Given the chance, Paul Keating, and to a lesser extent Bill Kelty and Garry Weaven, those relics of Australian labour politics and the union movement from the 1980s, champion the Australian compulsory superannuation system as a huge win for the average worker. They claim credit for winning an industrial battle to grant superannuation to the workers. Prior to their glorious victory, they viewed super as a privilege for a wealthy few. I suppose they keep banging on about it because they could be fearful of the average worker finding out one or two home truths about compulsory superannuation that are perhaps not so glorious after all.
Every $10 of wage otherwise payable to an average income worker, when paid as a superannuation contribution makes the average worker worse off. Wages are about 50% more valuable to an average worker than superannuation contributions. For an average paid worker on an annualised income of $75,000, the income tax rate including Medicare levy is 34.5%. An extra $10 of wage ends up as immediate net income of $6.55. Should that extra $10 of wage be paid instead as a superannuation contribution, it is taxed, deferred and reduces the entitlement to the age pension. After allowing for these effects, the present value of the contribution is around $4.26. That is, the value of a wage is around 50% higher to an average worker than superannuation. How did it come to this?
The fundamental error made by those in the union movement arguing for compulsory superannuation was to think it was in addition to wages, not in substitute for. Perhaps it was envy politics, perhaps a limited understanding of the economics of labour but in any case, the politicians of the left and labour unions claimed they had won a great victory for workers by having superannuation made compulsory. When superannuation contributions are made compulsory, employers adjust wages to compensate. All that happened was that some wages were paid in an alternative form.
The error was compounded by the Labour government introducing tax on fund earnings and contributions. A flat rate tax was levied on all contributions meaning that the perceived tax advantage was immediately weakened, substantially so for those on lower rates of income tax. That $10 of superannuation contribution is reduced to $8.50 immediately in the fund, then is invested for many years deferring the utility that would otherwise be available to the individual to use that money in whatsoever way they wanted – to invest, to borrow less, to consume more etc. This loss of utility can be measured by observing rates of interest in the personal loans market. Consumers value ready liquid cash – that is why they pay high rates of interest to borrow to fund personal consumption. Borrowing costs in the personal loans market display a significant variation, from 5%pa to more than 10%pa.
The final insult occurs on retirement and the means test that is applied to the retiree’s pension entitlement. Every extra $8.50 of assets will reduce the annual pension by approximately $0.66. By assuming a 20 year time horizon, a 2.5%pa real return and 6%pa real as the discount for loss of utility, the present value of the worker’s net superannuation $10 contribution is around $4.26. Whereas, the value of the $10 wage was $6.55.
It is true that before the advent of compulsory superannuation, only those on higher incomes were typically superannuated. The complex interaction of the tax and welfare system meant that super could be economically justified for the higher paid. Employers knew this. I’m not convinced Keating and his coterie have grasped this point yet.