Relief for the lower paid requires relaxing the Superannuation Guarantee rules, not tightening them

Jane Hume, writing in the June 2017 edition of the Investment Magazine, an Australian publication aimed at institutional investors, argued for the removal of the $450 per month minimum income threshold that governs Superannuation Guarantee (SG) obligations. Her arguments were unconvincing to me. After nearly 30 years of my career in superannuation, as a consultant, actuary and for 12 of those years a trustee director, it is very clear to me that the $450 threshold should be increased, not reduced. Jane would like to see it reduced to zero. I would like to see it increased to $1,500.

There are three fundamental reasons that support the concept of a minimum income threshold: labour economics, tax and efficiency.

Firstly, labour economics. The SG contribution is a substitute for wages, not an adjunct. If the law requires an employer to pay 9.5% of earnings to a super fund, the employer will adjust the (real) wages so that the total cost of wage and super is unchanged. This adjustment can be done immediately or over time or in the case of some casual employees, reducing their hours of work or some similar adjustment. Labour cannot be paid more than what labour is worth for any length of time.  With this in mind, it is simply not correct to argue that low income earners are ‘missing out’ by not having SG contributions made. They are simply having their pay made to them in cash, free of the judgement of government that some of that cash should be withheld and contributed to super. For those who desire to save by super, they can do so voluntarily.  The argument that work is changing and people are increasingly having multiple employers is a red herring.

The second argument, referred to by Jane in her article, relates to tax policy. The tax free threshold for income tax is currently $18,200. Yet, contribute to super and the contribution is taxed immediately at 15%. That is back to front. The loss of utility imposed by preservation, ie up to 40 years before a worker gets access to their deferred wages, needs to be compensated by a tax concession, not made worse by a tax penalty. Contrived attempts to remove this anomaly using co-contributions and the like at best get someone back to a neutral tax position but no better. When the age pension entitlement is brought into consideration, the position is made even worse. Not only does the low income worker suffer higher effective tax rates and deferred access to their money, they will also see their entitlement to the age pension under threat by virtue of the means test.

Thirdly, the question of efficiency arises. Dealing with the administration of small amounts is costly for employers, employees, payroll administrators, super funds, insurance companies, and the tax office. A great swathe of process and activity sweeps all aspects of business, pretending to be valuable work. In fact, it is nothing of the sort. It is such a waste of time and resources that otherwise should be put to productive purposes.

The net present value of that deferred wage, eroded by nugatory effort, deferred access and tax anomalies falls to a vanishingly low level.

These prime reasons explain the need for a minimum income threshold before the SG takes effect. It takes a special form of arrogance to impose laws on people that affect their day-to-day lives in such matters that are not of national importance.  Governments must ensure there are justifiable grounds of national interest prior to enacting these controls over the lowest paid people in our country. In the case of the $450 threshold, it would be unconscionable as a trustee to argue for it to be reduced. Instead, our low income members’ interests would be better served by arguing for the threshold to be increased. By the way, $1,500 per month roughly translates to the current tax free threshold.