5 December 2016
This week the news finally broke on the serious flaws in our compulsory superannuation system: Even the treasurer Scott Morrison appeared genuinely alarmed that more than 2 million workers have been underpaid compulsory super entitlements.
Industry research revealed that nearly one-third of workers are affected by the underpaying of what are supposed to “compulsory” super contributions of 9.5 per cent superannuation. I believe that as the compulsory dimension of the super system is examined more closely in the months ahead it will become clear the system needs some serious adjustments to make it more effective for all concerned.
Under current rules if you earn more than $450 in any month, then your employer must contribute 9.5 per cent of your ordinary time earnings into a super fund. This rate is slowly increasing to 12 per cent over the next decade.
For years, the super industry has been arguing that the $450 threshold should be abolished so that all employees should be getting some super. Is this the right policy?
The reality is that these compulsory employer super payments are forgone wages because employers have a total employment cost for their employees and it is this expense that an employer will focus on meeting.
From an employer’s perspective, it doesn’t matter what is included in this total cost. Typically it will include pre-tax salary, employer provided fringe benefits, workers compensation premiums and super contributions.
Sometimes other costs such as office costs per employee and other internal business costs will also be included. If employees are to get more employer super contributions then other direct employee costs will be reduced.
Employer super isn’t concessionally taxed for the lower paid. Instead employer super contributions are taxed at 15 per cent, but most lower- income earners pay a much lower tax rate than this on their personal income because of our progressive tax scales on that income and the various tax offsets that are available, such as child care subsidies and family tax benefits. To solve part of this higher super fund tax problem, the previous ALP government introduced the Low Income Super Contribution that returned up to $500 of contributions tax if your total income is less than $37,000.
The Abbott government removed this policy, but the Turnbull government has reintroduced it with a new name — the Low Income Super Tax Offset. This compensation covers their contributions tax but not the 15 per cent tax paid super fund earnings before retirement.
Is there a better way?
Here’s the issue for investors and workers.
The maximum age pension for singles is just over $23,000 and about
$34,400 for a couple, assuming maximum pension and energy supplements.
The age pension is a guaranteed income benefit to eligible recipients, especially for those on low or modest incomes. That is, we force low- income employees to save for retirement, but then provide them with a retirement income benefit that may represent a significant percentage of their pre-retiree earnings.
Super was primarily designed to assist people earning between one and 2.5 times average earnings — that is, between $75,000 and 187,000 salary per year. It is people in the income bracket who, with good incentives, could save enough to be off the aged pension for a reasonable portion of their retirement years.
So maybe we should consider changing the compulsory super system so that those earning less than average weekly earnings can make a choice.
They could take the 9.5 per cent as additional salary and pay their marginal rate on that income or they could continue to direct it into super. Those who expect to have a lower income for a temporary time, for example because they are starting their working life, might elect to receive super.
It has been said that most people would then elect not to save for their retirement and would take the higher wage. I suspect this is probably right.
Tony Negline is author of The Essential SMSF Guide 2016/17 published by Thomson Reuters.