Oz Blog News Commentary

Do superannuation increases come out of workers’ wages?

April 17, 2019 - 18:14 -- Admin

Today saw Opposition Leader Bill Shorten claim that past increases in compulsory super contributions wouldn’t come out of wages.

The empirical evidence shows that over time, when there’s an increase in compulsory superannuation, it hasn’t affected wages growth.

Opposition Leader Bill Shorten, press conference, April 17, 2019

Australia’s superannuation system requires employers to make the compulsory contributions on behalf of their workers. Right now that contribution is set at 9.5 per cent of wages and is scheduled to increase incrementally to 12 per cent by July 2025. Federal Labor recently recommitted to increasing compulsory super to 12 per cent of wages, which is also Coalition policy.

But just because the government requires your employer to pay 9.5 per cent extra on top of your salary doesn’t necessarily mean that money comes out of the employer’s pocket. Instead it will probably come out of yours.

But what does the evidence say?

Inconsistent with the theory

While employers hand over the cheque, in theory workers pay for almost all of it via lower wages.

The Henry Tax Review and others have concluded that this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been. The Parliamentary Budget Office came to the same conclusion just two weeks ago.

Bill Shorten, then assistant treasurer, made this point in a speech in 2010:

Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.

Even Paul Keating, speaking in 2007, made this point. Compulsory super contributions come out of wages, not from the pockets of employers:

The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost […] In other words, had employers not paid nine percentage points of wages, as superannuation contributions, they would have paid it in cash as wages.

This is more than mere theory. Compulsory super was designed to forestall wage rises. Concerned about a wages breakout in 1985, then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for superannuation contributions.

When the Super Guarantee climbed from 9 per cent to 9.25 per cent in 2013, the Fair Work Commission stated in its minimum wage decision of that year that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”.

The pay of 40 per cent of Australian workers is based on an award or the National Minimum Wage and is therefore affected by the Commission’s decisions. For these people, there is no question: their wages are lower than they would’ve been if super hadn’t increased.

And inconsistent with the empirical evidence

If wage rises came from the pockets of employers then we should see a spike in wages plus super when compulsory super was introduced, and again when it was increased. But there wasn’t one when compulsory super was introduced – a point Bill Shorten has made in the past.

When compulsory super was introduced via awards in 1986, workers’ total remuneration (excluding super) made up 63.3 per cent of national income. By 2002, when the phase-in was complete, it made up 60.1 per cent.

A recent study by Reserve Bank economists found that the labour share of income — the share of total domestic income paid to workers in wages, salaries and other benefits including superannuation — has gradually declined since the 1980s.

Out of the 26 countries for which the Organisation for Economic Co-operation and Development has data, Australia recorded the tenth largest slide in the labour share of national income during the period compulsory super contributions were ramped up.

Of course, changes in super aren’t the only thing that affects workers’ share of national income.

But the size of the fall in the labour share in Australia over the period when the super guarantee was increasing isn’t consistent with the idea that employers picked up the tab for super.

Will the future be different?

Paul Keating recently argued that while past increases in compulsory super were paid from wages, lifting compulsory super contributions to 12 per cent today won’t be:

Workers are not getting real wage increases anywhere, and can’t get them. The Reserve Bank governor makes the point every week. So the award of an extra 2.5 per cent of super to employees via the Super Guarantee will give them a share of productivity they will not get in the market – without any loss to their cash wages.

But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons for current low wages growth. If employers aren’t willing to give wage rises, why would they absorb an increase in the compulsory Super Guarantee?

And while real wages haven’t grown particularly quickly, nominal wages are still growing: by 2.2 per cent a year over the past five years. It would be easy for employers to simply reduce those nominal wage rises to offset any increase in compulsory super – as they have in the past.

When it comes to compulsory super, there’s no such thing as a free lunch for workers.

Are higher super contributions even necessary?

In updated projections released this week, we show that, even after allowing for inflation, most workers today can expect a retirement income of at least 89 per cent of their pre-retirement income – well above the 70 per cent benchmark endorsed by the OECD, and more than enough to maintain pre-retirement living standards. These results suggest that future increases in compulsory superannuation contributions are unwarranted.

This latest modelling also showed increasing the compulsory super would primarily benefit the top 20 per cent of Australians. Retirement incomes for some low- income workers would increase by around 2.5 per cent, but most low- and middle-income workers would see very little change in their retirement incomes, because lower Age Pension payments would largely erode the increase in income from savings.  What’s more, the age pension is indexed to wages. If wages grew by less (as they would as compulsory super contributions were increased) pensions would grow by less too.

Lifting compulsory super would also cost the budget $2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.

But our retirement incomes system is not working for some low-income Australians who rent, particularly in Sydney and Melbourne. And this problem will get worse because on current trends home ownership for over-65s will decline from 76 per today to 57 per cent by 2056.

Therefore the priority should instead be to boost the maximum rate of Commonwealth Rent Assistance by 40 per cent – worth more than $1,400 a year for a single retiree.