. The Murray review correctly alluded to this problem, suggesting that the purpose should be to provide income in retirement to substitute or supplement the age pension.
While this may indeed be an adequate purpose for superannuation from the perspective of an individual, the thing missing from super is a legislative purpose; particularly one that justifies making the system compulsory.
As the recent rush to access super during the pandemic shows, many young families clearly need the income now, even if that comes at the expense of income in retirement.
What harm is the government seeking to prevent through compulsory superannuation? What good is the government trying to achieve by forcing us to save nearly 10 per cent of our wages?
When phrased in this way, two potential rationales emerge: reducing the cost of the age pension to taxpayers or alleviating old-age poverty.
While the first reason might be the best reason for a compulsory super system, it is relatively easy to dispense with. Treasury estimates in 2009 suggested super would only reduce the cost of the age pension by 6 per cent, although more recent estimates suggest this figure may be higher.
Regardless of how you measure the cost, or estimate the return, the better conclusion on the evidence is that super costs the budget more in concessions than it saves in age pension outlays - for the next several decades at least.
Moreover, no evidence has been advanced that the compulsory nature of the system is key to generating age pension savings. The bulk of pension savings almost certainly come from those on average or above-average incomes; who would be likely to save for retirement anyway.
This does not even consider the money lost to bloated fees - fees that are only possible because of the lack of true competition in a compulsory system.
The issue of old-age poverty is probably a more pressing issue, but this is far more about the adequacy of the age pension than the nature of the super system.
It is worth noting it's not actually clear the age pension is inadequate in the first place. Our research from 2014 indicated the pension was sufficient on most consumption-based poverty measures, and even fared OK on relative income measures.
There are good reasons to be sceptical of relative poverty measures, but they are especially unreliable when considering groups with different consumption patterns.
As the Grattan Institute noted in a 2018 report that concluded most workers were well-served under the current super model, even older Australians with access to superannuation savings spend less in retirement than they did prior to retirement, especially as they get older.
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Second, the groups most at risk of old-age poverty - older single women and those who don't own their own home, for example - already start with lower super balances and are far less likely to have any super left by the time they reach 70.
Altering the system to the extent necessary to ensure adequate super for marginal income earners would be a very costly waste of money. The pension is already a better-targeted solution to this problem.
Of course, both rationales for compulsory super are built on the assumption that, if left to their own devices, individuals would systemically undersave for retirement. This, too, is a questionable assumption.
For example, in an environment where home ownership is falling markedly among younger demographics, the decision to prioritise buying a home over retirement savings is likely a rational one. Evidence suggests that owning a home is far more important than super at keeping people out of poverty in retirement.
Moreover, as the recent rush to access super during the pandemic shows, many young families clearly need the income now, even if that comes at the expense of income in retirement.
Of course, there is the even more fundamental point that, if proper protections are in place to prevent serious harm, it should not be the business of government to protect individuals from the consequences of their decision-making - especially if it punishes those who are making good choices.
After all, anyone who believes 9.5 per cent of wages is insufficient to fund their retirement could voluntarily increase their contributions to 10 per cent or 12 per cent of their wages without forcing everyone else to do the same.
That this solution is dismissed out of hand shows that much of the motivation for the increase is really about satisfying the vested-interest vultures that feast on compulsory super.
- Simon Cowan is research director at the Centre for Independent Studies.