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Phil Gallagher: It's wrong to argue that more in super will mean less in pockets

  Published: 27 Feb 2020

An opinion piece by Phil Gallagher as published in the Australian Financial Review on February 27, 2020.

The superannuation guarantee rise is baked into legislation and continues to receive bipartisan support, but the increase and its relationship to wages is still the focus of significant debate.

Those who oppose the legislated increase to a super rate of 12 per cent say it will come directly at the expense of a worker's wage.

These critics, who view the settled policy through a short-sighted lens, miss the main point. The debate should not be about the short-term cut to wages in the next year or two, but the impact on family spending during a person's working life, and in retirement.

As the head of retirement income modelling in Treasury for 21 years and the lead projector on three Intergenerational Reports, I have seen these short-sighted arguments before.

Yes, wage growth is stagnant and the economy is sluggish. But the answer to these challenges is not to take more money away from working Australians by winding back the legislated super increase. All that will do is leave hard-working Australians with less money over their lifetimes.

My research shows increasing the rate to 12 per cent will allow employees to keep more of their wages and boost their total spending over their entire adult life. For the 7 million Australian workers who will receive an increase in super, on average the effect of the legislated rise would be a less than 1 per cent decrease on household family spending over working life. The payoff will be an average 10 per cent increase in retirement incomes.

During a person's working life, there is a very large difference between how much you get paid and how much you can actually spend because of things like personal tax, family payments and childcare benefits. The amount paid in wages does not automatically translate into an equivalent amount in spending.

For example, a couple with children, both earning $50,000, have a marginal tax rate of 36 per cent. On top of this, 30 per cent of any wage rise they receive will result in a reduction in family payments.

They would get to spend only 34 per cent of their wage rise.

The next scheduled rise in the super rate is to 10 per cent next year. The government's mid-year economic and fiscal outlook forecast is for a wage rise of 2.75 per cent in that year, which is higher than the current rate of wage increases.

If we assume this is the wage rise in the absence of a super rise, a person on $50,000 could expect a rise to $51,375.

There are several studies and views on the degree to which an increase in the super rate will cut wages. While some claim a figure as high as 80 per cent, others found no relationship, and another study found the partial fall could range from 40 per cent to 65 per cent. But what is clear is that there is no evidence to support a claim that there is a direct, or equivalent, trade-off.

For our worker on $50,000, if we assume a partial offset of 70 per cent, when the super rate increases to 10 per cent, their wage would increase to $51,212. This is a difference of $163 compared with the forecast increase of $51,375.

For a couple, both earning $50,000, the difference would be $326.

But as we have explained, higher wages do not equal higher spending. On the original extra wage rise, the couple would pay tax of $118 (36 per cent). Their family payments would be reduced by $98 (30 per cent). The net increase in family spending from not having the super rise would be $111 a year for the couple - or $2.13 a week.

In other words, only a third of any extra wage rise that could come at the expense of a super increase goes to household family spending. Two-thirds of the wage increase would go to the government, helping to increase its budget bottom line. In contrast, if this couple benefits from the lightly taxed extra super contributions for a full working life, they could expect a 4.4 per cent increase in their retirement spending.

This would be more than $2370 per year of extra spending of their 25 years in retirement, in wage deflated terms, or $4350 per year if the amount is CPI adjusted. This is nothing to sneeze at. This is being able to have the heater on in winter and not worry about the bills, a nice dinner out every once in a while, or a trip to see the grandchildren.

Even taking a conservative approach with a partial trade-off, our couple could either have an extra $111 to spend a year while they are working if the super rate doesn't increase, or $4350 a year extra to spend for 25 years in retirement if it does.

The loss of a wage rise to taxes is even higher if a worker has a HECS debt, and losses to income tests will be made worse if the family has childcare or Family Tax Benefit Part B payments.

Of course, that's if workers were to get a rise at all: one of the reasons for the 2014 super rate freeze was the promise it would deliver higher wages, a promise that never eventuated.

What is guaranteed is that increasing the super rate to 12 per cent will mean workers get to keep and spend more of their money.

Phil Gallagher was executive senior manager of retirement income modelling at Treasury from 1993 to 2013. He is now a special retirement policy adviser to Industry Super Australia.

*The above material, whilst correct at the time of publication may include references or statements which are no longer current.

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