The Grattan Institute is calling on the federal government to stop a looming policy that will force workers to put an extra 2.5% of their salary into superannuation. The existing 9.5% superannuation guarantee (SG) is scheduled to increase by half a percentage point starting 1 July 2021 until it hits 12% by mid-2025.
Effects of the superannuation guarantee increase
According to the report, increasing the super guarantee to 12% will negatively impact low-income workers who already need every dollar they earn. It suggests that the increase will simply take away more money from low-income Australians that could be used to pay down the mortgage. This could lead to larger mortgage debts at retirement that will need to be discharged using superannuation savings at retirement.
From 1995 through 1996, 72% of 55-64-year-old Australians owned a home outright. That number has fallen to 42% in 2015-2016.
The report also suggests that higher compulsory super contributions are ultimately financed by lower wages therefore resulting to lower living standards for today’s workers. Business Council of Australia chief executive, Jennifer Westacott, adds, “The higher compulsory superannuation contributions are, the bigger impact they have on the living standards and wages of workers today – that’s because, just as the Henry Review said, workers bear the cost of these contributions through lower wages growth.”
Furthermore, the increase in compulsory super contributions by repressing wage growth will also have an unintentional negative effect to Age Pension beneficiaries as their payments are indexed to wages.
The main beneficiaries from this increase will be the high-income earners because they receive larger tax concessions. The report said, “For the bottom half of workers, retirement incomes will not rise materially because lower age pension payments would outweigh the increase in income from savings.”
In the opinion of the Grattan Institute, stopping the super guarantee increase would save $2-2.5 billion per year. Cassandra Goldie, chief executive of the Australian Council of Social Service, agrees that it was hard to justify the increase given the foregone wages have their greatest impact on low-income earners. They receive little or no benefit from the current tax breaks.
Superannuation industry fights back
A former Treasury official now working for Industry Super Australia, Phil Gallagher, is of the opinion that the Grattan modelling was “deeply flawed” tending to overinflate retirement incomes for lower-income workers.
According to Mr Gallagher, “Getting the super guarantee to 12 per cent is vital to deliver a decent standard of living for working people who have little scope to save for their retirement outside super.”
The Grattan report is a timely reminder that although the retirement system is working for some, superannuation is not the complete solution to your future financial worries.
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