Hike In Super Savings Rate To Barely Dent Pension Costs

Rising contributions into savings will “not have much impact on the age pension for many years”.

Forcing workers to lock 20 per cent of their earnings into superannuation would “barely” reduce the amount of money the government spends on the Age Pension, according to the Grattan Institute.

Its analysis of modelling on ­increases in the superannuation guarantee rate, scheduled to lift from 9.5 per cent to 12 per cent by 2025, has found rising contributions into savings will “not have much impact on the Age Pension for many years”, saving the budget just 0.1 per cent of GDP in reduced spending on the Age Pension in the second half of the century.

The Age Pension is the single largest cost to the federal budget at $45 billion a year, and the Grattan Institute has argued there is little benefit to be gained from making workers lock away more of their wages

Grattan Institute senior fellow Brendan Coates, who has argued for the scrapping of further increases in the super guarantee, said the modelling, released earlier this month by actuarial firm Rice Warner, revealed a rate of 20 per cent — more than double the current requirement — “barely changes the future trajectory of age pension spending” in the federal budget.

“In fact, it would fall by just 0.2 per cent of GDP by 2050, and 0.3 per cent of GDP by 2100. In contrast, the budgetary costs of extra super tax breaks from a 20 per cent super guarantee are much larger — at around 0.8 per cent of GDP out to 2050, falling to 0.6 per cent of GDP by 2100, or more than 80 years from now,” Mr Coates said.

A super guarantee rate of 20 per cent of wages would also lead to an enormous increase in public debt out to 2100, as super is taxed at a flat 15 per cent concessional rate rather than higher marginal income rates. “The increase in public debt could be as high as 50 per cent of GDP, assuming the interest rate paid on that debt equalled economic growth,” Mr Coates said.

Josh Frydenberg has signalled the government is poised to launch a review of the adequacy of the $2.7 trillion super system, recommended by the Productivity Commission, which could be used to build a case to scrap the scheduled increase in the guarantee rate.

Rice Warner, which has been critical of the Grattan Institute’s analysis, believes a rate of between 10 and 15 per cent would provide a standard of living in retirement that was adequate “for most while not being excessively generous”.

“While no one is talking about lifting compulsory super to 20 per cent of wages, these figures do raise the question of whether more compulsory super is actually driving down the budgetary costs of the Age Pension when practically doubling the super guarantee rate barely reduces Age Pension spending even 80 years from today,” Mr Coates said.


By Michael Roddan - Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

The Australian

18 June 2019

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