Workers ‘pay for super increases’

The Grattan Institute think tank has called for a review of the nation’s $3 trillion retirement incomes system.

Super increases are paid for by workers, Grattan finds

The Grattan Institute think tank has called for a review of the nation’s $3 trillion retirement incomes system after finding that workers overwhelmingly bear the burden of increases in compulsory superannuation contributions, through lower wage rises over the two-to-three year life of an enterprise agreement.

In a paper called “No free lunch: higher super means lower wages”, Grattan has renewed the controversy over its 2018 report, which concluded that the trade-off between more super in retirement and lower living standards while working wasn’t worth it.

The reason was that higher income in retirement was mostly offset by reduced pension payments due to asset and income means-testing, resulting in little net increase in retirement incomes.

This time, Grattan tested the conventional wisdom in Australia that compulsory super ultimately came at the expense of workers’ wages.

Using administrative data on 80,000 federal workplace agreements made between 1991 and 2018, the report found on average that 80 per cent of the cost of increases in compulsory super was passed to workers through lower wage rises in the life of an enterprise agreement.

“This new empirical analysis reinforces that the planned increase in compulsory super, from 9.5 per cent now to 12 per cent by July 2025, should be abandoned,” Brendan Coates, the lead author of the report, said.

Mr Coates said the analysis, together with Grattan’s 2018 rebuttal of the conventional wisdom that Australians didn’t save enough for retirement, meant that Australia needed a rethink of its retirement incomes policy.

Grattan said its latest report was conservative because it ignored the likelihood that employers passed on some of the cost of super into higher prices, or by reducing other non-wage benefits to workers.

The proportion of compulsory super that came from wages was also likely to be even higher in the longer term.

Grattan’s work in 2018 prompted fierce responses from some of the architects of compulsory super, including former Labor prime minister Paul Keating and ex-ACTU boss Bill Kelty.

While both acknowledged that super came out of wages in the 1990s, they asserted that further increases in super from current levels would not be funded from lower wages.

Supporters pointed to the 1980s accord between then-treasurer Mr Keating and Mr Kelty to defer wage rises in exchange for more super, noting that the agreement was no longer in place.

More recently, they said the lack of any connection between wages and super was demonstrated by sluggish real wages growth and the absence of any increases in compulsory super. Also, there was no scope for wages to be cut in response to higher compulsory super because growth in wages was so low.

The Grattan report dismissed all those arguments. It said the accord collapsed in 1996 when Labor lost power, with all subsequent increases in compulsory super occurring without a formal deal to trade off super for wages.

To Mr Keating’s point that slow real wages growth without any increases in compulsory super showed there was no connection between the two, Grattan said nominal wages had averaged only 2.1 per cent growth over the past five years.

“If compulsory super had gone up during this period, we expect that wages growth would have been even slower,” it said.

“By the same token, cancelling future increases in compulsory super would not guarantee stronger future wages growth — it would just remove one of the factors that will weigh on wages growth in the coming years.”

Further, annual growth in nominal wages was still well above zero. This meant there was still ample scope for wages growth to fall to accommodate an increase in compulsory super.

Grattan said none of the explanations for lower wages growth, including slower productivity gains, technological change, globalisation, an underperforming economy, or weaker bargaining power for workers, helped explain why employers would foot any more of the bill for higher compulsory super “this time around”.