Superannuation versus wages: will workers really end up paying for their own super rise?

Come 1 July next year, the amount your boss contributes to your superannuation is scheduled to rise ever so slightly, from 9.5% of your wage to 10%.

Under the current law, this amount, known as the “super guarantee”, is due to go up by 0.5 percentage points every year until it reaches 12% in 2025.

The increases are currently law and both Coalition and Labor party policy. They are supposed to help you fund a more comfortable retirement by increasing the size of your super nest egg when you leave the workforce.

But even though the increase is the law of the land, powerful political forces, both inside the Coalition government and outside parliament, have assembled to oppose it.

It’s a debate that is taking place amid an unprecedented drain on super funds, as people who have been hurt by the coronavirus-inspired economic crisis take advantage of emergency provisions allowing them to withdraw as much as $20,000 from their retirement savings.

Opponents inside and outside of the government’s own backbenches have seized on a review of the system being conducted by Treasury, and due to report within weeks, to argue that Australian business can’t afford the rise and – crucially – that any increase would come out of your wage rises in the future.

But are these claims right?

Do super rises affect wages?

The idea that business can’t afford the increase due to the coronavirus crisis seems most plausible – after all, we are gripped by recession – but is easiest dealt with.

Because contributions from employers are to increase only gradually, most of the cost will fall on to businesses in a few years, by which time everybody hopes the Australian economy will have recovered from the coronavirus recession.

Taking a broader view, wage growth in Australia has been slow for years. At the same time shareholders have taken an increasing share of profit, pointing to business having the capacity to pay more.

And looking at the situation over a few years, the idea that business can’t afford the increase is also incompatible with the argument that workers will end up paying for their own super rise anyway.

The historical record shows this was certainly the intention when compulsory super was first put forward as part of the Accord agreement between the Hawke Labor government and the unions in the mid-80s.

More recently, it’s been put forward with force by the generally well-regarded Grattan Institute, which in February said that historically about 80% of any super increase has been clawed back from workers through reductions in their future wage rises.

Grattan based its findings on a detailed analysis of almost two decades worth of enterprise bargaining agreements, which it said found that wage growth was crimped when super went up.

Opponents disagree, pointing to a general decline in union power over the past decade that has reduced the power of workers to squeeze pay rises out of the boss.

They also point out that the idea 80% of super comes from future wages is a step down from the previous position of Grattan, which accepted economic theory that the pass through was 100% by definition.

This depends on the theory that the labour market is like the stock exchange, where buyers and sellers negotiate prices in an equitable and transparent way – something that many researchers, including Grattan, no longer believe and common sense indicates isn’t true.

Industry super heavyweight Greg Combet this week called Grattan’s argument “nonsense”.

What’s the evidence for a super increase?

You’d expect super funds to want more money to invest for their members, but other researchers also don’t agree with Grattan’s version of events, and point to compelling evidence that pay rises and super increases aren’t related to each other.

This includes the ARC Centre of Excellence in Population Ageing Research, based at the University of New South Wales, which in its submission to the Treasury review said the conventional view of the labour market was broken and cited research showing that only about 11% of super increases came out of wages growth.

Jim Stanford, an economist at leftwing think tank the Australia Institute, analysed wage rises since 2012, a time period during which there have been two increases in the super guarantee rate.

He found no solid relationship between the amount of super received and the size of pay rises.

Indeed, in some sectors, such as mining, both super payments and wage rises were small, while in others, such as education and healthcare, they were both larger.

“Not coincidentally, those are two sectors with among the highest union density of any parts of Australia’s economy, and where workers have enjoyed a relatively stronger degree of bargaining power – which they have used to extract both relatively stronger wage increases and above-minimum superannuation contributions from their employers,” he says in a paper released in November last year.

Speaking to Guardian Australia, he goes further.

“Historically when workers are powerful enough to win wage increases they have also been powerful enough to win increases to their pension income,” he says.

“The argument from Grattan and others that if you just give up your super increase you’ll get more in your pay packet, that’s utopian dreaming.

“What you will get instead is none of both.”

He agrees with the argument made by one of the super system’s architects, Paul Keating, that the sluggish growth in real wages over the past few years, when there’s been no increase to super, shows the link doesn’t exist.

While labour productivity has run at about 1.2% a year since 2012, wages, after inflation has been taken into account, have stalled or gone backwards. The super guarantee rate last went up, from 9.25% to 9.5%, in 2013.

The share of profit enjoyed by business owners “has hit all-time records since 2017”, Stanford says.

“Because of the pandemic and how it’s shaped the labour market I think employers are licking their lips at the prospect of both freezing and restricting wages and restricting super increases,” he says.

“They don’t want to do it anyway but now the pandemic gives them a good argument against it.

“The employers’ favourite pension system is called ‘work til you die’.”

What about low-income earners?

Grattan has also claimed increases in super don’t do enough to help low-income earners – a finding that has also been criticised by the trade union-backed McKell Institute.

McKell’s executive director, James Pawluk, said that Grattan revised its estimates of the benefit to lower income earners between a November 2018 paper and its February research.

“It shows unambiguously that lower income earners are substantially better off, and by implication that if you change the taper rate and make the tax concessions more progressive you could achieve a much better outcome,” he says.

(It’s common ground between Grattan and its critics on the left that the taper rate – the rate at which you lose pension payments as you receive super income – is broken and needs to be fixed.)

Brendan Coates, the lead author of the Grattan paper, says the institute stands by its research, which he says is consistent with the international literature on the topic.

“It’s an empirical question,” he says.

“The approach that we’re using is blind to your particular model of the labour market.

“These results are robust to a range of different model assumptions.

“The results remain strong over the last decade, which is a period where wages growth has been lower and is distant from the Accord.”