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Home / How super works / Super news / Retirement Income Review finds problems more super won’t solve

Retirement Income Review finds problems more super won’t solve

November 23, 2020 by Peter Martin 1 Comment

Reading time: 3 minutes

On this page

  • Most retirees have enough
  • It’s the pension that matters
  • There’s a real retirement income problem
  • No recommendations, but findings aplenty

It would be a waste if the Friday’s mammoth Retirement Income Review was remembered only for its finding that increases in employers compulsory superannuation contributions come at the expense of wages.

That has long been assumed, and is what was intended when compulsory super was set up.

Compulsory super contributions are set to increase in five annual steps of 0.5% of salary between 2021 and 2025. These are much bigger increases than the earlier two of 0.25% in 2012 and 2013.

PeriodSuper guarantee rate
1 July 2002 – 30 June 20139.00%
1 July 2013 – 30 June 20149.25%
1 July 2014 – 30 June 20219.50%
1 July 2021 – 30 June 202210.00%
1 July 2022 – 30 June 202310.50%
1 July 2023 – 30 June 202411.00%
1 July 2024 – 30 June 202511.50%
1 July 2025 – 30 June 2026 and onwards12.00%

And the wage rises they will be taken from will be much lower. The latest figures released on Wednesday point to shockingly low annual wage growth of 1.4%.

Should each of the scheduled increases in employers compulsory super knock 0.4 points off wage growth (which is what the review expects) annual wage growth would sink from 1.4% to 1%.

Private sector wage would sink from 1.2% to 0.8%, in the absence of something to push it back up.


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Because inflation will almost certainly be higher than 1%, it means the buying power of wages would go backwards, all for the sake of a better life in retirement.

The review presents the finding starkly. Lifting compulsory super contributions from 9.5% of salary to 12% will cut working-life incomes by about 2%.

And for what? It’s a question the review spends a lot of time examining.

Most retirees have enough

The review dispenses with the argument that the goal of a retirement income system should be “aspirational”, or to provide people with higher income in retirement than they had in their working lives.

It finds that for retirees presently aged 65-74 the replacement rates for middle to higher income earners are generally adequate.

Many lower-income earners get more per year in retirement than they got while working.

If the increases in compulsory super proceed as planned, this will extend to the bottom 60% of the income distribution.

They’ll enjoy a higher standard of living in retirement than while working (and will enjoy a lower standard of living while working than they would have).

Most retirees die with most of what they had when they retired, leaving it as a bequest. They are reluctant to “eat into” their super and other savings because of concerns about possible future health and aged care costs, and concerns about outliving savings.

The review quite reasonably sees this as a betrayal of the purpose of government-supported super, saying

superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation

It’s the pension that matters

The pension does what super cannot. It provides a buffer for retirees whose income and savings fall due to market volatility, and for those who outlive their savings. 71% of people of Age Pension age get it or a similar payment. More than 60% of them get the full pension.

If there’s one key message of the review, it is this: it is the pension rather than super that matters for maintaining living standards in retirement, which is what the review was asked to consider.

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It is also cost-effective compared to the growing budgetary cost of the super tax concessions.

The Age Pension costs 2.5% of GDP and is set to fall to 2.3% of GDP over the next 40 years as the super system matures and tighter means tests bite.

Treasury modelling prepared for the review shows that if more money is directed into super and away from wages as scheduled, the annual budgetary cost of the super tax concessions will exceed the cost of the pension by 2050.

There’s a real retirement income problem

A substantial proportion of Australians, about 30%, are financially worse off in retirement than while working, and they are people neither super nor the pension can help.

Mostly they are older Australians who have lost their jobs and cannot get new ones before they before eligible for the Age Pension or become old enough to get access to their super. Often they’ve left the workforce due to ill health or to care for others and are forced to rely on JobSeeker, which is well below the poverty line.

It’s much worse if they rent privately. About one quarter of retirees who rent privately are in financial stress, so much so that the review finds even a 40% increase in the maximum Commonwealth Rent Assistance payment wouldn’t be enough to get them a decent standard of living in retirement.


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No recommendations, but findings aplenty

The review was not asked to produce recommendations. Instead, while noting that much of the system works well, it has pointed to things that need urgent attention.

It finds that pouring a greater proportion of each pay packet into the hands of super funds is not the sort of attention needed, and in the present unusual circumstances could cost jobs as employers who can’t take the extra cost out of wages take it out of headcount.

The government will make a decision about whether to proceed with the legislated increase in compulsory super in its May budget, just before the first of the five increases due in July.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Learn more about making super contributions in the following SuperGuide articles:

Your simple guide to Superannuation Guarantee (SG) contributions

September 1, 2020

How to make super contributions after you’ve retired

July 8, 2020

Contributing to your super in your late 60s: What are the rules?

July 3, 2020

Work test: Making super contributions over 67

July 1, 2020

Non-concessional super contributions guide (2020/21)

June 26, 2020

Concessional super contributions guide (2020/21)

June 22, 2020

How do tax-deductible superannuation contributions work?

February 1, 2020

Beginner’s guide to making super contributions

January 1, 2020

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IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

Reader Interactions

Comments

  1. Frances McKiernan says

    December 10, 2020 at 8:56 pm

    Please stop repeating the failure of logic in this arena that is being touted by right wing employer groups. The premise of this and other reports seems to be that money in the pocket of the worker now is better than money in super later – which may or may not be true but where is the promise that the forgone increase in super will be paid in ages instead?
    For example, this statement:
    “It finds that pouring a greater proportion of each pay packet into the hands of super funds is not the sort of attention needed, and in the present unusual circumstances could cost jobs as employers who can’t take the extra cost out of wages take it out of headcount.”
    Interpretation: “this extra money will just go to the super fund giants (as if they somehow own the money instead of the workers in their individual accounts) and if we poor blighted employers have to do this then we have to cut jobs”
    So: employers will have to cut head count if they have to pay extra (in super) to the workers – in other words they just want to avoid paying any extra at all! They bleat about having to pay this or cut jobs – admitting that if they don’t pay it, it won’t go to the worker as a wage rise!
    It is a complete nonsense. Please stop repeating this right wing failure of logic

    Reply

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