More compulsory super hurts Middle Australia — however you look at it

New Grattan Institute research published today in The Conversation shows that lifting compulsory superannuation contributions to 12 per cent of wages would make Middle Australia poorer. We calculate it would cost today’s typical (median) 30-year-old Australian worker up to $30,000 over their lifetime.

Of course, projecting future retirement incomes requires making assumptions, and sometimes the assumptions can have a big impact on the conclusions. This post sets out the two key assumptions we’ve made, and how varying these assumptions affect our results. It shows that on any reasonable assumptions, more compulsory super makes middle-income Australians worse off.

We’ve taken account of inflation only

Our lifetime income projections adjust future incomes for inflation only – that is, we’ve allowed for the fact that a dollar in the future will buy less than a dollar today. But we have not allowed for the fact that people tend to prefer getting a dollar today rather than getting the same dollar in 40 years’ time – that is, people usually value consumption now more than consumption later.

By not applying such a ‘real discount rate’ to future incomes, we are being generous to advocates of higher compulsory super. The red bars in the chart below show the impact on lifetime incomes allowing for inflation only (that is, a 0 per cent real discount rate): many workers would be worse off. The orange bars show the impact after applying a common but relatively low real discount rate of 2 per cent: most workers would be even worse off.

We expect any higher super contributions would be paid for via lower wages

Proponents of lifting compulsory super insist it won’t come from workers’ wages. But we’ve assumed it would – because the evidence suggests that more super means lower wages. It’s a reasonable assumption, because while the evidence isn’t perfect, it all runs in the same direction.

Compulsory super was originally created to forestall wage increases that could have sparked inflation. And workers appear to have paid for compulsory super via lower take-home wages. That’s the view of the Henry Tax Review and the Parliamentary Budget Office. It’s also the view previously held by Paul Keating and Bill Shorten. And it’s exactly the position adopted by the Fair Work Commission in 2013 when compulsory super was increased from 9 per cent to 9.25 per cent of wages – minimum wages went up by less than they would have without higher compulsory super.

Some argue that even though past increases in compulsory super were paid from wages, an increase to 12 per cent today wouldn’t be. But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons for current low wages growth. If employers aren’t willing to give wage rises, why would they absorb an increase in compulsory super?

And while real wages have stagnated, nominal wages are still growing: by 2.2 per cent a year over the past five years. It would be easy for employers to simply reduce those nominal wage rises to offset any increase in compulsory super – as they have in the past.

More compulsory super hurts middle Australia even if employers pick up half the tab

So we’ve assumed that none of the costs of any increase in compulsory super would be borne by employers. But the next chart is generous to advocates of higher compulsory super by comparing scenarios where 25, 50, 75 or 100 per cent of any increase is borne by employers. It shows that employers would have to pick up more than half the tab before the median worker would come out ahead – a very unlikely scenario.

And again, applying a real discount rate of 2 per cent makes higher compulsory super look even worse. As the next chart shows, under such a discount rate middle-income workers would go backwards even if 75 per cent of extra compulsory super contributions came from employers’ rather than workers’ pockets.

 The bottom line

Our research shows that lifting compulsory super contributions to 12 per cent would leave workers in Middle Australia poorer over their entire lifetimes – and that remains true under any future scenario we could reasonably expect.

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