Super guarantee increases will lower age pension costs: Rice Warner

Increasing the superannuation guarantee will reduce age pension payments and save the federal budget billions of dollars, according to new research. Photo: Getty

Increasing super guarantee contributions from the current 9.5 per cent of wages to 12 per cent will ultimately save taxpayers money otherwise spent on pensions, new research shows.

The super guarantee has already saved the federal budget $17 billion in 2020 – a figure that is expected to rise to $100 billion by 2058 based on analysis by Rice Warner.

The research – commissioned by Industry Super Australia (ISA) – found that leaving super guarantee (SG) contributions at 9.5 per cent leads to a “small short-term improvement” to the federal government’s bottom line.

But the improvement would be matched by a “medium-term decline” as the government is forced to spend more on age pensions to offset lower superannuation balances.

Rice Warner compared this scenario to four others:

• Freezing SG contributions at 9.5 per cent but reducing the taper rate from $3 to $2
• Increasing SG contributions to 12 per cent but keeping the taper rate at $3
• Increasing SG contributions to 12 per cent but reducing the taper rate to $2
• Scrapping SG contributions entirely and increasing the age pension by 50 per cent

The ‘taper rate’ refers to the amount by which fortnightly pension payments are reduced, for every $1000 above the asset test thresholds.

Of the five scenarios, Rice Warner found age pension payments were lowest under the ‘business-as-usual’ (BAU) plan – proceeding with the legislated SG increases and keeping the taper rate at its current $3.

The cost of age pensions will reduce with higher super contributions. Source: Rice Warner

ISA deputy chief executive Matt Linden said Rice Warner’s findings “lay bare claims that super costs the budget more than it saves” and reinforce the case for increasing contributions.

“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,” he 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.”

The super guarantee is set to increase by 0.5 percentage points annually from July 2021, until it reaches 12 per cent.

The legislated increase would be the first since 2014, but it is receiving growing resistance in Parliament.

And both the Grattan Institute and Reserve Bank have opposed the increase, arguing it would eat into future wages growth.

Guaranteed super contributions are scheduled to start increasing from July 2021.

The New Daily is owned Industry Super Holdings