The Federal Government Super Enquiry - The Questions that Need to be Asked

On Friday last week, Treasurer Josh Frydenberg announced a review into the superannuation and retirement system in Australia, with much of the review being focussed around employer contributions going into super.

Australia is scheduled to have an automatic increase to the amount already being directed into super from employee wages (the Super Guarantee payment) – currently, 9.5% and this is currently set to increase in the years ahead. The next legislated increase in compulsory superannuation contributions is scheduled for July 1, 2021.

However, it appears as though the next increase (and those to follow) may actually hurt due to low wages growth.

The last two super guarantee increases we’ve had were back on July 1, 2013, and July 1, 2014, and these took place when wage growth was stronger. In 2013 wages growth was 3 per cent per year. And they were small — an extra 0.25 per cent of salary each.

The next five, to be imposed annually from July 1, 2021, are twice the size: 0.5 per cent of salary each. If taken out of wage growth, they have the potential to cut it from its present usually low 2.3 per cent per annum to something with a "1" in front of it, pushing it below the rate of inflation, for five consecutive years.

If we were going to do that (even if we thought the economy and wage growth could afford it), it would be a good idea to have a good reason why.
After all, compulsory superannuation is the compulsory locking away of income that could otherwise be spent or used to pay down debt or saved through another vehicle, regardless of the wishes of the person whose income it is. So, here are some issues that need to be considered during this review process:

Question 1. What's it for?

Fortunately, the new inquiry doesn't need to do much work on this one. For most of its life, compulsory super hasn't had an agreed purpose.

At times it has been justified as a means of restraining wage growth, at times as means of restraining government spending on the pension, at times as means of boosting national savings.

In 2014, more than 20 years after compulsory super began, the Murray Financial System Review asked the government to set a clear objective for it, and two years later the government came up with one, enshrined in a bill entitled the Superannuation (Objective) Bill 2016.

The bill lapsed, but the objective at its center lives on as the best description we've come up with yet of what compulsory super is for: To provide income in retirement to substitute or supplement the age pension.
Which raises the question of how much we need. For compulsory super, the answer is probably none. People who want more than the pension and their other savings can often save more through voluntary super over their working life.

Question 2. How much do people need?

Assuming for the moment that how much people need in retirement is relevant for determining how much compulsory super they need, the inquiry will need to examine what people need to live on in retirement.

The "standards" prepared by the Association of Superannuation Funds of Australia are loose. The more generous of the two allows for overseas travel every two or so years, $163 per couple per fortnight on dining out, $81 on alcohol "or equivalent spent with charity or church".

It isn't a reasonable guide to how much people need to live on, as each household and family is different and has a different set of objectives.

Question 3. Does it come out of wages?

The best guess is that, although paid by employers in addition to wages, compulsory super comes out of what would otherwise have been their wage bill.

Treasury puts it this way:

Though compulsory superannuation guarantee contributions are paid by employers, wage-setting generally takes into account all labour costs. As such, it is widely accepted that employees bear the cost of higher superannuation guarantees in the form of lower take-home pay.

The inquiry will probably make its own determination.

If it finds that extra contributions do indeed come out of what would have been pay rises, it will have to consider the trade-off between lower pay rises (and they are already very low) and the compulsory provision of more superannuation in retirement.

Question 4. Does it boost private saving?

It would be tempting to think that the compulsory nature of compulsory superannuation meant that each extra dollar funnelled into it increased retirement savings by an extra dollar.

But it doesn't, in part because wealthy Australians who are already saving a lot have the option of offsetting it by saving less in other ways.

For them, the increase in saving isn't compulsory.

For financially stretched Australians unable to afford to save (or for Australians at times in life when they can't afford to save), the compulsion is real and unwelcome.

Question 5. Does it boost national saving?

Boosting private saving (at the expense of people who are unable to escape) is one thing. Boosting national savings (private and government) is another.

The tax concessions the government hands out to support compulsory super are expensive. The concession on contributions alone is set to cost $19 billion this year and $23 billion in 2022-23, notwithstanding some tightening up.

On balance it is likely that the system does little for national savings, cutting government savings by as much as it boosts private savings. But, because the question hasn't been asked, not since the Fitzgerald report on national saving in 1993 shortly after compulsory super was introduced, we don't know.