The pros and cons of increasing super contributions to 15%


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Don't hold your breath, but extending compulsory super to 15% has long been a Labor ambition and is part of its policy platform.

After the election, the financial services minister, Stephen Jones, indicated this was still on the longer-term agenda, though in its first term the government will be more concerned with bedding down the legislated increase to 12% by 2025.

Under this timeline, employer super contributions are rising by half a percentage point annually, with the latest increase - from 10% to 10.5% - coming in on July 1 this year.

pros and cons of increasing super guarantee to 15%

Jones told ABC Radio National that the government's key priority for the immediate future was providing certainty that the increase to 12% was locked in and would not change. But he said it was reasonable to look at whether there is a pathway to 15% after that, especially given that politicians, public servants and many others are already receiving more than 12%.

"Will it be number one on our agenda? Absolutely not," he said. "Will we look at whether there's a pathway there? Absolutely."

The case for increasing super contributions to 15%

There are many arguments regarding what is an adequate level of income in retirement, but one commonly used standard is that you need around 65%-75% of your pre-retirement income to maintain your standard of living.

For lower and middle income earners, the income from super is likely to be supplemented by the age pension.

But not everyone has an equal ability to build their savings to achieve that income. Women, who tend to take more time out of the workforce, casual workers and others who have broken working lives don't have the benefit of receiving compulsory super consistently over their working lives.

Many older people approaching retirement have not enjoyed the benefits of accumulating super at 9.5% per cent for much of their working lives and are looking at retiring with lower balances.

The 2020 Retirement Income Review said the super system will only fully mature in the 2040s when most of the workforce has had the benefit of 9%-plus super contributions for 40 years. Most retirees in more recent years have only had 20 years of accumulation at lower contribution rates.

Advocates argue that lifting contributions to 15% would eliminate some of the inequities in the system and ensure more people could maintain their standard of living in retirement.

The case against

The Retirement Income Review argued that higher super contributions come at the cost of lower wage growth and that some lower and middle income earners, who are more likely to receive an age pension in retirement, may be "over-saving" for super under the compulsory system.

Its modelling estimated that most people in the bottom 60% of income earners would exceed the benchmark of having 65%-75% of their working income in retirement.

It also argued that retirement incomes would be higher if people drew down their capital in retirement, with their savings running out by age 92, rather than trying to preserve it.

Other changes

One change that came in on July 1 to improve super outcomes for lower earners is the abolition of the $450 a month threshold for compulsory super payments. Now all employees must receive super regardless of their income.

July 1 also saw the introduction of the retirement income covenant, which requires super funds to guide members into effective retirement income strategies.

Jones also indicated that he has spoken to Treasury about potentially requiring businesses to pay compulsory super at the same time as they pay wages, making it easier for employees to ensure they are getting their entitlements. Policies designed to ensure businesses can't avoid super payments through contract arrangements will also be considered.

Some groups have also suggested measures to increase women's super, such as paying super on parental leave.

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Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.
Chris Brown
August 20, 2022 9.38am

They would better to make it a priority to legislate that the sole purpose of superannuation is to replace the need for an age pension in retirement. This would create certainty and allow other changes to be made - such as removing early release of superannuation and allowing home buying and necessary medical and emergencies to be included as part of the superannuation structure. (see related Money stories about these)

Cam Simpson
August 22, 2022 10.42am

Great to have a balanced discussion rather than a political one. We've trusted the experts on climate change and covid. Why not on the SG rate aswell.

I know people on a higher super % and they don't like it. They feel its over saving, would prefer the money now, especially those with new mortgages and younger families, and a couple recognise that not everyone lives to age 65. Maybe 12% to age 50 and 15% afterwards?

How about ideas to boost super for women for those over 50?