How the super freeze could be costing you thousands

The freeze on the rise in superannuation guarantee means that Australians are missing out on tens of thousands of dollars come retirement.

It’s been almost four years since the government put a freeze on an increase in the superannuation guarantee — the compulsory superannuation contribution made by employers for their workers.

And in that time the financial implications are being felt by the majority of Australians, particularly lower-income earners.

In 2014, the government decided the compulsory super contribution rate would remain temporarily frozen at 9.5 per cent until 2021, rather than increasing to 12 per cent by 2019-20 through annual increases of 0.25 percentage points.

Instead, the superannuation guarantee is scheduled to increase to 10 per cent in 2021 then increase by further 0.5 percentage point increments every year until 2025 when it reaches 12 per cent.

However, superannuation advocates say any further freeze – which could be permanent – would rob workers of a decent retirement and harm the greater economy.

Modelling conducted by Industry Super Australia (ISA) shows Australians would miss out on an extra 20 per cent in superannuation savings over their full working lives if the super guarantee remained stuck at 9.5 per cent.

“For a typical industry super fund member earning 70 per cent of the average wage, the superannuation guarantee increase to 12 per cent should deliver around an extra $75,000 at retirement,” says Matthew Linden, ISA public affairs director.

Younger workers are disproportionately impacted due to the compounding effect of lost returns. Photo: ISA

Sector research and advocacy body Association of Superannuation Funds of Australia (ASFA) takes it further.

It says the freeze in the superannuation guarantee rate not only reduces retirement outcomes of the majority of older Australians but also leads to an increased government expenditure on the age pension.

ASFA research director Ross Clare believes the Australian economy is healthy enough to accommodate an increase in the super guarantee now.

“The budget is getting into better shape now. The 2016 budget saw a number of significant changes to the taxation of super; a lot of extra revenue being raised through cutting back some tax concessions and increasing tax take in a few areas,” he says.

“And we would argue that given those adjustments to superannuation tax settings and an improving budget situation, bringing forward the schedule for the superannuation guarantee increases makes sense.

“It’s affordable and it would deliver better budget outcomes in the future and decrease reliance on the age pension.”

An ISA report, titled ‘Super freeze and low income tax changes on working life’, which was released in 2014, found the temporary freeze in the super guarantee was being felt across the board, with a disproportionately high impact on younger workers due to the compounding effect of foregone investment returns on lower contributions.

“Younger workers are disproportionately impacted due to the compounding effect of lost returns,” Mr Linden explains.

“Modelling conducted in 2014 shows a 25-year-old on average weekly earnings stands to lose around $35,000 from the temporary freeze; while a 40-year-old will lose around $20,000.”

The ISA report also revealed the additional time someone must remain in the workforce to recoup the fall in their superannuation balance from the freeze in the super:

• A 37-year-old worker on $65,000 salary will take three years to fill the gap

• A 25-year-old worker on $38,000 salary will take six years to fill the gap

• A 32-year-old worker on $54,000 salary will take five years to fill the gap

• A 41-year-old worker on $80,000 salary will take two years to fill the gap

As a consequence of the changes, the report found most Australians would need to work to 70 years of age and beyond to make up the shortfall rather than retiring at the current age pension age of 67, assuming they made no additional contributions themselves.

According to ASFA estimates, a permanent freeze in the super guarantee at 9.5 per cent would result in around 40 per cent of retirees relying on the full age pension by 2050.

As a result, the government expenditure on the age pension would need to rise by approximately 25 per cent.

The proportion of Australians achieving a comfortable standard of living in retirement would also fall to around 40 per cent of retirees (from 50 per cent if current increases were maintained).

“I don’t want to be too doom and gloom about the future,” Mr Clare says.

“We are looking at seeing more people retiring with a better lifestyle in retirement in the future (thanks to compulsory guarantee) but there are still many people dependent solely on the age pension.

“By increasing the super guarantee and extensively getting more retirement savings, that group would be smaller and more people would be comfortable in retirement – or closer to comfortable than they would be under the current schedule.

“It’s all a matter of degree. And it’s still a little while until we get back into the scheduled increases. But ASFA would prefer to see the changes sooner rather than later.”

Indeed, according to Mr Linden, the current 9.5 per cent in compulsory super contributions is already falling short for some members of the Australian workforce who are already feeling the financial pinch and not having enough money to retire comfortably.

“Despite 25 years of compulsory superannuation, women, low wage and gig economy workers are still falling well short of what is projected for a ‘comfortable’ retirement,” he says.

“According to the Australian Bureau of Statistics, the median super balance for a man on the cusp of retirement is currently around $166,339 – for a woman it’s $96,011 or only 57.7 per cent of that. These shortfalls impact not only individuals, but, through increased pension costs, society as a whole.”

Let’s hope we can lift the freeze. Photo: ISA

As it currently stands, the freeze in compulsory super means that Australians need to either put more money aside themselves for their retirement (those who can afford to), work longer or retire with less. Not an ideal scenario. But one with a viable solution – lifting the freeze and increasing the rate of compulsory super sooner.

“The current super freeze simply means Australians will have less at retirement, either forcing them to work longer or heightening pension reliance,” Mr Linden says.

“Superannuation was never meant to replace the age pension but to supplement it so that Australians could have a higher standard of living in their retirement.

“Ending the freeze would increase the superannuation savings of millions of people while boosting the national pool of capital required to generate jobs and economic growth.”

As to whether or not the freeze will be lifted and the rate of super increased before 2021, only time will tell. But Clare remains optimistic: “It’s hard to say, but we always live in hope. Many people said we wouldn’t get the increase from 9.5 per cent to 12 per cent legislated, but we did, and at the right time things can happen.”

To find out more about the superannuation guarantee, visit here.

This content was created by Guardian Labs as part of a partnership with Industry Super Fund, and published on 14 June 2018.