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Scrap super guarantee increase to boost wages, save $2b: Grattan Institute

Jessica Irvine

Published: February 8 2018 - 9:00PM

Workers should not be forced to lock away a rising portion of their wage in superannuation, according to a new report.

Axing the planned increase to 12 per cent in the rate of compulsory super would save federal coffers almost $2 billion a year – money that would be better spent boosting rent assistance for vulnerable retirees, mainly single women, the Grattan Institute report says.

Amid persistent low wages growth, the report argues the current 9.5 per cent rate is adequate to fund a decent retirement income for the typical worker.

"There is no strong case to raise the superannuation guarantee to 12 per cent, as currently legislated," the report concludes.

Grattan Institute fellow Brendan Coates said it was a common misunderstanding that increases to the super guarantee were paid by employers out of profits.

"Higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today. Therefore, increasing the super guarantee to 12 per cent will hurt the living standards of low-income earners, the bulk of whom are women."

The report recommends a $500-a-year boost to commonwealth rent assistance for age pensioners, costing $250 million a year, as the better way to help vulnerable retirees.

"Single women who are retired and do not own their own home are the group most likely to rely almost solely on the age pension, and are at the greatest risk of poverty in retirement."

The appropriate rate of the super guarantee charge has been a hot-button issue in Australian politics since it was introduced by prime minister Paul Keating in 1992 at 3 per cent, and phased up to 9 per cent from July 2002.

Mr Keating has since argued it should be increased to 15 per cent.

In 2012, the Gillard government passed legislation to increase the rate to 12 per cent by 2019.

Delivering on a 2013 election promise by Tony Abbott, the Coalition government has on several occasions delayed increases to the guarantee. The current rate of 9.5 per cent has been frozen until July 2021, when it is intended to resume increasing to reach 12 per cent by July 2025.

Abolishing the planned increase, scheduled to start in the final year of the forward estimates to be unveiled in the May budget, would save the federal government money. That is because money delivered as wages is, on average, taxed at a higher rate than contributions to super.

According to the report, the current super guarantee rate is already adequate to deliver an income in retirement for the median worker of 79 per cent of their pre-retirement wage, meeting international benchmarks for an adequate retirement income.

And increasing the super guarantee could hurt low-income earners in two ways.

First, every extra dollar put into super would simply reduce age pension payments in retirement, thanks to the pension assets test.

And second, by suppressing wages growth, increases to the super guarantee would mean lower rises in the generosity of the age pension, which is indexed to wages growth, the report says.

"I think super has just become an article of faith, particularly for those in the labour movement," Mr Coates said.

"It's something that they helped to create and therefore they're not alive to the trade-off between current and future consumption."

Housing affordability was also a reason to hold off on increases, Mr Coates said.

"We know that home ownership is falling rapidly among the young and the poor, so raising the super guarantee to 12 per cent at a time when young Australians are already struggling to afford housing – and in particular overcoming the deposit hurdle – seems like a bad idea."

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