Superannuation guarantee increase will shrink wages growth

author-avatar By on November 20, 2020
Superannuation guarantee increase will shrink wages growth

Photo by Anukrati Omar on Unsplash

Raising the superannuation guarantee to 12% will shrink wages growth, raising questions over whether the mandated rises should be abandoned.

Those are the findings from Treasury's Retirement Income Review, released publicly today.

The mammoth 600 page report found that "the weight of evidence suggests the majority of increases in the superannuation guarantee come at the expense of growth in take-home wages".

The superannuation guarantee is the minimum amount your employer is required to take out of your earnings to contribute towards your super. 

The rate is currently 9.5% of your base salary but is due to gradually increase to 12% by 2025.

PeriodGeneral super guarantee (%)
July 1, 2002 - June 30, 2013 9
July 1, 2013 - June 30, 2014 9.25
July 1, 2014 - June 30, 2021 9.5
July 1, 2021 – June 30, 2022 10
July 1, 2022 – June 30, 2023 10.5
July 1, 2023 – June 30, 2024 11
July 1, 2024 – June 30, 2025 11.5
July 1, 2025 – June 30, 2026 12

Source: ATO

The report found that raising the superannuation guarantee to 12% will ultimately cut a workers' lifetime income and disadvantage lower income earners.

"A rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower-income earners," the report said.

"This is based on the view, supported by the weight of evidence that increases in the SG rate result in lower wages growth, and would affect living standards in working life."

Need somewhere to store cash and earn interest? The table below features savings accounts with some of the highest non-introductory and introductory interest rates on the market.

The findings of the report are consistent with recent Reserve Bank modelling which revealed that lifting the superannuation guarantee to 12% will strangle wages growth by 1.75%.

Yet 75% of Australians are in support of the superannuation rate rise, at least according to a nationwide survey conducted by the Association of Superannuation Funds of Australia (ASFA).

The Treasury review found that raising the superannuation guarantee to 12% will cut a workers' lifetime income by as much as 2%.

“Maintaining the SG rate at 9.5% would allow for higher living standards in working life. Working-life income for most people would be around 2% higher in the longer run," the report said.

The report also found that if the mandated super guarantee increases were to go ahead, it will result in higher-income earners receiving larger tax concessions.

"This would not occur if the SG rate remained at 9.5%," the report said.

"Further calculations show that workers bear between 71% to more than 10% of the cost of increases to the SG through lower wage growth, depending on the time period considered."

Home ownership key to a secure retirement

The report also looked at policies that would push more Australians to use the equity in their family homes to fund their retirement, rather than relying on compulsory super contributions.

"Homeowners also have the opportunity to access the equity in their home to supplement retirement income and manage longevity risk, although few currently do so," the report said.

"If this potential were realised, housing would take on an even more important role in the retirement income system."

The family home is regarded as the most significant form of voluntary savings for most Australians as it greatly reduces accommodation expenses in retirement.

"On average, equity in the family home represents the largest share of net wealth for Australians aged 65 and over," the report said.

It highlights reverse mortgages as a way for homeowners to tap into their equity to fund their retirements.

"Few retirees use the equity in their home to support their standard of living in retirement."

"The options available to do so include reverse mortgages, equity release schemes, home equity loans and downsizing. Reverse mortgages are the main product available, but usage is low."

Australia has a very limited number of reverse mortgage providers, with only two writing 80% of new loans from 2013-2017 according to the report.

It also said drawing down on existing assets in retirement can have a "bigger impact on improving retirement incomes than changes to the superannuation guarantee rate".

"Without improving the way retirees draw down their assets, extra contributions to superannuation will not result in most retirees maintaining their living standards.

"Fully drawing down superannuation can substantially boost retirement incomes, without having to increase contributions. Other options to improve retirement incomes include strategies and products to achieve greater certainty around income or drawing on equity in the principal residence."


Latest Articles

author-avatar
Emma joined Savings.com.au as a Finance Journalist in 2019. She is a journalist with more than five years experience across print, broadcast and digital media, with previous stints at Style Magazines, 4ZZZ radio, and as editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of young women and millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand. When she's not writing about finance she's watching Greys Anatomy (again).

Collections:

Get free insights & tips monthly

By subscribing you agree to the Savings Privacy Policy

Loading data please wait...

{{returnData.productName}}

Overview

Current Rate

{{returnData.currentRate | percentage:2}}

Comparison Rate*

{{returnData.comparisonRate | percentage:2}}

Rate Type

{{returnData.rateType}}

Advertised Rate

{{returnData.advertisedInterestRate}}

Comparison Rate*

{{returnData.comparisonRate}}

Monthly Repayment

{{returnData.monthlyRepayment}}

Interest Type

{{returnData.interestType}}

Total Interest Rate

{{returnData.totalInterestRate | percentage:2}}

Base Interest Rate

{{returnData.baseInterestRate | percentage:2}}

Bonus Interest Rate

{{returnData.bonusInterestRate | percentage:2}}

Total Interest Rate

{{returnData.totalInterestRate | percentage:2}}

Introductory Rate

{{returnData.introductoryRate | percentage:2}}

Introductory Term

{{returnData.introductoryTerm}}

Base Interest Rate

{{returnData.baseInterestRate | percentage:2}}

Term

{{returnData.term}}

Advertised Interest Rate

{{returnData.advertisedInterestRate | percentage:2}}

Interest Frequency

{{returnData.interestFrequency}}


Fees and Features

Ongoing Annualised Fee

{{returnData.annualFee}}

Upfront Fee

{{returnData.upfrontFee}}

Offset Account

Redraw

Principal & Interest

Interest Only

N/A{{returnData.interestOnly}}

Max loan to value ratio (LVR)

{{returnData.maxLVR | percentage:0}}

Lump sum repayments

N/A

Additional repayments

Maximum Loan Term

{{returnData.maximumLoanTerm}}

Upfront Fee

${{returnData.upfrontFee}}

Ongoing Monthly Fee

{{returnData.ongoingFees}}

Early Repayment Fee Applies

N/A

Vehicle Types

{{returnData.vehicleType}}

Maximum Vehicle Age

{{returnData.maximumVehicleAge}}

Pre Approval Available

N/A

Online Application

N/A

Account Keeping Fee

{{returnData.accountKeepingFee}}

Minimum Monthly Deposit

{{returnData.minMonthlyDeposit}}

Linked Account Required

N/A

Interest Calculated

{{returnData.interestCalculated}}

Interest Paid

{{returnData.interestPaid}}

Online Application

N/A

ATM

N/A

EFTPOS

N/A

Account Keeping Fee

{{returnData.accountKeepingFee}}

Minimum Monthly Deposit

{{returnData.minMonthlyDeposit}}

Linked Account Required

N/A

Interest Calculated

{{returnData.interestCalculated}}

Interest Paid

{{returnData.interestPaid}}

Online Application

N/A

ATM

N/A

EFTPOS

N/A

Minimum Deposit

{{returnData.minDeposit | currency : '$' : 0}}

Upfront Fees

{{returnData.upfrontFee | currency : '$' : 0}}

Annual Fees

{{returnData.annualFee | currency : '$' : 0}}

Notice Period to Withdraw

{{returnData.noticePeriodToWithdraw}}

Online Application

N/A

Automatic Rollover

N/A

Maturity Alert

N/A