Articles – The Centre for Independent Studies

An opt-in increase would be a great first step towards real super reform

Simon Cowan

16 January 2021 | Canberra Times

The guarantee rate, which currently diverts 9.5 per cent of your salary to a retirement savings account, is scheduled to rise to 10 per cent in July this year. This rise is the first of a series of increases culminating in a rate of 12 per cent in 2025.

While much of the focus last year was on the arguments for and against delaying or abandoning the increase altogether, alternatives – such as allowing workers to opt out and instead receive an extra 0.5 per cent as direct income – now look like they may be a more viable way forward.

The crux of these compromise proposals is that the guarantee rate would rise; compelling businesses to pay an extra 0.5 per cent in super, but allowing workers to choose to take some or all of that money as income instead. There is a lot of merit in this idea, either opting into or opting out of a higher contribution rate.

Either way, it neatly punctures the claim that workers would not see the promised wage increases flowing from abandoning the increase in the level of contributions. A specific portion of wage increases would be explicitly linked to super changes.

In effect, it puts both sides’ arguments to the test: if proponents of the increase are right, workers either get more super or a pay rise they otherwise wouldn’t. However, if opponents of the increase are correct, this flexibility shouldn’t cost businesses much at all, because the economic effect of increasing the guarantee rate is unchanged – since superannuation is ‘paid for’ through wages forgone by workers.

It is worth reiterating that this contention is strongly supported both by economic theory and empirical research. A raft of recent analysis in connection with the 2020 Retirement Income Review as well as the debate around raising the guarantee rate confirms this.

For example, analysis by ANU academics Robert Breunig and Kristen Sobeck suggests that between 71 per cent to more than 100 per cent of increases in the superannuation guarantee are offset by lower wage growth. This is consistent with analysis by Coates, Cowgill and Mackey at Grattan who put the offset at around 80 per cent. It is also consistent with the approach of the Fair Work Commission during a previous increase in the guarantee rate, which said “the SG rate increase … is a moderating factor in considering the adjustment that should be made to minimum wages.”

And of course, the trade-off between super and wages was explicit in the original design of the system. Most of the counter-claims to this evidence involve logical inconsistencies or sleight of hand. For example, some have claimed that workers lack the bargaining power to ensure that the 0.5 per cent super increase forgone will translate into wages. They argue that wages have been stagnant for years and this is the only way to get workers a pay rise. Yet this argument is internally inconsistent. First, it confuses real wages (which have been increasing slowly, if at all) with nominal wages (which have been rising at around 2 per cent a year). Businesses can absolutely cut that 2 per cent increase by 0.5 per cent to allow for an increase in the super rate.

Moreover, if workers really have no bargaining power, what would stop employers from deducting the cost of increasing super from wages? No one can be under any illusions after the last 12 months: businesses can pause, or even cut, nominal wages.

It is telling that many of those rejecting this evidence are connected in some way to the trade union movement or the Labor Party – or both. While this alone does not invalidate their counter-arguments, one odd feature of this debate is that many of those opposing the guarantee increase are accused of being motivated in part (or whole) by animus towards unions. Yet, unpacking this claim is important. After all, changes in compulsory contributions have nothing to do with composition of the boards or management of super funds. And opt-in/opt-out schemes ensure workers wouldn’t be worse off.

The sector – particularly the industry funds – almost uniformly opposes anything that looks like choice or competition, and on the face of it, it’s hard to see why. Why wouldn’t the industry funds sector, if they were really convinced by their ability to deliver superior returns, believe they had a natural advantage in any competition for funds?

Industry super’s press release arguing against the opt-in/opt-out plan more or less gives the game away by claiming it would increase taxes and small business red tape – hardly what you might call traditional union concerns. It’s making additional contributions compulsory that is important to unions and other vested interests. Increasing compulsory contributions gifts them with an even larger pool of money from disinterested savers, on which they can levy fees, instead of requiring them to offer competitive returns and lower fees to convince workers to make higher contributions.

By contrast, the retirement income benefits of increased compulsion are far more limited, and the benefits of more choice far higher, especially given the fact that workers have always had the option to make additional voluntary contributions should they feel they need higher incomes in retirement.

Indeed, “opt-in” options for super guarantee could be taken further, effectively allowing workers to dial-in their own super guarantee rate. Workers could, for example, elect to set their own contribution rate anywhere from 5 per cent to 15 per cent of their salary, reflecting their personal circumstances and overall retirement income savings goals. Women concerned about their lower level of super savings could opt for a higher guarantee rate. Those in insecure work may choose to reduce their super contributions in favour of additional, upfront income. Those saving for a home, or starting a family, would have greater control over their own savings. And for those who prefer to save less, the Age Pension will continue to protect them from old age poverty, as it always has.

The government is inching towards a path bypassing a blanket super increase. If anything, making the next increase opt-in would be a fantastic way of getting ordinary workers to start thinking about whether super really works for them. This is a necessary first step for further reform.

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