It's unlikely that compulsory superannuation under a Coalition government will ever rise to the 12 per cent of wages that Labor, the unions and the financial services industry want.
The minister for financial services, Kelly O’Dwyer, gave a speech last week that just may be an indication the government is thinking about pushing out further the date at which compulsory super, known as the superannuation guarantee (SG), reaches 12 per cent.
The Coalition has already delayed the scheduled increases to the SG that were put in place when Labor was last in government.
O'Dwyer said a higher SG comes at the expense of future wage rises and would particularly hurt low wage earners, at a time when wages growth is very low.
The SG has been at 9.5 per cent since mid-2014. The next scheduled half-a-percent increase is due in mid-2021, and will then rise by half-a-percentage point each financial year until it hits 12 per cent in mid-2025.
Another reason the Coalition just may have something to say about the increase in the SG in the Budget next month is that, for the first time, the costs of the scheduled increase will be included the four-year forward estimates.
The trade-off for giving-up a part of wage rises and locking the money away until retirement is that the money is taxed very lightly on the way into super and when it is inside super.
And most people pay no tax on their super when in retirement, at least up to the first $1.6 million per person.
For middle and high earners any trade-off between wage rises and future retirement savings, which will vary between occupations and sectors, will likely be worthwhile.
It's not only the tax breaks, but also the powerful effects of compounding of investment returns over several decades that makes the positives of compulsory super outweigh any loss of income for most workers.
O’Dywer questioned whether lower-paid workers benefit from higher compulsory super.
Brendan Coates, a fellow at the Grattan institute, says increasing the SG to 12 per cent will hurt the living standards of low-income earners, the majority of whom are women.
Saul Eslake, independent economist and vice-chancellor's fellow at the University of Tasmania, says those on low incomes are never going to be save very much for their retirement, even if the SG is 12 per cent.
If someone is on relatively low wages for his or her life, they may end up with $40,000 or $50,000 at retirement and while they could put that money to good use by paying off the mortgage, for example, there are still going to be on the full age pension, Eslake says.
Labor is reportably looking at the possiblity of applying the SG to the taxpayer-funded paid parental leave and perhaps shortening the time the SG takes to reach 12 per cent.
By John Collett
10 April 2018