Next year’s legislated increase in the superannuation guarantee (SG) will increase retirement incomes without commensurately cutting wages, according to research by Industry Super Australia.

Contrary to recent media reports, ISA’s research paper from December 2019 found that while workers were likely to give up some wage rises to an increase in the SG, they would be better off overall and enjoy a considerably improved retirement.

“The analysis does point to costs being shared between employers and employees but the extent varies over time,” the report said.

The impact of an SG increase on wages is controversial, though.

Independent think tank the Grattan Institute opposes further increases and cites COVID-19 as another factor demanding caution.

Grattan’s household finances director Brendan Coates told The New Daily that “our work clearly shows that at least 80 per cent of a rise in the SG would be paid for in lower wage rises than otherwise and it might be even higher over time”.

“If, for example, the SG rise came in during the third year of an EBA [enterprise bargaining agreement] the effect wouldn’t be immediately evident,” Mr Coates said.

Retirement boost matters

However, ISA’s research factored in the effects over time on superannuation balances and pension payments and found there were significant overall gains even when wage rises were muted.

The paper claimed that “a reduction in working-life disposable incomes of between 0.1 per cent and 1 per cent would result in a 4 per cent to 20 per cent increase in disposable retirement incomes”.

Centre for Future Work director Dr Jim Stanford, one of the authors cited in the ISA research, said extensive analysis showed there was no constant correlation between rises in the SG and the level of wage rises.

“We looked at the econometric data back to the early ’90s when the superannuation guarantee began and could find no [constant] negative correlation between a rise in the SG and lower wage rises,” Dr Stanford said.

“In some years, there were increases in the SG and wage growth was strong. In other years the SG was flat and wage growth was low.

“That has happened over the last five years when there has been no increase in the SG but very low wages growth.”

The above two charts demonstrate Dr Stanford’s point, showing that wage growth dropped significantly even when the SG flatlined from 2015 onwards.

And although several scheduled SG rises have been delayed since 2010 to aid business investment and ultimately wage growth, corporate profits as a share of the economy have increased over this period but wage growth has remained weak.

Independent economist Stephen Koukoulas said it was not useful “to look at rises in the superannuation guarantee in isolation”.

“If the economy is good and companies are making higher profits, they can afford to pay a higher superannuation guarantee without cutting back on wage rises,” he told The New Daily.

It’s not that simple

“I don’t think increases in the SG alone have much effect on wage growth,” Mr Koukoulas said.

Much of the research claiming SG rises have a negative correlation to wage increases is based on an erroneous view of the labour market, according to Dr Stanford.

Such analyses view the labour market as being driven by “perfect competition and marginal productivity,” he said.

“But that bears no relationship to reality.

“The level of wage rises is driven by factors like minimum wages, enterprise bargaining agreements and social norms and expectations.

“Even employers [in enterprises] not covered by EBA’s track movements of wages in the economy in granting wage rises.”

Wages are complicated

“The trade-off between wages and superannuation is politically and institutionally mediated, it’s not a market outcome,” Dr Stanford added.

But Grattan’s Mr Coates said the Reserve Bank of Australia had also found that 80 per cent of the scheduled SG increase would come at the expense of lower pay rises.

He said it was not a good idea to increase the SG in the current environment.

“It would have a negative economic effect because it would increase the savings rate,” Mr Coates said.

“Already, COVID-19 has caused a big spike in the savings rate. [And] with rising unemployment, there is a need for increased spending, not savings.”

Next year, the superannuation guarantee is legislated to rise from 9.5 per cent of wages to 10 per cent of wages.

The New Daily is owned by Industry Super Holdings