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Should employer super contributions be increased?

Nicki Bourlioufas  |  25 Jun 2019Text size  Decrease  Increase  |  
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Rising living costs and income inequality sit on one side, and changing living standards on the other in this debate about boosting the minimum superannuation contributions rate.

The Grattan Institute, a non-partisan think tank, is arguing against any further increases in the level of compulsory superannuation, with its research suggesting Australians have sufficient superannuation.

However, the nation’s peak body for superannuation funds, the Association of Superannuation Funds of Australia, says the findings are flawed.

Most workers today can expect a retirement income of at least 89 per cent of their pre-retirement income, well above a 70 per cent benchmark endorsed by the OECD, according to controversial research from the Grattan Institute.

The institute claims this figure is more than enough to maintain pre-retirement living standards.

Low income earners unfairly penalised

“Many low-income Australians will get a pay rise when they retire, through a combination of the Age Pension and their compulsory superannuation savings,” say Grattan Institute researchers Brendan Coates and Owain Emslie in a recent report.

They claim the legislated plan to increase compulsory superannuation contributions from 9.5 per cent to 12 per cent should be scrapped, which would save the Budget about $2 billion a year.

Coates and Emslie suggest the main beneficiaries from a higher Super Guarantee would be high-income workers, because they supposedly have more to from further super tax concessions.

"Retirement incomes for low- income workers would increase by around 2.5 per cent, but most low- and middle-income workers would see very little change in their retirement incomes, because lower Age Pension payments would largely erode the increase in income from savings,” say Coates and Emslie.

Use of CPI a 'fatal flaw'

However, Ross Clare, director of ASFA Research and Resource Centre, says a fatal flaw in the Grattan Institute’s analysis is the use of movements in the Consumer Price Index as the deflator for their projections of retirement income, rather than the movement in community living standards , reflected in average wages growth.

“What this means in practice is that…you assume that acceptable living standards do not change, the same bundle of goods and services are purchased as at the start of the projection period, only prices for them change,” says Clare.

“On that basis, the Grattan model assumes that a retiree now should only expect to live the life of a typical person in the 1950s," he says.

Clare suggests this avoids factoring in costs for services such as internet or the purchase price of cars, televisions, common white-goods, regular holidays or even common dietary options.

A recent survey of 1,000 Australians conducted for ASFA indicates that Australians want more in retirement than the Age Pension delivers.

Around 80 per cent of those surveyed would like to be able to spend at least what is set in the ASFA Comfortable Retirement Standards, which is around $43,300 for a home-owning single person, and $61,000 for home-owning couples.

More than 90 per cent of those surveyed support, or strongly support, compulsory superannuation and the scheduled increase in the SG to 12 per cent from 9.5 per cent.

The superannuation message

Elise Treagus, a financial planner with Wakefield Partners, believes the fact that many Australians are happy with the planned increase in the SG is a positive indication that the superannuation message is reaching everyday Australians.

“Increasing SG is an important part to maintaining the purpose of superannuation. Doing the increase slowly over time has led to more discussion regarding superannuation and therefore has given a boost to people interested in thinking about their future over their current situation,” she says.

“This in turn leads to a more informed nation and gives hope for a better future where no pensioner needs to worry about affording living expenses.”

ASFA also disputes the Grattan Institute’s claims related to the OECD adequacy measure.

“It is not clear that the OECD has set an adequacy benchmark of 70 per cent. If the OECD had done so, Australia would get a fail mark as the most recent projections published by the OECD indicate that the net replacement rate for individuals on average earnings is 42.6 per cent for men and 38.8 per cent for women, which are some of the lowest in the OECD,” says Clare.

According to the Grattan Institute, a significant problem for those retiring is the very high cost of rent.

“The retirement income system is not working for some low-income Australians who rent, particularly in Sydney and Melbourne

"Therefore, the priority should be to boost the maximum rate of Commonwealth Rent Assistance by 40 per cent – worth more than $1,400 a year for a single retiree,” say Coates and Emslie.

Treagus agrees that some changes are needed.

”The rental demands of retirees are valid issues. It is a forced savings plan for a retirement income and therefore some ‘pain’ is necessary. Changes may be necessary to capture the retirees that are renting and finding it increasingly difficult to manage living costs,” she says.

is a Morningstar contributor.

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