Is increasing the superannuation gaurantee the solution to poverty in retirement?

Lisbeth Latham

In 2021 workers are scheduled to receive a point five per cent increase in the superannuation guarantee paid by employers, this increase has become the centre of a new struggle as the government is widely expected to again delay this increase. In response unions, particularly unions representing predominantly feminised workforces, have been trying to build public pressure on the government to not postpone the increase based on the need to combat the problem of retirement poverty particularly amongst women. Largely absent from this discussion has been the question of whether the superannuation system operating within Australia is an effective or appropriate mechanism for providing economic security for in their retirement.

Prior to the 1980s, superannuation schemes were primarily part of industry awards negotiated by unions, and they applied to only a minority of the workforce, predominantly men. The current compulsory employer superannuation contribution scheme was first established as part of the Prices and Incomes Accord under the Hawke Labor government in 1986. The initial employer contribution was set at 3%, this was funded as a deferred pay rise for workers, and thus whilst nominally “paid for” by employers was actually paid for by working people. The idea was the superannuation scheme would help provide a better standard of living for workers in retirement based on three pillars: 

• a safety net consisting of a means-tested government-funded age pension; 
• compulsory employer contributions to superannuation funds; and 
• further contributions to superannuation funds and other investments.

As the scheme was envisioned not as a supplement to the aged pension, but a replacement for it, it was a mechanism by which the cost of supporting retired workers off of the state (and therefore capital), and back onto working people themselves. Moreover, with the majority of workers not expecting to be reliant on the pension, it was politically easier for successive governments to let the aged pension decline as a proportion of the median wage, albeit not by as much as other welfare payments, as a consequence those retirees who were unable to build up a sufficient superannuation fund, and who were forced to rely to rely on the aged pension face a retirement in poverty, highlighted by Australia having the second-highest poverty rates in the OECD amongst people aged over 65, with 35% per cent living in poverty against an OECD average of 14%.

In response to this growing problem of poverty of old age, the Rudd Labor government in 2012 legislated for a stepped increase in the compulsory employer contribution by point two-five of a per cent every year until it reached a super contribution of 12%. However, only the first two increases were made, as following the ALP losing government, the Abbot Coalition government postponed the remaining increases, and they won’t begin until July 2021. As we have gotten closer to the next increase pressure has been building for a further delay, now justified by the COVID pandemic, as a way for businesses to instead use the money to boost the economy by instead using the money earmarked for the increased super guarantee money for wage growth to boost the economy.

Of course, there is no reason to expect a further postponement of the superannuation payment will result in a boost to any part of the economy other than company profits. The previous postponement occurred during a period of record-low wage growth in Australia. Whilst companies will have been factoring the scheduled increase into their bargaining positions, there is no mechanism via which companies can be made to shift the expenditure into higher wages - they would more than likely just pocket it as profits.

However, while the logic for business and the LNP’s opposition to boosting the employer contribution is flawed and deeply cynical, this does not mean that increasing the contribution is an effective way to address poverty in old age amongst working people.

Increasing the employer superannuation contribution will not eliminate inequality in retirement, it is more likely to increase it. This is not to say it won’t boost the potential balances of retirees with projected lower balances, it will, but the primary beneficiaries of any boost in super contributions will be those workers who already have the largest balances. This is because the whole superannuation system is built on an unequal system, where women on average have lower incomes and are more likely to have breaks in their employment. Moreover, it does nothing for those members of the working class who are entirely excluded from the labour market due to injury, disability, illness, or caring responsibilities whose marginalisation from the labour market and resultant poverty extends into retirement.

Average Balances by Age Group 2016

Age	Average Balance - Men	Average Balance - Women
20-24	$5,294	$5,022
25-29	$23,712	$19,107
30-34	$43,583	$33,748
35-39	$64,590	$48,874
40-44	$99.959	$61,922
45-49	$145,076	$87,543
50-54	$172,126	$99,520
55-59	$237,022	$123,642
60-64	$270,710	$157,049

Source: Association of Superannuation Funds of Australia, Superannuation account balances by age and gender 2015-16, October 2017, pg. 9.

Adding to this problem is the fact that whilst Australia’s massive superannuation system is seen as being highly stable due to its size, it is built on and contributes to the instability of the financial markets. At the end of the June 2020 Quarter, the total value of Australian Superannuation assets was $2.9 trillion, approximately 155% of GDP. This massive volume of assets has pumped money into a system driven primarily by speculation - giving the sense superannuation is a guaranteed future income. However,, we have repeatedly seen massive amounts of wealth wiped out of the value of superannuation savings as a consequence of the inherent instability in the domestic and international financial systems - the bulk of which play no productive role in the real economy.

Following the 2008 Global Financial Crisis, the average balanced fund lost 22% of its value. Whilst the average asset value was back at pre GFC balance by 2012, that was just to get back to the level and part of that was based on contributions into the funds not gains in the value of assets. We can expect to see a continued cycle of funds losing huge amounts of wealth and having to rebuild it over time, delivering retirement insecurity and uncertainty to working people.

So what is the solution? While ideally, we would start from scratch with a more equitable pensions system that meets the needs of all working people - such an approach would face significant resistance including from working people, who would see it as a government raid on their retirement savings. In this context, the solution is to maintain the current three-pillar system, but shift the priority onto the old-age pension ensuring that it provides a liveable income to all, so rather than being a safety net is sufficient to provide a comfortable existence and can then be supplemented via other mechanisms. This emphasis would be achieved by generating income by withdrawing the tax-free thresholds from superannuation and instituting a truly progressive taxation system which substantially increases the tax rates on high-income earners, ramps up company tax, and closes the capacity of companies to offshore their tax liabilities.

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