80% of cost of Super Guarantee rate increases passed on as lower wages

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New economic modelling by the Grattan Institute finds that around 80% of the cost of increasing the Super Guarantee rate is passed on to workers as lower wages.

Part of the ongoing debate about increases to the Super Guarantee rate has been about how much, if any, of the cost is paid by workers.

The Super Guarantee rate is legislated to increase to 10% in 2021, and then gradually increase to 12%. Some members of the Coalition have been calling for a freeze or pause in the SG rate. The Treasurer – who has previously committed to the legislated timetable, but more recently returned to saying there were “no plans” to change the legislated increases – has started a Retirement Income Review. The new Grattan Institute modelling will likely be submitted to the Review.

The modelling – released in the report titled ‘No free lunch: higher super means lower wages‘ – is based on analysis of over 80,000 federal workplace agreements. It finds that about 80% of increases to the Super Guarantee rate are passed on as lower wage rises over the term of the agreements, usually 2-3 years.

This differs from earlier work from the Grattan Institute on the Super Guarantee rate, which assumed that higher Super Guarantee was fully passed on through lower wage growth – pointing to Treasury modelling. That report – Money in retirement: more than enough – argued that the Super Guarantee rate should remain at 9.5% as Australians could already expect a comfortable retirement.

The new finding of 80.5% is also expected to be the lower end, “lower-bound”, of the effect, while the “long-term impact is likely to be even higher”.

“This trade-off between more superannuation in retirement but lower living standards while working isn’t worth it for most Australians,” said Brendan Coates, Grattan’s Household Finances Program Director and lead author of the new report.

“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.”

“Together, these findings demand a rethink of Australia’s retirement incomes system.”

The modelling was based on agreements that cover about a third of employees, though the report authors expect it would apply to other employees.

Some have argued that wages growth has been slow at the same time that increases to the Super Guarantee rate were paused – the Coalition legislated a slower increase to the SG rate, it would have otherwise already be 12%. Coates rejects this argument: “It’s true that wages growth has slowed in recent years, but nominal wages are still growing by more than 2 per cent a year, so employers have plenty of scope to slow the pace of wages growth if compulsory super contributions are increased.”

“And none of the plausible explanations for lower wages growth – whether slower growth in productivity, technological change, globalisation, an under-performing economy, or weaker bargaining power among workers – helps explain why employers would foot any more of the bill for higher compulsory super this time around.”

In research – commissioned by Industry Super Australia – released last year, Dr Jim Stanford, Director and economist with the Centre for Future Work at the Australia Institute, said many of those proposing a 100% offset between wages and super had “only asserted that relationship – and then cited others who also assert that argument”, in a “circular and repetitive exercise in ‘group think’”. Stanford’s modelling found increasing the Super Guarantee rate would have “no negative effects on future wage growth”.

The new Grattan report criticises the work by Stanford on a number of technical points, including only capturing the “short-run impact of increased super on wages” – leading to an underestimation on the impact on wages over the longer term.

Stanford took to Twitter to defend his work, and note the Grattan Institute is “conceding that what they once portrayed as a self-evident consensus”, and to criticise their methodology.

Recent research from the ANU found the case for increasing the Super Guarantee rate to 12% “tenuous unless the stance is adopted that a primary aim is to use superannuation to replace the Age Pension where possible”.

Labor reaffirms commitment to legislated SG increases

Stephen Jones, Labor Shadow Assistant Treasurer and Shadow Minister for Financial Services, “reaffirmed” Labor’s commitment to the current timetable for Super Guarantee rate increases.

Labor has committed itself to the currently legislated timetable for increases to Super Guarantee – which was passed by the Coalition. Under Labor’s previously legislated timetable, the SG rate would already be 12%. The Labor platform says the party will “urgently prioritise” ending the freeze on SG increases and raise it to 12 % as “soon as practicable”.

“Freezing the legislated increase won’t lead to pay increases and it won’t change super tax benefits for high income earners. The original timetable has already been delayed twice costing workers who are retiring today between $60,000 and $100,000 in their superannuation balance,” said Jones.

“Too many Australians retire without adequate retirement savings, which is why our super system needs to be strengthened and protected, not undermined.”

Some, including Liberal Senator Andrew Bragg, have proposed low income earners be able to opt-out of Super Guarantee, presumably receiving it as wages, something Jones rejects.

“We agree that workers need a pay rise. We don’t think they should pay for it with super cuts,” Jones said.

“The last time the Liberals and Nationals froze the Superannuation Guarantee wages growth didn’t pick up, we got record low wages growth instead.”

“The Liberal Party has form when it comes to undermining superannuation. They have opposed every increase.”

More to come.

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