The SG increase: implications for employers

Starting on 1 July 2013, the Superannuation Guarantee (SG) minimum rate begins its phased increase from 9% of Ordinary Time Earnings (OTE) to 12%. The phase in period is 6 years. This increase has implications for employers.

In the case of an employee on minimum terms and conditions of employment, then as the SG increases, the total cost of employment will also increase. The full increase from 9% to 12% will increase the superannuation cost by one-third. In terms of total labour costs, the increase will be 2.75%. The employer will then have to choose whether to reduce the quantity of labour employed because the marginal cost of the last unit of labour will have increased and alternatives to labour may have become more advantageous, or whether to accept a lower level of profitability, or whether to temporarily absorb the cost increase and then offset it later with lower levels of ordinary pay increases. Whichever option is the most appropriate will depend on the circumstances of the labour market, the employment contracts in place and the employer’s competitive position.

In the case of an employee not on minimum terms and conditions, but nonetheless in receipt of  a superannuation benefit worth 9% of OTE, then the employer has more ability to offset the higher superannuation contribution with a lower inflationary pay increase in the future.

In the case of an employee already in receipt of superannuation benefits worth more than the current SG, say 11% of OTE, then there is no need to make any adjustment at all to the superannuation contribution until the SG passes 11%. This is an important point that is worth recalling – the purpose of the SG is limited. It is limited to ensuring that all employed persons (very few exceptions) are in receipt of a superannuation contribution that meets or exceeds a certain specified minimum. Sometimes, employees expect that an employer that currently pays a margin over the SG, say 11% instead of 9%, should maintain that margin when the SG increases. This is incorrect.

Employers need to determine the appropriate mix of labour and capital resources in their business depending in part on the relative costs of the different factors of production. The increase in the SG may, but not in all cases, increase the relative cost of labour. The right approach to take is specific to each employer and needs to be planned for now.