The cost of increasing the super rate
The apparent unity ticket between the Morrison government, the Labor opposition and the broader labour movement in support of increasing compulsory superannuation contributions must surely rank as one of the stranger recent cases of strange bedfellows.
Not only because bipartisanship is increasingly rare in Canberra, but also because each holds a position that appears entirely counterintuitive.
In backing an increase in super contributions from 9.5 to 12 per cent, the government is supporting a reform that will cost vast sums in revenue. This change will funnel even more money into industry funds under the influence of trade unions, which the Coalition usually portrays as a malign force. And it will, according to credible economists, weaken an already weak economy by constraining the spending power of workers.
Labor, traditionally the party that supports the struggling worker, is backing a change that experts fear will further stymie wage growth, disproportionately benefit the wealthy and increase economic inequality.
To date, Labor is solidly behind the increase, while Scott Morrison and Josh Frydenberg have repeatedly and emphatically stated their commitment to it, staring down members of their backbench who have their doubts. It would seem the increase is a done deal, unless the findings of the newly established inquiry into Australia’s retirement income system – announced by Frydenberg last week – change the terrain substantially.
It seems to defy explanation, this robust bipartisanship that exists – for the time being, at least – on the super increase. Unless, of course, you look to the history of how the respective sides came to their positions and came under the thrall of vested interests.
Let’s start with the Labor side, for the story of the evolution of Australia’s unique $2.9 trillion superannuation regime, which harvests some $30 billion a year in fees and charges from members, is mostly a Labor story.
While the regime has developed incrementally, one might identify a sliding-doors moment that set the country on the path towards the current reality.
That moment came at the 1984 ALP federal conference, when Labor shifted from viewing superannuation as an issue of social security to one of industrial relations. The consequences of that change were huge.
The 1984 conference effectively signed the death warrant for a national, government-run superannuation scheme, which Labor had been committed to until that point.
According to Emily Millane, a researcher with the Australian National University’s Crawford School of Public Policy who is completing a PhD on the history of super, the concept of a national, government-run super scheme was not a new one. “At various points in history stretching right back to the 1920s, there had been proposals around to create a national superannuation scheme – so you would contribute through your wages to a pension, run through the government,” she says.
Early proposals came from the conservative side of politics and were opposed by Labor, explains Millane, “because they said that it took money out of workers’ wages, and they were already paying for their retirement through their taxes that delivered the age pension”.
But, gradually, Labor came around to the idea. And in the ’70s, the Whitlam government proposed to introduce a national super scheme.
Significantly, says Millane, the idea was then considered to be an issue of social security – and one of equity. The wealthy had long enjoyed the benefits of super; its generous tax treatment made it an attractive dodge. Why shouldn’t everyone have the same opportunity to augment their retirement income through a concessional super system?
In the 1984 Labor platform, in the section on social security, the party’s policy read as such: “Labor will introduce a self-supporting, portable national superannuation scheme providing entitlements to cover all persons …”
But elsewhere in the platform, in the section relating to industrial relations, the policy said something else. It articulated a new right: “the right of employees … to have access to superannuation schemes which are not discriminatory, and which make reasonable provisions with respect to benefits and the operation of such schemes”. That is to say, employees would have the right to join occupational super schemes, of which there would be, in time, a multiplicity. That decision marked the key shift in the way super was seen in our politics.
Millane says that the policy shift was in significant part a recognition of an emerging reality that some unions had already set up the first small industry funds by the late ’70s.
In the years after the 1984 conference, economic circumstances conspired to turbocharge the growth of super funds. When Bob Hawke led the Labor Party to power in 1983, his government inherited an economy with big problems – the exact opposite of those faced by the current government.
The Hawke government faced a “terrible conundrum” of a recession, compounded by double-digit inflation, driven by out-of-control wage demands, according to Ralph Willis, then minister for Industrial Relations. So, says Willis, a big part of the solution lay in persuading unions to turn their demands for immediate income increases into deferred income increases, to “turn it into superannuation”.
It worked so well that, in 1992, Labor introduced a “super guarantee”, making it compulsory for employers to contribute to workers’ superannuation. Initially, this was set at 3 per cent, with a series of stepped increases. According to Millane, the initial legislation set the endpoint of super contribution at 9 per cent – 0.5 percentage points less than the current rate. But somewhere along the line, the goal became 12 per cent.
As for the conservative parties, they overcame their initial unease about compulsory super, though not their objections to union involvement in running super funds. There were a few reasons for this. First, they came to realise, as did Labor, that ultimately most of the cost of super is borne by workers, not employers. The second factor is that because super is taxed at a concessional rate of 15 per cent going in, 15 per cent on earnings and nothing when taken out as a pension, it disproportionately benefits people on higher incomes, paying higher marginal tax rates. And those people tend to be Coalition voters.
Many have wondered why it is necessary to offer tax concessions on a scheme that is compulsory. They are both fundamentally inequitable and enormously expensive for the government, notes Ben Oquist, executive director of The Australia Institute.
“The colossal distortion in Australia’s retirement income system is the overly generous tax treatment for superannuation,” he says. “Super tax breaks will still cost the budget over $170 billion over the [four-year] forward estimates, with the benefits flowing overwhelmingly to high-income earners. The current tax arrangements for super are terrible for women, terrible for low-income earners and great for the finance sector.”
Eva Cox, feminist, adjunct professor at the University of Technology Sydney, former Labor adviser and long-time critic of the inequities of the super system, has been making similar points for decades.
The super system rewards people on the basis of how much they have earned during their working lives, and disproportionately benefits those who have earned a lot. Meanwhile, says Cox, it leaves behind those who “contributed by providing unpaid work or have been excluded from the workforce for whatever reasons, or been grossly underpaid because they work in some of the shit jobs”.
That means women in particular, because their working lives are often interrupted by caring roles and because what Cox terms “feminised” jobs are less well paid. The gender pay gap, now about 14 per cent, is magnified when it comes to super payouts, to about 47 per cent.
But the argument that increasing super contributions to 12 per cent will give women more in retirement overlooks the fact that it will give even more to higher-income earners.
A lot more. According to John Daley, chief executive of the Grattan Institute, which released a comprehensive review of the Australian retirement income regime in November 2018, 50 per cent of the tax concessions flowing from an increase in super contributions would flow to the top 20 per cent of people.
It would, in short, only exacerbate inequality.
Furthermore, the Grattan report found that the current rate of super contributions, in combination with the pension system, is adequate.
“With a guarantee of nine-and-a-half, and assuming that the current pension settings stay in place – and I think that’s actually a pretty good assumption – most people will have incomes in retirement that enable a standard of living in retirement comparable to their standard of living while they are working. That’s true up-and-down income distribution,” says Daley.
It follows, then, that an increase to 12 per cent would give some people – wealthy people – a standard of living higher in retirement than during their working lives, subsidised by those still in the workforce and paying tax.
Another point Daley makes is that the cost to the government of providing pensions “doesn’t really change as a percentage of government spending as far as the eye can see”.
Meanwhile, the cost to government of the superannuation system keeps growing. “Indeed,” says Daley, “the Treasury analysis is that the total cost of the tax concessions that go to favour the top is larger than the total benefit of the age pension to people at the bottom.”
In a swingeing critique for The Conversation this week, Peter Martin, a visiting fellow at the ANU’s Crawford School, also noted that the plan to increase contributions by 0.5 percentage points each year for five years from July 2021 “will hurt”, given the current state of the Australian economy. The two previous increases in 2013 and 2014, he notes, “took place when wage growth was stronger. In 2013, wages growth was 3 per cent per year. And [the increases] were small – an extra 0.25 per cent of salary each.” The next five increases will be 0.5 per cent each.
“If taken out of wage growth, they’ve 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,” Martin warned. This would push wage growth below inflation.
As for the rationale for Labor’s commitment to the increase, Martin and others suggest two reasons: a sentimental commitment to honouring the legacy of the Labor heroes, particularly Paul Keating, who set up the scheme; and an utterly unsentimental commitment to the rewards flowing from being involved in the superannuation industry. Eva Cox puts it thus: “The union movement and all of the ex-union people who have moved into the industry have their snouts very comfortably in the trough.”
Martin says a large number of people across the political spectrum – other than those in government, the unions or the super industry – think there is no need for 12 per cent. “Basically,” he says, “anyone who’s thought about this and who is not in the thrall of the industry or the labour movement … does not want to increase compulsory super.”
This article was first published in the print edition of The Saturday Paper on Oct 5, 2019 as "Super costly". Subscribe here.