Retirement review puts push for 12 per cent super back on the table
The federal government’s resolve to push compulsory superannuation to 12 per cent is certain to be tested in its coming review of the retirement income system.
Scheduled super guarantee increases, already enacted by legislation, would see the current rate of 9.5 per cent grow to 10 per cent from July 2021, then a further 0.5 percentage points each year until it reaches 12 per cent in July of 2025.
However, the terms of reference for the review, announced Friday, have put all three key pillars of the retirement system – the age pension, compulsory super and voluntary savings – squarely back on the table.
Compulsory super’s move to 12 per cent has already been a hot topic, with battle lines firmly drawn between detractors and supporters.
On one side is the industry super fund titans, Labour and the unions, for whom increased super payments remain a core focus.
On the other are major industry research players, including the Grattan Institute, as well as financial experts, who claim the rise to 12 per cent super could be met by workers themselves, rather than employers, and could impact future real wage growth.
The Grattan Institute’s household finances program director Brendan Coates says the Henry Tax Review and The Parliamentary Budget Office supported its conclusion.
“Any increase in compulsory super contributions could lead to wages being lower than they otherwise would be,” he said.
“Real wages haven’t grown much, although nominal wages have grown by 2.2 per cent a year in the past five years,” Coates says.
“It would be easy for employers to simply reduce those nominal wage rises to offset any increase in compulsory super, as they have in the past,” he says.
However, other groups, such as the McKell Institute, argue there is “no evidence” that compulsory super increases lead to lower wages.
It looked at wage growth over the past 25 years and found “wage growth rising and falling completely independent of super increases.”
It is also important to note that Treasury research shows that any likely increase in the rate of compulsory super won’t actually save the Federal Budget money. It costs the budget more because super tax breaks exceed any future pension savings.
Which begs the question, why is the government pushing so hard for higher super contributions so more Australians become self-funded in retirement.
Assistant Minister for Superannuation and Financial Services Jane Hume tells The Age and Sydney Morning Herald that the aim of the super system is to encourage people to save for retirement and enjoy a better standard of living than afforded under the age pension alone.
“The Government is ensuring superannuation tax concessions are affordable and well-targeted, and that all Australians are encouraged to save for their own retirement,” Senator Hume says.
About 1.4 million retirees are currently self funded and don’t receive a pension. This number changes from year to year and the changes are reflected in an Intergenerational Report, which the government releases every five years. The next report is due next year.
Financial advisors say workers need to double check for themselves that they are really better off by the planned compulsory super increases.
Essentially, the rising super guarantee means you’re foregoing current entitlements for future benefits
Given that many of us are employed on a total remuneration package, where earnings and super are bundled into one figure, they say you need to check your wage component on your employment contract carefully.
“Essentially, the rising super guarantee means you’re foregoing current entitlements for future benefits,” explains financial advisor Nikki Booth.
“The likely outcome is that your in-hand wage will go down to accommodate for the increase in super your employer will have to contribute,” Booth says.
“For the average Australian, especially low-income workers, this is likely to put a strain on your cash flow,” Booth, of My Wealth Solutions, explains.
Chartered accountant Michelle Kvello agrees. She describes the rising super guarantee as a “forced savings plan” that’s being mandated by government.
“If salary packages remain the same (which most employers will do), then your immediate take-home pay could go down,” she said.
“Your overall gross salary may not change when the super guarantee rises – it’s just the split that’s different,” the director of Lantern Partners explains.
Check super payments
James True, who heads up Legal Vision’s employment team, says the anticipated rising super guarantee could herald a period of confusion.
“While employers might prefer to express remuneration inclusive of super because the package sounds higher, it’s important that employees are clear which component is their take-home wage,” True says.
“It’s important that everyone knows which component of a package refers to salary and which is super,” he says.
To ensure you are getting paid the right amount of super, employees should also regularly check that their employer is paying into your designated fund, Booth says.
Payments should be made quarterly at a minimum, but it’s better to have your employer make contributions monthly to ensure you are capitalising on potential growth, she says.
“Once there’s a more solid outcome for the super guarantee in place, it could also be time to renegotiate a wage increase with your employer, to offset the effect of any rises.
“Or, if this isn’t achievable, you could negotiate other benefits to help keep your cash flow at a sustainable level, such as having your phone or commute paid by your employer,” Booth says.