Government needs a super long-term strategy

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Published by The Drum, Wednesday 3 September

The Government has further delayed increases in the superannuation guarantee, as part of its mining tax repeal deal.

The Coalition’s election commitment was that superannuation would rise to 12 per cent of salary by July 2020. In the May budget, the Government proposed to delay that to 2022. Under legislation passed yesterday, the guarantee will now reach 12 per cent in July 2025, a full six years after the previous government’s timeframe.

The Prime Minister argues that “by delaying the increase in the superannuation guarantee levy we are keeping more money in workers’ pockets.” It is true that an increase in mandated superannuation will tend to slow wage increases. Superannuation is a form of compensation with tax advantages – and there is only so much compensation employers will be prepared to pay.

Superannuation increases are now to be delayed until the 2020s, so the resulting wage slowdown, too, will be delayed.

Following the Prime Minister’s logic, one might be tempted to cut the superannuation guarantee to zero – after all, that would put even more “money in workers’ pockets”.

But the purpose of compulsory superannuation is to help provide for adequate incomes in retirement and to preserve the pension for those who need it. And most of us should be saving more for retirement. With the postponement, many of us will retire with less.

Compulsory superannuation payments will be about 13 per cent lower over the coming decade after yesterday’s change. For an average worker who has recently joined the workforce, that could reduce retirement balances by about 5 per cent, or $40,000.

For those on lower incomes, the impacts will be magnified if the Low Income Super Contribution (LISC) scheme is shelved, as planned, in 2017. LISC ensures that people earning relatively low incomes do not end up paying a higher tax rate on their super contributions than they pay on their ordinary income.

The postponement will help the budget over most of the next decade. Tax revenues will be brought forward: the typical worker’s tax rate on take-home pay is about 30 per cent, or double the 15 per cent rate on superannuation contributions. Companies, too, pay 30 per cent tax.

So by postponing superannuation increases, the Government will pick up additional tax, regardless of whether employers or workers get the money that would have gone to super. The extra tax over the next decade will average about a tenth of a percent of GDP a year (about $1.5 billion).

These early savings will reduce debt and future interest payments. But tax revenues further into the future will be lower, and other government spending will rise. There are two main reasons why.

One, lower super inflows will probably lower national savings. That reduces future national income and thus shrinks the base for tax revenues.

Second, as people retire with lower super balances, expenditure on aged pensions will rise. How much it rises depends on what people do with their super on retirement, and what rules apply at the time.

Most people will still claim at least a part pension at retirement. With lower balances at retirement, some of us will go onto the pension sooner, or claim a larger part pension.

So overall, postponing the increase in the superannuation guarantee will improve the budget over most of the next decade, but will lead to longer-term retirement savings challenges. And it may not help the budget much in the longer term.

What should government do to promote retirement adequacy? The obvious two options are to encourage voluntary superannuation contributions and to increase net returns on the money superannuation funds invest.

On the first, it is unclear what more government could do to encourage more people to make voluntary contributions up to their “concessional caps” – the amount up to which people pay less tax on their contributions. Some already do so; many do not despite the benefits.

There is, however, a lot government can do to improve net returns. This is hugely powerful lever: a lasting increase in net returns of just a fifth of a per cent per year would fully offset the impact on retirement balances of the government’s delay in the superannuation guarantee increase.

The government’s main lever is to get superannuation fees down, while preserving the quality of investment management. The spread of fees between the best and worst funds is well over half a per cent a year, so getting the high-fee funds down towards best practice would strongly improve retirement adequacy.

Grattan’s 2014 report, Super Sting, recommends that government bring wholesale price pressure to bear in superannuation by running a tender for the right to offer a default fund – any fund that employees have not explicitly chosen. There are other opportunities to remove cost and complexity in the system, as many submissions to the Financial System Inquiry set out.

Government should drive efficiency in the superannuation system. That would take pressure off future budgets, and could fully offset the impacts of its current budgetary measures on retirement adequacy.

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