While Australia is in the grips of its first recession in 30 years due to COVID-19, many employers and some members of government are arguing a planned increase of the super guarantee (SG) to 12% is unaffordable.
Successive coalition governments have frozen increases to the SG (which should have reached 12% in 2019 under the former Labor government’s legislation) and now the Morrison government has signalled it may not implement future increases at all.
Under legislation currently in place, the SG rate would increase incrementally to reach 12% in 2025.
In August coalition Senator Jane Hume, the minister responsible for superannuation, said she was undecided about future increases to SG.
“I’m reasonably ambivalent on the issue, to tell you the truth.
I think this is a decision that really should be based on the circumstances at the time,” Ms Hume said.
But with an ageing population and a dwindling proportion of taxpayers, Australia also faces a huge strain on future aged pension expenditure if super is not increased.
If the 12% SG rate is abandoned, future age pension costs will increase to 4.6% of GDP compared to 2.6% GDP today, according to data from the Australian Institute of Superannuation Trustees (AIST).
Similarly, a recent report by Rice Warner found freezing super at 9.5% would negatively impact the federal budget in the longer term through reduced super tax revenue and growing age pension costs – offsetting any savings achieved by the freeze.
Based on the evidence, not only is an increase to 12% super affordable, it is essential.
Failure to provide 12% super would also have a harmful impact on workers who are already disadvantaged under the current system including women and lower-paid workers.
What about wages growth?
Arguments that increases to super would come at the expense of wages growth are discounted by the fact wage growth flatlined when the SG rate was previously frozen.
Industry Super Australia (ISA) modelling found the federal government’s 2014 SG freeze failed to deliver wage increases and “workers sacrificed their super for nothing in return”.
The ISA said the analysis confirmed employers will not voluntarily provide deferred super increases in the form of increased wages.
“This shows employers pocketed the lost super and workers’ total remuneration also went backwards,” the ISA said.
The issue of wages growth is also compounded by the fact the nexus between wages and productivity has been disrupted.
Workers generated 9.5% in increased productivity over the past seven years, yet did not see a return for this productivity as super increases were denied and wages remained flat.
Per Capita Executive Director Emma Dawson said increasing the SG rate is “the only way government can directly ensure that a share of business profit in the years ahead is distributed in wages”.
System already leaving workers behind
While raising the rate to 12% is essential to improve retirement prosperity across the board, the system’s design is already leaving many workers behind.
Women are particularly disadvantaged by the time they spend out of the workforce caring for children and family.
They retire with 47% less super than men and women over 55 represent the fastest growing cohort of homeless Australians.
Many younger workers are also facing an uphill battle to build up their super balances.
During the COVID-19 pandemic, coalition government policy allowed 2.5 million Australians to draw down on their super – leaving 600,000 young people with no super remaining at all.
Since 2017, the coalition government has also allowed young people to withdraw super to pay for housing deposits.
There is a serious question over whether the super balances of young people can recover from these early withdrawals – even with an increased SG rate.
The true cost of a dignified retirement
Despite the government waiting for “circumstances” to be known before deciding if the increase to 12% super will proceed, the 9.5% SG rate has long been acknowledged as inadequate to fund dignified retirements.
The AIST said the adequacy of the 9.5% rate is based on some precarious assumptions: that an individual would work full-time, uninterrupted, with decent pay for at least 40 years.
With most women taking caring breaks from the workforce and 40% of Australians retiring voluntarily before 65 due to ill health or lack of employment, it is clear the proposition that 9.5% super is adequate is destined to fail.
Modelling from the ISA showed a 40-year-old worker on an average wage with $95,000 of accrued super would be $73,000 worse off if the SG remains stuck at 9.5%.
For a 20-year-old minimum wage worker with no existing super, the denial of 12% will cost them $92,000 upon retirement.
It is estimated that a single person needs $43,687 per year or a total super balance of $545,000 to fund a comfortable retirement, according to the AIST.
We’ve waited 30 years, it’s time to raise the rate
In a notable 1991 speech, then-treasurer Paul Keating said: “Unless we can move – and move rapidly – we will put the Commonwealth Government age pension system under unbearable stress
and condemn an entire generation of elderly people to an unsatisfactory and poorly provided retirement.”
Keating’s speech detailed for the first time a vision for universal 9% superannuation, with a final goal of reaching 12%.
Keating laid the groundwork for this plan as Prime Minister by legislating the Superannuation Guarantee Act in 1992.
But nearly 30 years later, Keating’s words about the inadequacy of our pension system remain true and the ultimate goal of reaching 12% super is still unrealised.
Superannuation is at a tipping point.
Decisions made in the coming months and years will shape the retirements of millions of workers.
While some fortunate workers already receive higher super contributions, including IEU members accessing super co-contribution, it is evident that a base level of 9.5% super is not enough.
For workers without access to enhanced super and those who cannot afford to sacrifice additional funds, the SG rate is the foundation of their retirement savings.
Repairs to the super system will also be needed if we are to ever see women workers and other disadvantaged cohorts catch up to average super balances.
In that historic speech nearly three decades ago, Keating concluded a universal 12% super system was “the difference between being able to enjoy the free time at the end of one’s working life and wanting the means to enjoy it”.
It is time to raise the rate and provide as many Australian workers as possible with the means to “enjoy” a dignified retirement.
Add your name to more than 20,000 voices calling for change to our super system by signing the Australian Unions petition here.
