In the debate about super, the actual point of a retirement income policy is lost

Greg Jericho
·5-min read
<span>Photograph: Joel Carrett/AAP</span>
Photograph: Joel Carrett/AAP

The release of the Retirement Income Review’s final report, a 638 page behemoth of analysis has revealed yet again that debate about retirement and superannuation is utterly distorted.

The response to the report has focused mostly around the increase of the superannuation guarantee from 9.5% to 12% and the impact on wages growth. It has also focused on whether we should use superannuation to help people buy a home.

Lost in the debate is the actual point of a retirement income policy – ie retirement income.

Related: Bet your house on it: three things to know from Australia's retirement income review

As we saw last year with the scare campaigns around dividend imputation tax credits, too often a debate about retirement comes to mean a debate about inheritance.

The first aspect of any debate about our retirements should be to ask whether it works – do people retire with an adequate level of income?

The standard level is that you should be able to retire on 70% of your working income. And the report confirms pervious findings by the Grattan Institute that overwhelmingly people do so:

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What we need to remember is that this is not only because of superannuation but the aged pension.

The Grattan Institute estimated that for all but the wealthiest 30% the pension is a massive chunk of their retirement income:

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And yet after listening to the debate this week you would be forgiven for thinking the question of lifting the super guarantee from 9.5% to 12% is the make or break aspect of the retirement system.

It is not.

It is also not what drives the big difference in retirement incomes.

The most recent survey of household incomes and wealth shows a great disparity of retirement income to the wealthiest 20% of households:

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But while the wealthiest 20% get 24% of their income from superannuation compared to 15% for middle income households, the biggest difference was income from wages and investments:

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But even given this, the fact that wealthier household accrue much more superannuation means increasing the guarantee from 9.5% to 12% is obviously going to benefit them more.

Importantly this benefit is increased because they will lose less of the pension due to the increased super:

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And increasing the guarantee from 9.5% to 12% is a massive cost to the budget because, as the review notes, “the cost of the earnings tax exemption in the retirement phase is likely to grow as the superannuation system matures.”

The report estimates that by 2050 the amount of revenue forgone through superannuation tax exemptions will be greater than the amount spent each year on the aged pension.

This aligns with the estimations by the Grattan Institute that raising the super guarantee to 12% will by 2050 see the government save around 0.52% of GDP in spending on the aged pension, but forgoing around 0.69% of GDP in revenue each year from tax concessions:

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This is the furphy about superannuation as being “self-funded” retirement. It is not – it is very much funded by the government forging revenue – revenue that could be spent on services and benefits that would more help low to middle income households.

Superannuation is also income and the review concludes that “the weight of evidence suggests the majority of increases in the SG come at the expense of growth in wages”.

The work by the Grattan Institute is very robust and confirms what the Reserve Bank has also found, that around “80 per cent of super rises are passed through to workers via lower wage rises during the life of an EBA”.

This does not mean keeping the rate steady will increase wages growth – it won’t, because wages are affected by much more than superannuation. We have six years of evidence to show that keeping the guarantee rate steady does not mean there will be strong wages growth.

And you could argue that the pass through of superannuation in the future will be less than 80%, but clearly it is not going to be zero.

This doesn’t mean the guarantee is bad – it is helping to deliver an adequate retirement income for households.

But it does mean that increasing the rate to 12% requires acknowledging that there is going to be an impact on wages that should at the very least be outweighed by the benefits later on in retirement or could not be achieved in other, better ways.

What the review finds is that people could have both higher working life income and retirement income if they more efficiently drawdown their superannuation balances.

The problem is, as the review found, “when retirees die, most leave the majority of the wealth they had at retirement as a bequest” and that “retirees tend to consume only the income derived from assets and not the assets themselves”.

And that is a major problem.

Retirement policy should be geared towards people’s life in retirement, not about what they may be able to leave for their children or grandchildren to inherit.

Debate about raising the superannuation guarantee is not a debate over the worth of the guarantee itself. But we need to be clearer about what we are arguing about and what the actual objective of the policy is – because progressives who focus on the superannuation guarantee over other areas risk losing sight of the real point.