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Saturday, 26 September 2020

Does the SGL need to increase to 12%?

There's a bit of a 'culture war' going on regarding when and if the SGL rate should increase to 12% on schedule, be brought forward, or deferred. Those on the left side of politics view the Australian Superannuation system as one of their great social reforms, although moving towards a self-funded retirement system was probably a demographic inevitability regardless of which side of politics was in power given the aging population was causing an increase in the ratio of pensioners to tax payers since the 1980s. As the introduction of the SGL was a Labor initiative, they therefore jump on any suggestion to defer the planned increase of the SGL rate as an attack on the Superannuation system itself ('mediscare' seemed to work, so expect a host of 'superscare' election ads if there is any delay to the SGL increase before the next election).

Those on the hard right of course hate the very concept of government mandated savings for retirement, as they would prefer people to be able to choose for themselves whether or not to spend current income or defer some of it for their retirement (then again, the far right is also against redistribution of income and welfare, so if left to their own devices, those without any retirement savings would presumably end up in poverty if they didn't save for their retirement).

Since we have a Superannuation system in place, and the rate is planned to eventually rise to 12%, the real question is whether the rate change should proceed according to schedule, or, due to the economic impacts of Covid-19, whether the rate increase should be brought forward or deferred.

The argument for bringing forward the SGL rate increase is that it would be a proxy wage rise, given that the SGL is employer funded. Given the current lack of wage inflation, an SGL increase is at least one way to funnel company profits into employees pockets rather than to shareholders (even if the employees can't access the funds until they retire). The original SGL was a trade-off of wage rises for superannuation contribution (at a time of high inflation and wage increases), so any SGL increase would theoretically result in a commensurate decrease in future wage rises. But in a time of negligible wage rises, an increased SGL contribution would initially simply be an additional cost to employers. Of course, there is the possibility that imposing an SGL increase on employers would therefore discourage employment, at a time when unemployment has increased due to the economic impacts of Covid-19.

The  argument for deferring the SGL rise is that people need as much current income as possible in the current economic environment, so it makes no sense to defer additional current income to fund retirement spending. And that this isn't the right time to impose an additional cost on employment when many companies are already struggling financially.

Of course the superannuation 'industry' is in favour of the SGL increase happening sooner rather than later, as SGL contributions add to the pool of retirement savings they can 'clip' for management and admin fees. And trade unions favour larger Industry Super Funds as they promote Industry Super as if superannuation is a worker benefit that is provided by the trade unions (union membership has been declining for the past few decades, so anything that makes trade unions seem more relevant to workers is vital to their continued existence).

However, looking at the SGL rate dispationately, the key question is whether an increase from 9.5% to 12% is actually critical to making Superannuation provide an adequate retirement income in the long term. It has been pointed out that currently 40% of retirees report that their superannuation doesn't provide an adequate income for a comfortable retirement, which is taken as evidence that the SGL rate needs to rise. But the reality is that current retirees did not accumulate their Superannuation at the current SGL rate of 9.5%, but for most of their working lives the SGL rate was much, much lower. SGL was only introduced in 1992 at of rate of 4%, and the rate has slowly increased over the years.

For example, looking at a 45 year working life (from age 20-65), those that retired in 2017 would have received SGL at an average rate of only 4.54%. Those retiring in 2018 after working 45 years had an average SGL contribution rate of 4.75%, and even those that retire this year after working 45 years only received an average rate of SGL at 5.38%.

So, even with the SGL rate at "only" 9.5%, twenty year old works will retire after 45 years after having received roughly twice the total SGL contributions of recent retirees. The actual impact on their final retirement balances will be even greater, as the impact of receiving 9.5% SGL in year 1 of saving for your retirement rather than in year 45 is much more than double due to the benefits of compounding for 45 years. So, while 40% of retirees may have inadequate Super balances at the moment, in future years the current SGL rate will already provide a much greater benefit at retirement age.

Overall, keeping the SGL at the current rate for a few more years will not have much impact on eventual retirement balances, but might assist with the recovery in employment rates over the next few years.

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