With the Super Guarantee rate already legislated to go to 12%, and a government review of the retirement income systems likely, a disagreement has broken out over the impact of increasing the SG rate.
The Grattan Institute says that increasing the SG rate from 9.5% to 12% will cost a typical 30 year old worker $30,000 over their lifetime. But the modelling behind this figure has been strongly criticised by superannuation industry groups. Rice Warner disagrees with the “sensational” figure, saying the “analysis has less to do with the SG level, but is more about the issues of means-testing of the Age Pension”.
The Super Guarantee rate is currently 9.5%, with gradual increases to 12% by 2025 already set in legislation.
The Grattan Institute has long argued against increases to the SG rate, claiming that most Australians already have a better standard of living in retirement compared to when they are working.
The “big winners from higher compulsory super would be the wealthiest 20% of Australian earners, who would benefit from extra super tax breaks and would be unlikely to receive the age pension anyway,” says the Institute.
“Higher compulsory super redistributes income from the middle to the top. Middle earners would be no better off.”
Rice Warner says a 9.5% rate means a “dignified” retirement for most – “warding off poverty” – when combined with the Age Pension.
“However, it will not provide everyone with a reasonable replacement rate, nor a comfortable retirement. A higher SG improves the position for more people and has the advantage of also reducing long-term Age Pension costs.”
The Grattan Institute has detailed some of its methodology on its blog, while Rice Warner plans to release a green paper on the issue within the next month.
One of the assumptions made by the Grattan Institute is that increases in compulsory super contributions will come from wages.
“It’s a reasonable assumption, because while the evidence isn’t perfect, it all runs in the same direction.”
A report by the Productivity Commission recommended a review of retirement incomes before any increases in the SG rate – a recommendation which the government may well adopt, based on comments by the Treasurer.
Attempt to undermine Super Guarantee: ISA
The Grattan Institute says that “just about all” of the income from higher superannuation balances would be offset by lower pension payments as a result of the pension assets test. Also, as wages are accounted for in the indexation of the age pension, directing money from wages to super would slow increases in pension payments.
Industry Super Australia says the Grattan Institute has contradicted itself with this argument, and is trying to “undermine the superannuation guarantee”.
“Despite releasing research only a few weeks ago that claimed increasing the super guarantee to 12 per cent would not ease the burden on the age pension, today they are claiming that an increase will leave workers poorer, because it will reduce the amount they are entitled to through the pension.”
“Both can’t be true. Not only does one completely contradict the other and make a mockery of the claims, the modelling Grattan relies on to peddle these myths is deeply flawed.”
“Under their modelling, the effect of the superannuation guarantee on wages, pension indexation and taxation is incredibly overstated, and assumes women, low-income and self -employed workers don’t exist.”
“They double count salary sacrifice contributions, and overestimate voluntary contributions and the amount of age pension paid.”
ISA says the Grattan Institute has assumed the Government has implemented schemes to minimise underpayment of employer contributions – which ISA says hasn’t happened – and only uses the single rate pension, which is much higher than the couples pension.
Industry Super Australia Acting Chief Executive Matthew Linden said: “Any attempt to wind back the proposed super increase or freeze it altogether would not only affect Australians’ quality of life at retirement, it would increase the burden of the age pension on the budget.”
Grattan Institute’s modelling “becoming tedious”: ASFA
The Association of Superannuation Funds of Australia (ASFA) says that the Grattan Institute’s “inability to accurately model retirement outcomes is becoming tedious”.
“The Grattan Institute’s latest missive on retirement funding continues the pattern of selective and misleading modelling that seeks to undermine a retirement system that is globally acknowledged as one of the best in the world,” said ASFA CEO Dr Martin Fahy.
“Good public policy will always benefit from lucid, rigorous research and modelling. However, the Grattan Institute’s latest output is based on unsound assumptions regarding average earnings, working patterns, the future rate of the Age Pension, how the means test for the Age Pension works, and most importantly working Australians’ aspirations for a dignified retirement.”
ASFA said it was a “heroic assumption” to assume that not increasing the SG rate by 2.5% would result in a wage increase of the same size, and that individuals would retain the full benefit of this money.
“In reality, the increase in personal tax, withdrawal of family tax benefits and child-care subsidies would erode most of the increase, leaving people no better off in working life and worse off in retirement,” said ASFA.
ASFA also took issue with the claim that increasing the SG rate to 12% would not make a difference to retirees, said retirees prefer the certainty of their own savings over the uncertainty of the age pension, and that using a CPI deflator created an “unrealistic view of the future level of the Age Pension”.
Use of SG analysis “misleading”: Rice Warner
The Rice Warner paper concluded that an SG rate of between 10% and 15% was needed to achieve the objectives of the super system.
The Grattan Institute – correctly – quoted Rice Warner as saying a 12% SG rate “will not have much impact on the age pension for many years”, followed by a reduction of about 0.1% GDP in the second half of the century. Meanwhile the tax concessions are “more immediate and they will average about 0.22% of GDP throughout this century”.
However Rice Warner went on to say that this was a “small cost to pay for the improvement in retirement incomes which it would deliver”.
“We should point out that these values (Age Pension costs and personal tax concessions) do not need to equate; it is desirable to give tax concessions for those who save and lose access to their funds until they retire.”
Rice Warner now says: “In twisting our argument, Grattan also erroneously claimed that the Paper shows that we (at Rice Warner) believe increasing the SG would have huge fiscal costs not only in the short term but also in the long term.”
Rice Warner says the Institute is wrong to conclude that superannuation has a net cost to the budget, because the Institute uses the ‘revenue-foregone’ measure of tax concessions – which doesn’t account for how people would respond to change in policy.
“The aggregate tax concessions on a ‘revenue foregone’ basis is not the same as the ‘revenue gained/lost’ from a change in policy.”
“Increasing the SG has complex distributional impacts which aren’t captured by aggregate fiscal estimates in Treasury’s Budget analysis.”
This article has been updated since publication with the comments by ASFA.