There is the real world and then there are economic theories and models.
The campaign against increasing the superannuation guarantee levy prefers to ignore the real world.
In the worst-case scenario for anyone on average or median wages, a $1 increase in the super levy is worth 12.5 per cent more than a $1 increase in wages. The anti-SGL brigade overlooks that.
In the really real world, for many people the difference is much greater, more like 27 per cent.
Also in the really real world, it’s not a simple choice between an increase in wages or SGL.
A great deal of effort in some quarters has gone into claiming that it is, ignoring the probability that it would be a bit of both if the government sticks to its legislated increase in the SGL.
The latest shots in the anti-SGL war were fired this week by the Australian Financial Review, which twice somewhat breathlessly reported it had “obtained” a 70-page study by two ANU economists commissioned by the government’s retirement income review.
(The story, branded “exclusive”, might suggest a dark alley and a drop box, or at least an exchange of passwords to “obtain” the report.
Nah, it’s up on the Crawford School website and has been for a couple of months for anyone who is interested. Here’s the link.
The study by Professor Bob Breunig and Kristen Sobeck used historical tax office data to try to work out to what extent increases in the SGL end up being at the expense of wages growth, which is what standard economic theory suggests and the anti-SGL mob likes to trumpet.
(Mind you, that’s the same standard economic theory that says if companies pay less tax, they will pay their employees more. Apparently if there was no corporate tax or SGL, workers would be fabulously well paid. Sure.)
The study finds and proposes several things.
The clearest finding is that wages have been rising more slowly for people working in industries that already enjoyed employer super contributions greater than the SGL – though there is a warning that other factors might be at play about the nature of such industries.
It also finds wages growth for SGL-only workers has fractionally slowed after the SGL has been increased.
And it “suggests” that between 71 and “more than 100 per cent” of increases in the SGL are offset by lower wage growth; “workers bear most of the incidence of increases in the superannuation guarantee”.
Personally, I suspect there was so much happening globally concerning the problem of low wages growth the last time the SGL was increased, in the 2014 and 2015 financial years, let alone with the tone of the change of government here and subsequent slowing of economic growth, that it’s a brave soul who can precisely finger the role the SGL played.
But for the sake of the exercise, let’s adopt the suggested worst-case scenario, that every dollar increase in SGL comes at the cost of a dollar foregone in higher wages.
Even with that, anyone on a wage of between $45,000 and $120,000 still gets at least 12.5 per cent more with an SGL rise than they do with a wage rise.
The obvious (but widely overlooked) difference is that the worker only loses 15 per cent of the extra SGL payment to tax, but 32.5 per cent of the extra pay.
The real world doesn’t overlook the tax impact, but Professor Breunig and Ms Sobeck were only commissioned to look at what might happen to wages when the SGL increases.
On the face of it, a $100 wage increase results in $67.50 more for the worker while a $100 increase in the SGL would mean an extra $85 – a fat 26 per cent more.
But that would be ignoring the extra 9.5 per cent of super that comes on top of the $100 wage increase, worth $8.075 after tax.
So it’s really $75.575 from the wage rise compared with $85 for the SGL increase – 12.5 per cent.
That ignores two other factors that shouldn’t be ignored:
- The effective marginal tax rate (EMTR) for a great many people, especially those on lower or median wages with children, is often 50 per cent and more, given the way the tax and transfer systems interact, as covered here plenty of times. At an EMTR of 50 per cent, the worker gets 27 per cent more from an SGL increase than the same amount as a pay rise
- The SGL compounds wonderfully, ending up being worth much, much more down the track. For many working women on median and lower wages in particular, that can make a vast difference.
At the same time, there is a trade-off relating to age – the closer to retirement, the clearer the value of extra money in SGL appears; at a young age, the dollar in the hand might appear more appealing despite the loss of compounding investment returns.
Backing off the Breunig and Sobeck study’s worst-case suggestion, there’s plenty of room to wonder about the size of the impact on wages.
The Reserve Bank has done a fairly light analysis of the SGL/wages issue, leaning towards the “wages growth will be reduced” camp, to the delight of the usual suspects.
But there’s not much weight in that RBA lean – its best guess being that wages would be 1.75 per cent lower than otherwise over the “long term” if the legislated SGL increase goes ahead.
As another observer has put it: “If you assume the long term is 15 years and wages rise on average 2 per cent per annum, than this 1.75 per cent comes off what should be a 35 per cent rise in pay.”
That’s not much of a cost for the more dollars received and the eventual effect of compounding investment.
And if there was any other reason to be wary of the vehemence of the anti-SGL political mob, consider who they predominantly are – the likes of Tim Wilson, Andrew Bragg and Jason Falinski, who furiously cater for their base of employers and investors.
If it really worked out to be the same or even better for employers if the SGL is increased, do you think Wilson, Bragg, Falinski & Co would think it’s worth campaigning about?
They have never shown any interest in promoting wages growth before and are fans of wages suppression – workplace “flexibility”, cutting penalty rates, limiting public sector wage increases to unemployment-battered private sector increases.
None of the historical studies – and that includes the pro-SGL efforts – can capture the current angst over an uncertain economy, employment and the sub-standard wages growth of the past half dozen years. Nobody has data on the future.
My best guess is that Australia’s employees have more or less surrendered to capital’s strike of only giving wages increases of about the CPI and a bit less than that for the next year or two, using COVID as either a genuine reason or an excuse.
Throwing a 0.5 per cent SGL increase into the mix might shave the counterfactual average wage rise, but not by a lot. Which is why the political opponents don’t like it.
If they had shown anything other than antipathy to current wage levels, never mind the idea of strong wages growth, they might have some credibility. They don’t.