Grattan Institute: Increases to superannuation contributions will come at expense of wage growth

Every Aussie worker is legislated to get paid more in super over the coming years. Sounds good, right? It turns out you’ll actually have to pay for it.

A Melbourne-based think tank says the planned increase in compulsory superannuation contributions will come at the expense of future wage growth, exacerbating the economic shock caused by the coronavirus pandemic.

The Grattan Institute report shows the early release of superannuation is not a valid reason for contributions paid by employers to increase from 9.5 per cent to 12 per cent.

Superannuation guarantee benefits are legislated to incrementally rise to 12 per cent over the next five years. A large group within the superannuation industry argue the increase must go ahead as planned to recoup losses incurred from members withdrawing money through COVID-19 hardship payments.

Grattan’s household finances director Brendan Coates said modelling showed the increase in contributions would not boost retirement incomes, but come at the expense of wage growth.

“While employers might hand over the cheque for compulsory super, workers ultimately pay for almost all of it through lower wages,” he said.

“Our work shows that around 80 per cent of the cost of super comes via lower wages within two to three years. The long-term impact could be as high as 100 per cent.”

Mr Coates also noted raising compulsory super to 12 per cent would cost the federal budget close to $2 billion per year in extra super tax breaks, which would largely only benefit wealthier Australian workers.

Grattan said workers who had withdrawn funds through the scheme would have lower retirement incomes, and the government would bear the brunt of the cost via the age pension.

However, even at 9.5 per cent, ongoing superannuation contributions would be able to recoup the majority of money withdrawn, even if a worker is unemployed for the next two to three years.

“Retirement incomes will fall for workers who have withdrawn their super, but not by as much as you might expect,” Mr Coates said.

“The median worker earning around $60,000 who takes out $20,000 in super at age 35 would replace 88 per cent of their pre-retirement income, if compulsory super stays at 9.5 per cent, still well above the 70 per cent benchmark used by the OECD and others.”

The Reserve Bank of Australia is also forecasting lower growth in wages next year when the first incremental rise occurs.

Early release of superannuation was implemented in April as a financial support measure for people who had become unemployed or experienced a reduction in working hours.

It allows someone to withdraw up to $10,000 in both the 2020 and 2021 financial years.

Treasury expects total withdrawals to sap $42 billion from the retirement pool by Christmas.

More than $30 billion has already been drained from the sector from nearly four million requests.