Our world is getting weirder by the day. As we grapple with a Republican US president tearing up the rulebook for the global trading system, our own conservative brigade is barracking for an expanded welfare state through its campaign to freeze the Superannuation Guarantee. The resulting inadequate retirement savings would force millions more retirees onto the age pension. And with their sheer voting power – projected to comprise one quarter of the voting population by 2035 – they will reject any political party that tries to limit their pension to today’s $472 per week adjusted only for inflation.
If that’s not bad enough, as Australia’s population ageing accelerates, there will be far fewer workers earning the incomes and paying the taxes to support our expanding pensioner population. The most recent Commonwealth intergenerational report points out that the number of working-age Australians for every person above the retirement age of 65 years has fallen from more than seven in 1975 to less than five in 2015, and within a few decades is projected to fall to well below three people. Yes, that’s right: less than three working-age Australians supporting each retiree.
After what was heralded as the great tax-mix switch when the GST was introduced at the turn of the century, Australia remains heavily reliant on direct taxation by advanced-country standards, deploying bracket creep to increase the income tax burden on working people. The Coalition government’s program of changes to personal tax brackets is meant to ameliorate this taxation by stealth but if the Superannuation Guarantee increase is cancelled the personal tax burden on working people will need to increase sharply to fund the burgeoning age pension bill.
That is, of course, unless the GST rate is increased substantially. Australia’s is still 10 per cent, but those of the EU members and the Nordic countries are in the 20-25 per cent range. One of the reasons the Turnbull government abandoned any consideration of increasing the GST rate was that it felt politically obliged to compensate self-funded retirees, as well as wage and salary earners and income support recipients. What’s the point of increasing the GST rate if everyone is to be fully compensated for it?
Much of the conservative opposition to the legislated increases in the Superannuation Guarantee is ideological. Having industry superannuation funds, supported by trade unions, making judgements about the performance of company directors and senior management just seems, well, outrageous.
Others, including Reserve Bank Governor Phillip Lowe and the Grattan Institute, persist with the argument that workers will get a wage rise if the legislated increase in the Superannuation Guarantee is cancelled. These are the same real wage rises that we’ve been told for each of the last few years were just around the corner but have never materialised.
Since 2013, labour productivity has grown by 1.2 per cent per annum while annual real wages have not grown at all. The decoupling of productivity growth and real wages owes much to the irreversible globalisation of the labour market powered by the internet.
Businesses did not feel pressured to grant wage increases when unemployment in NSW and Victoria fell to the 4.5 per cent level the Reserve Bank claimed would oblige them to do so. If businesses did not offer wage increases before the COVID-19 pandemic, they definitely won’t be overcome with generosity with the unemployment rate hovering around or above 10 per cent.
Businesses will allocate to profits not workers the labour-cost savings from a cancelled increase in the Superannuation Guarantee.
Governor Lowe recently told a parliamentary committee meeting: "If this increase goes ahead, I would expect wage growth to be even lower than it otherwise would be”, adding there would be less current income, less spending and fewer jobs.
To test this assertion, we need look no further than the Reserve Bank itself. In its February 2020 statement on monetary policy the Reserve Bank, for the first time, included in its economic forecasts for 2021 the legislated increase in the Superannuation Guarantee. Comparing these forecasts for 2021 with those it made for the same year in its November 2019 statement on monetary policy, the difference in the wage price index is 0.1 percentage points and the difference in jobs growth is an increase – not a reduction – of 0.1 percentage points. Other variables might have been at play, but 0.1 percentage points is nothing more than a rounding error.
In truth, most of the wage increases for everyday workers in the last few years have come from public sector agreements and mandated increases in the minimum wage flowing through the awards system. The only increases in prospect in the coming years of elevated unemployment will be from further increase in the minimum wage and the legislated increase in the Superannuation Guarantee.
Australia’s retirement incomes system is the envy of the rest of the world. Its three components – compulsory superannuation, private savings and an age pension safety net – are designed to work together. It’s not perfect. For example, the tax incentives for superannuation savings for the well-off remain generous, even after the Turnbull reforms that contributed to his loss of leadership from resentful wealthy people and their backers in the Coalition party room.
Cancelling the legislated Superannuation Guarantee is a policy prescription for higher personal taxes and bigger government. It seems a weird move from a conservative government but then again, we live in weird times.
Craig Emerson is a Distinguished Fellow at the ANU, Director of the APEC Study Centre at RMIT and Adjunct Professor at Victoria University’s College of Business.