Productivity Commission finds super a bad deal. And yes, it comes out of wages


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Australia’s super system could give us so much more to retire on, without taking more out of our wages.
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Brendan Coates, Grattan Institute

Want more to retire on?

In its long-awaited final report on the efficiency and competitiveness of Australia’s leaky superannuation system, Australia’s Productivity Commission provides a roadmap.

Weeding out scores of persistently underperforming funds, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a simple list of top performers would give the typical worker entering the workforce today an extra A$533,000 in retirement.

Even Australians at present in their mid fifties would gain an extra A$79,000.

If this government or the next cares about the welfare of Australians rather than looking after the superannuation industry it’ll use the recommendations to drive retirement incomes higher.

So why the continued talk (from Labor) about lifting compulsory super contributions from the present 9.5% of salary to 12%, and then perhaps an unprecedented 15%?

It’s probably because (and Paul Keating, the former treasurer and prime minister who is the father of Australia’s compulsory superannuation system says this) they think the contributions don’t come from workers, but from employers.

To date, they’ve been dead wrong. And with workers’ bargaining power arguably weaker than in the past, there’s no reason whatsoever to think they’ll be right from here on.

Past super increases have come out of wages

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% of wages and is scheduled to increase incrementally to 12% by July 2025.

So, for workers, what’s not to like?

It’s that while employers hand over the cheque, workers pay for almost all of it via lower wages. 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.

The Henry Tax Review and other investigations have found this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been.

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 super contributions.

When the Super Guarantee climbed from 9% to 9.25% 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% 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.

Where’s the evidence employers pay for super?

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% of national income. By 2002, when the phase-in was complete, it made up 60.1%.

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.




Read more:
The superannuation myth: why it’s a mistake to increase contributions to 12% of earnings


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.

Would it be different this time?

Paul Keating argues that while in the past lifting compulsory super to 9.5% was paid for from wages, a future increase to 12% today would not 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% 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 current wage growth is so weak.. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in the compulsory Super Guarantee?

And while real wages (wages adjusted for inflation) haven’t grown particularly quickly, the dollar value of wages continues to grow: by 2.2% a year over the past five years. It would be easy for employers to simply reduce those increases to offset any increase in compulsory super – as they have in the past.

And no, more contributions won’t help workers

The Grattan Institute’s recent report, Money in Retirement, showed increasing the compulsory super would primarily benefit the top 20% of Australians. It would hurt the bottom half during working life a lot more than it helps them once retired.

Their higher super contributions would not improve their retirement outcomes: their extra super income would be largely offset by lower part-pensions. 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 A$2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.

That would mean higher taxes elsewhere, or fewer services.

For low-income Australians, increasing compulsory super contributions would be a thoroughly bad deal. It means giving up wage increases in return for no boost in their retirement incomes.

A government that wanted to boost the living standards of working Australians both now and in retirement would consider carefully all of the Productivity Commission’s suggestions including this one: an independent inquiry into the whole idea and effectiveness of Australia’s regime of compulsory contributions, to be completed ahead of any increase in the Superannuation Guarantee rate .




Read more:
Why we should worry less about retirement – and leave super at 9.5%


The Conversation


Brendan Coates, Fellow, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

GST carve-up to be examined by the Productivity Commission


Michelle Grattan, University of Canberra

The government has ordered the Productivity Commission to review how the GST revenue is sliced up, setting the scene for a new round of hostilities between states over what they get from the tax. The Conversation

The review, to report by the end of January, follows long-standing pressure from Liberals in Western Australia, which currently loses out heavily from the present formula. There is now deep concern, after the Barnett government’s wipeout, that a number of federal seats in that state could be lost at the next election.

Under the Grants Commission’s formula, WA in 2017-18 will get only 34% of the average national per capita distribution of the GST.

The new WA Labor premier, Mark McGowan, welcomed the review, saying he had pressed for it. He said action was needed as soon as the report was received.

But South Australian Labor Treasurer Tom Koutsantonis said that after the WA rout of the Liberals, the federal government wanted “to take GST away from South Australians and give it to Western Australians”.

Expert sources said potential winners and losers from the PC review could not be predicted.

The outcome of the review would be taken to the Council of Australian Governments (COAG).

Treasurer Scott Morrison said the commission had been asked to inquire into the impact on the national economy of the current system of horizontal fiscal equalisation (HFE) which underpins the present distribution.

Under this system, the Grants Commission recommends a carve up to give each state the capacity to provide its citizens with a comparable level of government services.

“In recent years, views have been put to the government that the current approach to HFE creates disincentives for reform, including reforms to enhance revenue raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other states,” Morrison said.

“It is important for Australia’s future prosperity that our system underpinning Commonwealth-state financial relations supports productivity, efficiency and economic growth across the country.”

The federal government has been topping up WA’s money and confirmed that it will continue to do so in next week’s budget, by providing it with some A$226 million for infrastructure.

One closely watched area in the budget will be health, with the government expected to announce a staged lifting of the freeze on Medicate rebates, probably over three years and starting with GP consultations for those covered by concession cards.

Labor is pre-emptively seeking to raise the bar higher than the government will meet. Bill Shorten and health spokeswoman Catherine King said in a statement that if the government “doesn’t drop every single health cut in full”, including the entire Medicare freeze from July 1, it would be “more proof that they can’t be trusted on health”.

Meanwhile, Education Minister Simon Birmingham is setting the scene for the imminent announcement of the university funding policy by releasing a study on the cost of delivery of higher education, commissioned by the government and undertaken by Deloitte.

It showed revenue rose faster than costs – between 2010 and 2015 the average costs of delivery per student increased by 9.5%, while per student funding growth was 15%.

“This independent analysis speaks for itself: funding for our universities is at record levels, but it has grown above and beyond the costs of their operations,” Birmingham said.

“Australian taxpayers gave universities around $16.7 billion in 2016 alone or around $19,000 per student, which is more than ever before. In the context of a tight national budget, the Turnbull government is focused on getting the best return for every taxpayer dollar invested,” Birmingham said.

Birmingham has a meeting with university leaders and business and student representatives on Monday.

With housing affordability a key item in the budget, there is speculation one measure could be a tax break for first home buyers’ savings.

In its pre-budget monitor on the economy Deloitte Access Economics says the economic news is getting better – reinforcing the point Morrison made last week.

“National income is jumping by $100 billion this year, equalling the gains of the previous two-and-a-half years in one gulp,” it says, adding that the good news is mostly in profits. But wages growth remains low, restraining the growth in revenue.

Deloitte projects a deficit of $38.3 billion this financial year, $1.8 billion worse than in the official mid-year budget update, and (on the assumption of no further policy changes) the deficit falling to $27.5 billion next financial year. That would be $1.2 billion better than projected in the mid-year update.

Deloitte doesn’t expect Australia to lose its AAA credit rating in the near term. “Were it to happen, the initial trigger may actually be the debt of families rather than that of government,” it says. “In recent months Australian families passed those of Denmark to move into second place as the world’s most indebted [behind the Swiss].”

https://www.podbean.com/media/player/r88ra-6a1eda?from=yiiadmin

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.