• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • Join SuperGuide Premium
  • Account
  • Log In
  • Join SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / How super works / Super news / Workers bear 71% to 100% of the cost of increases in compulsory super

Workers bear 71% to 100% of the cost of increases in compulsory super

November 23, 2020 by The Conversation Leave a Comment

Reading time: 4 minutes

On this page

  • Here’s what we did
  • What happens when compulsory super is increased?
  • What about other findings?
  • Where does it leave us?

By Robert Breunig, Crawford School of Public Policy, Australian National University

The government’s much-anticipated Retirement Income Review has found that increases in employer’s compulsory superannuation contributions are financed by reductions in workers’ wage growth.

This isn’t obvious, and it certainly isn’t what the superannuation industry has been saying.

Legally, those contributions (at present 9.5% of each wage) come from employers, on top of the wage.

Employers are required to pay them under a legal instrument known as the “superannuation guarantee”.

But employers have to get the money from somewhere.


Advertisement
SuperGuide Premium is ad-free

Compulsory super was introduced in 1992 with the intention the money would come out of funds that would otherwise have been used for wage increases. The document said workers would be

forgoing a faster increase in real take-home pay in return for a higher standard of living in retirement

Government ministers encouraged employers to shave wage increases to pay for increases in compulsory super. In 2012 then minister Bill Shorten explained:

a portion of what would have been employees’ increases will go into compulsory savings

Modelling by the Treasury, Reserve Bank, Grattan Institute, and the private sector has long assumed that is what happens.

Then in February groundbreaking research by the Grattan Institute on 80,000 enterprise bargaining agreements over three decades of compulsory super found that was indeed what has been happening.

Grattan found that on average, 80% of each increase in compulsory super has been taken from what would otherwise have been a wage increase.

And now, in work commissioned by the Retirement Income Review using completely different data (from the Tax Office instead of enterprise agreements) and an entirely different analytical approach, so have we.

Here’s what we did

Imagine three companies (A, B, and C) offering an identical job in the same city with three different annual total compensation packages: $117,000 (A), $112,000 (B), and $109,500 (C).

The three companies offer the same wage ($100,000), they only differ in the amount of super they pay their workers: 17% (A), 12% (B) and the legally-required 9.5% (C). In this example, total compensation equals wages plus superannuation.

In a competitive labour market (which we largely have in Australia), job seekers would flock to company A, which offers the best compensation package.

How might B and C respond to get workers back?

By offering higher wage growth in subsequent years than A. Higher wage growth would ultimately lead to a catch-up in total compensation levels across the three firms, over time.

Examining the administrative tax records since compulsory super has been set at a single standard rate, that is indeed what we found – when a firm paid super at more than the standard rate, those firms that paid less or merely the standard rate lifted wages by more.

Compare super funds

Read more...

Advertisement

Put another way, the firms that paid their workers more than the legislated rate of super lifted their wages by less.

What happens when compulsory super is increased?

Legislated increases to the standard rate of compulsory super increase firms’ labour costs, but only for firms that pay the standard rate (in our example that’s firm C which we will call a super guarantee “SG” firm).

By comparing the difference in wage growth of employees in “SG firms” to “above SG” firms (companies A and B) during periods when the minimum super guarantee was increased, we can determine how companies pay for the increase in labour costs.

We already know that wage growth for “SG firms” is higher than “above SG” firms.

The question is: how does that change when the SG increases?

If “SG firms” find the money to fund the higher SG from somewhere other than wages, it won’t change at all.


Advertisement

If they pass on some or all of the cost to their workers in lower wage increases, then their wage growth should slow relative to that of “above SG” firms.

Our examination of Tax Office data finds this is what has happened.

Our results show that when the legislated compulsory super contributions increased from 8% to 9% in 2002 and again from 9% to 9.25% in 2013, companies passed on 71% to 100% of the cost to workers in the form of reduced wage growth.

What about other findings?

Two other studies, one funded by Industry Super, do not find a trade-off between super increases and wage increases (and in some instances present a case for superannuation increases leading to wage increases).

As we are seeing in the current debates about pausing increases in compulsory super, it tends to be politically easy to raise compulsory super when wage growth is robust and convenient to pause increases when wage growth is slow.

The correlations observed in these studies (that wage growth has been high when compulsory super has been increased) may well be picking up on the timing of increases in compulsory super – that they have been introduced at times when wage growth has been strong rather than having caused strong wage growth.

Where does it leave us?

Increases in compulsory super come at a cost to the wages of workers.

They might result in higher retirement incomes later in life (although this is uncertain because the settings of the age pension mean an increased superannuation balance is not directly correlated with an increase in retirement living standards).

But they leave less disposable income available to workers and their families to consume today or to save through alternative means.

They also cost the government money.

An increase in compulsory super contributions might one day reduce age pension expenditure, a question examined by the review.

But in the years before then, the government would forego substantial tax revenue because the extra super would be taxed at a lower rate than wages.

These are important things for the government to consider as it decides whether to proceed with the legislated increase in compulsory super from 9.5% of salary to 12% in five steps of 0.5% between July 2021 and July 2025.

Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

Compare super funds

Read more...

Advertisement

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

Related topics

How super works Super news

Related features

Government reviews of superannuation

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

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Join SuperGuide Premium and give your retirement plans a boost.

Get access to independent expert commentary on the latest super, retirement and SMSF issues, including the top performing super and pension funds, how much super is enough, the latest super rates and thresholds and new super measures and strategies.

You’ll have access to more than 600 articles, how-to super guides, checklists, tips, calculators, reckoners and other tools, as well as a monthly newsletter.

Find out more

Footer

Important: Disclaimer

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.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap