Research questioning raising SG rate based on “fantasy world”: ISA

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Industry Super Australia has disputed the findings of ANU research on the appropriate level of the Super Guarantee rate, describing it as based on a “fantasy world with dangerous conclusions”.

There is currently a debate raging about how high the Super Guarantee rate should be set. The Government has started a Review of Retirement Incomes, which will, in part, look at the Super Guarantee (SG) rate. Members of the Coalition are agitating for the SG rate to be paused or frozen, despite the Treasurer – though not the PM – explicitly committing to raising the SG rate to 12%. Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, has reportedly said that a 10% SG rate was a “nice round number” that people could relate to. The SG rate is set to rise from its current 9.5% to 10% from 1 July 2021.

Into this debate has come new research questioning the need to raise the Super Guarantee rate. The research, by three academics from the Australian National University – Associate Professor Geoff Warren, Dr Gaurav Khemka, and Yifu Tang – released earlier in January, found that increasing the Super Guarantee rate above 9.5% required assuming the policy aim of using super to replace the age pension, and as self-insurance against investment, longevity and early retirement risk.

“We see the case for increasing the SG to 12% as tenuous unless the stance is adopted that a primary aim is to use superannuation to replace the Age Pension where possible. We are wary over the use of the SG to facilitate self-insurance against risks, noting that this could lead to over-saving with its own issues and costs.”

Industry Super Australia, which has been campaigning for increases to the SG rate, said the research “comes to dangerous conclusions based on flawed assumptions that bear no resemblance to the working life of Australians.”

“The researchers have created a fantasy world where every Australian is a single man who is in the workforce for more than 40 straight years. This fantasy man never runs his own business, gets an injury or illness that forces him out of work, is made redundant or has a study break. Women do not exist and no parent takes time out of work to raise children.”

“There is no savings other than super – no family homes, investment properties, shares or bonds”

“This fantasy ANU model has also done away with unpaid super. The one in three Australians that Industry Super Australia analysis shows are currently underpaid super totalling close to $6 billion a year will be relieved to know that the ANU model has ended the scourge of underpayments.”

ISA says the scope of the research is “so limited that no meaningful conclusions could be drawn from it”, and is critical that it involves “no test of whether any assumptions hold in history or that the balances produced by the model benchmark to reality”.

The ANU paper acknowledges that it does not account for assets outside superannuation, and that the appropriate level of the SG rate can “can differ substantially across members; and with the stance taken on what the SG is trying to achieve, and the particular assumptions underpinning the modelling”. While early retirement and career breaks aren’t “addressed under the baseline analysis, but is investigated under the sensitivity tests”.

The academics say, in the paper, that they “understand that some of our findings are at odds with a strong belief in some quarters that increasing the SG is essential to ensure adequacy during retirement”. They ascribe these differences to four factors: their analysis accounts for the impact of SG on pre-retirement consumption, it treats the Age Pension as an available income stream not a safety net, doesn’t assume self-insurance as an aim, and is “based on the assumption that the SG will be paid for by the member out of their take-home pay”. This last point is an area of particular contention in the current debate around superannuation.

Last year research commissioned by Industry Super Australia was released which found that a one-to-one trade off between wages and super contributions was “not credible”. The paper by Dr Jim Stanford, Director and economist with the Centre for Future Work at the Australia Institute, found that many of the reports claiming there was a trade off did not have empirical evidence, but instead “simply repeated assertions to that effect in a circular and repetitive exercise in ‘group think’”.

“The only way to ensure Australians have dignity, choice and control in retirement is for the government to deliver on its promise to increase the super guarantee to 12 per cent,” says ISA.

The primary recommendation of the ANU research is that the “policy objective of the SG needs to be more clearly specified. How the interests of various members are to be traded-off is also pivotal, given that the impact of the SG is not evenly felt”.

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