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Frozen mandated super will cost more in long-term, actuary warns

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Freezing mandatory super contributions at 9.5 per cent of workers’ salaries will not improve Australia’s fiscal position over time, new research from Rice Warner and Industry Super Australia has warned.

The report by Rice Warner, commissioned by Industry Super Australia, has modelled scenarios where the increase in the superannuation guarantee (SG) rate would be funded from corporate profits and through wages. 

While a freeze in the SG at its current 9.5 per cent would generate a “modest budget benefit in short-term through higher taxation revenue” as income tax is expected to rise, Rice Warner has warned it would be offset by lower superannuation earnings tax and growing age pension expenditure. The forecast result is a net negative budget impact, evident after 25 years.

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Further, increased revenues on extra assets accrued through compounding interest would be lost.

The report has also argued a reduction in the asset taper rate from $3 to $2 would lead to an increase in voluntary savings regardless of the SG rate. 

The taper rate is part of the assets test to determine eligibility for the age pension – for every $1,000 of assets above the threshold, the age pension is reduced by $3 a fortnight.

There would be more age pension expenditure as a result of lowering the rate to $2 in the short to medium-term. The 13 per cent of age pensioners currently asset tested would receive a pension rise, and more people would be eligible for the pension, but the actuary has argued long-term costs would be met by a rise in taxes on private savings, as individuals retained a portion of their additional pension.

With the taper rate fixed at $2, the Rice Warner modelling has showed there is little difference for the resulting fiscal position, between if the SG rate is fixed at 9.5 per cent or has risen to 12 per cent.

Another scenario explored is if the SG was abandoned in favour of a universal pension. Rice Warner has estimated the age pension maximum rate would have to be increased by 50 per cent to deliver the same outcome as the SG and current age pension for a median wage earner. 

The federal budget would be $17.3 billion worse off in 2020 the report stated, allowing for tax and expenditure impacts, and $98.6 billion worse off in 2058 (in inflation-adjusted dollars).

Industry Super Australia deputy chief Matt Linden said the findings “lay bare claims that super costs the budget more than it saves and strengthens the case for proceeding with the legislated rise”. 

“It also shows compulsory super combined with a supplementary means-tested pension is the most efficient pathway for governments to meet community expectations about retirement incomes,” Mr Linden said.

“Superannuation saves Australia from the budgetary, economic and social unrest evident in parts of Europe who have long struggled to grapple with unsustainable publicly funded pensions.”

 

Frozen mandated super will cost more in long-term, actuary warns
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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