710,000 workers would choose to opt out of super

More than 710,000 workers would opt out of compulsory superannuation contributions if given the chance, new data shows.

More than 710,000 workers would opt out of compulsory superannuation contributions if given the chance, choosing ­instead to boost their take-home pay, according to the first official modelling of the impact of making super voluntary.

An estimated 7 per cent of ­employees, including one-fifth of those under 30 on low incomes, would prefer to take their 9.5 per cent compulsory super contributions as wage and salary income, rather than lock up income in super accounts, according to the Parliamentary Budget Office in a policy costing marked “sensitive”.

“Those earning in the top 15 per cent of wages and salary ­income (above $100,000 a year) would not opt out,” it said. “Those aged over 60 would not opt out.”

The conclusions imply that the benefits of the landmark Labor policy flow to higher income earners and older workers.

“The proportion of individuals choosing to opt out of the superannuation guarantee would vary by age and income, and would ­increase over time,” the PBO said.

It is estimated that about 15 per cent of workers earning less than $60,000, whose super contributions would amount to a maximum of $5700 a year — would opt out immediately.

The analysis, titled Making the Superannuation Guarantee Voluntary, found such a policy would improve the budget bottom line by $590 million in the first year, rising to $1.9 billion a year by 2029.

“Opting out will increase the net tax paid by individuals, although there will be short-term cashflow benefits that some individuals may value,” the PBO said.

Superannuation contributions are taxed at a flat rate of 15 per cent, while wages are taxed at 19 per cent for incomes between $19,000 and $37,000 and then 32.5 per cent up to $90,000.

The analysis comes at a ­difficult time for the super sector following a Productivity Commission report that found a third of accounts were unintended, fees excessive, and understanding of superannuation poor.

The royal commission into the financial services sector has further eroded confidence in the wealth management industry, where superannuation fees ­exceed $30bn a year according to the Productivity Commission.

“Due to the policy being ‘opt out’ rather than ‘opt in’, it is likely that the number of individuals opting out would start very low and increase over time, as more individuals become aware of the options,” the PBO said. “It is likely that some individuals would use the proposal to smooth their lifetime consumption, choosing to opt out when they are younger, and opt back in when they are older, possibly increasing their total savings to partially offset the early years of reduced saving.”

The PBO suggested much of the wage boost would go towards buying a home.

The impact on Age Pension outlays from voluntary superannuation would be “small” in the medium term, the PBO said. It stopped short of assessing the long-term fiscal implications.

The 2009 Henry tax review ­estimated that forgone revenue from super tax concessions exceeded the reduction in Age Pension outlays over the long term. “An increase in the superannuation guarantee would … have a net cost to government revenue even over the long term (that is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs),” it said.

In 1992, superannuation contributions were made compulsory for employees earning more than $450 a month, at a rate currently set at 9.5 per cent, due to rise to 12 per cent by 2025. For the self-employed (about 2.1 million workers), contributions are voluntary.

Noting “significant uncertainties” in estimating the behavioural response, the PBO said if an extra 20 per cent of workers opted out, revenues would be $32bn higher over the decade.