Finance Your Super Early super scheme doesn’t justify hikes to super guarantee: Grattan Institute

Early super scheme doesn’t justify hikes to super guarantee: Grattan Institute

Employers will raise their super contributions from 9.5 per cent of wages to 12 per cent of wages over several years. Photo: TND
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Most workers will still live comfortably in retirement without increases to compulsory employer contributions, even if they have withdrawn $20,000 from their accounts, the Grattan Institute believes.

The independent think tank on Friday released new modelling to argue the government’s early super access scheme does not warrant increasing the superannuation guarantee over the next five years from 9.5 per cent of wages to 12 per cent.

The report suggests raising the rate would slow the pace of economic recovery by eating into wages, while having a negligible impact on retirement outcomes.

More than 500,000 Australians have completely emptied their superannuation accounts, and more than $29.4 billion has been withdrawn from the system since April, according to the latest APRA figures.

Based on its modelling, Grattan claims workers earning $60,000 a year who participated in the early super access scheme would see their balances fall by $80,000 in today’s dollars at retirement.

However, those losses would be offset by increases in the means-tested Age Pension, which would reduce the overall amount lost to $24,000 – or roughly $900 per retirement year.

“Higher compulsory super would do little to boost the retirement incomes of many Australians, while draining government tax revenues and widening the gender gap in retirement incomes,” the report said.

“The government’s early release scheme does nothing to change that story.”

The report’s authors admitted, however, that the lowest and highest-paid workers would end up worse off as they would receive less age pension to compensate their superannuation losses.

“But boosting rent assistance would do far more than higher compulsory super to help these vulnerable Australians,” they said.

Comfortable retirement remain an option

Most workers who withdrew the maximum $20,000 would still retire with adequate incomes based on the OECD’s replacement rate calculation, Grattan argued.

All but the highest-paid workers would still enter retirement above the OECD’s ideal ‘replacement rate’. Graph: Grattan Institute

The OECD defines a ‘comfortable’ retirement as one paying annual incomes equal to at least 70 per cent of a worker’s pre-retirement income, which can be paid out through pension systems as well as other mechanisms, including superannuation.

(The percentage of a worker’s pre-retirement income that is paid out by a pension program upon retirement is known as the replacement rate.)

For a 35-year-old worker on median pay who took out the maximum in early super withdrawals ($20,000), their replacement rate would dip from 89 per cent to 88 per cent, according to Grattan’s modelling.

And if they remained unemployed over three years due to tougher labour market prospects, that rate would fall to 86 per cent.

Those figures would also be largely unaffected if a worker decides to work part-time while raising a family, or take a career hiatus to pursue other interests, Grattan claims.

For example, a median worker who only works 27 years and withdraws $20,000 under the scheme would see their replacement rate fall from 84 per cent to 81 per cent.

Most workers would still live comfortably if they take a number of years off work, Grattan argues. Graph: Grattan Institute

Findings questioned by other economists

Grattan’s report comes amid growing tensions within government over the legislated hikes to compulsory employer contributions.

A group of Liberal backbenchers, led by first-term MPs Dave Sharma and Dr Katie Allen, suggest contributions should remain frozen, as an increase would weigh on wages and deter companies from hiring additional staff.

The Reserve Bank has also said wages would suffer, but others disagree.

Industry Super Australia chief executive Bernie Dean told a House of Representatives committee in May that the legislated increase was “more important than ever before”, as it would help young members rebuild their savings after suffering losses during the economic downturn.

Per Capita’s Emma Dawson and Shirley Jackson found in the five years since the government froze the super guarantee rate at 9.5 per cent of wages, employees did not experience real increases in take-home pay. (The McKell Institute has made a similar point.)

They suggest workers actually suffered net income losses as wages continued to stagnate while super contributions were kept on ice.

Meanwhile, Centre for Future Work economist Dr Jim Stanford also found no correlation between increases to employer superannuation and wages growth, arguing workers “haven’t been getting their fair share”.

And former prime minister Paul Keating on Tuesday reaffirmed his stance on an increase, suggesting employers banked the benefits of a 10 per cent boost in labour productivity without compensating workers with higher pay.

A table showing when the super guarantee will lift, and by how much.

The New Daily is owned by Industry Super Holdings