Our retirement system is full of funny little anomalies, like the anonymity of the government's generous reverse mortgage scheme for pensioners. Another anomaly is that, despite the scramble for more revenue on both sides of politics, and the constant tinkering with superannuation taxes, both sides remain wedded to the plan to increase the super guarantee rate to 12 per cent.
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Aside from the self-interested enthusiasts in the industry, much of the support for the increase comes from the fallacy that superannuation comes out of employers' pockets and is effectively a "gift" that would disappear if the government didn't force companies to pay it.
This week, the Grattan Institute found this plan will cost the budget $2 billion a year. That's potentially $2 billion in savings if we instead abandon a plan that has little or no merit for the average family, and is actually counterproductive for many low-income earners. Seems like a no-brainer.
The truth is that super comes out of workers' wages. As the Labor-initiated Henry tax review noted, "although employers are required to make superannuation guarantee contributions, employees bear the cost of these contributions through lower wage growth".
When wage growth was strong, a reduction in wages through increasing the super guarantee might not have been noticeable. Yet we are now facing low wage growth, and the government is commanding employers to quarantine an extra 2.5 percentage points of your salary for retirement. In this case, increasing the super guarantee will increase the effects of wage stagnation.
Centre for Independent Studies research in 2016 estimated that the increase in the super guarantee rate to 12 per cent would cut workers' take home pay by 2.2 per cent, which is roughly equivalent to a full year's pay rise.
One area that is often ignored in debates over increasing the super guarantee is what to do for people who need the "lost" income they are forced to save. For many with a young family, where one partner is out of the workforce or working part time, every dollar of income matters. They might even appreciate access to some of those quarantined super savings.
Instead, the government provides family tax benefits and other income support payments – all of which often do little more than offset the lost income "saved". In effect, a system that should alleviate pressure on the age pension in fact creates pressure for extra welfare payments before retirement.
That super also does little to reduce future pension expenditure – Treasury estimates cited in the 2009 Harmer pension review report claim the maturation of the superannuation system will reduce the total value of pension spending by only 6 per cent – should make us question the value of doubling down on compulsory super.
At a fundamental level, those supporting the increase in the guarantee haven't proved that any improvements in living standards after retirement outweigh the loss of income before retirement.
In fact, it is not even clear that this policy will be unambiguously positive for living standards in retirement – given it may make affording a home even harder.
While much is made of the impact of rising house prices on affordability, this is not the biggest hurdle for young home owners. Mortgage repayments have actually remained relatively constant as a proportion of income despite the massive increase in house prices.
The biggest challenge is affording a 20 per cent deposit, which in Sydney increased by more than 70 per cent as a multiple of average earnings between 2000 and 2015. Yet super forces people to save for their retirement instead of saving for a home deposit.
To make matters worse, as house deposits have become less affordable, we actually increased the savings burden for retirement by half a percentage point.
The Grattan Institute estimates that the percentage of retirees who own their home will diminish from more than 75 per cent to just 57 per cent. That's a scary statistic, because we know that the retirees who are really struggling are those who don't own their own home and depend fully on the age pension.
Our research from 2014 found that members of this group – who are likely to be older, single and more likely to be female – have little or no savings left, and certainly have no superannuation.
Given how important home ownership is in retirement, it seems counterproductive to living standards in retirement to make it harder to buy a home in order to contribute to superannuation.
Increasing the number of retirees who use accumulated super savings to pay off debt early in retirement does nothing to reduce the burden on the age pension and provides little return for taxpayers for decades of tax concessions.
The Grattan report is a timely reminder that although the retirement system is working for some, superannuation is not a magic bullet – and increasing the guarantee rate comes with costs and well as supposed benefits.
Simon Cowan is research director at the Centre for Independent Studies.
