13 December 2016
You know, I have a rule that if something looks wrong, it almost certainly is wrong. There is another rule I find useful: if the industry super funds put out a piece of research, it is almost certainly misleading and definitely self- serving.
This month, the lobby group for the industry super funds, Industry Super Australia, and CBUS, the industry super fund covering construction workers and chaired by former Labor premier Steve Bracks, issued a report, Overdue: Time for Action on Unpaid Super.
It’s not entirely clear how an individual super fund gets away with sponsoring this type of research. After all, the trustees are bound by the sole purpose test of maximising the retirement benefits of the members. It’s not as if the research were confined to the construction industry or following up unpaid superannuation contributions on behalf of individual members.
But let me return to the report: the numbers quoted in it are essentially made up. According to the panic-stricken summary, 30 per cent of employees miss out on their full super entitlements and, on average, each of them misses out on four full months’ super. Pull the other one.
Raising the tone from yelling to full-throttle screeching, did you know that “without action, unpaid super and lost earnings will reach $66 billion by 2024”? Yes, that’s right: $66bn. Industry Super Australia may have to employ Demtel’s Tim Shaw to make some advertisements on this diabolical state of affairs.
Let me go through the methodology used to arrive at the scary estimate of 2.4 million workers missing out on their full super guarantee entitlements. (The appendix does at least use the term “apparent underpayment”.)
Take the Australian Taxation Office’s 2 per cent sample of individuals and matched member contributions statements, add numerous contentious assumptions and settle on a really big figure. I particularly like this one: “Create an estimate of ordinary time earnings from the salary and wage data on the ATO individual tax returns”.
The errors in this exercise alone are enormous and fail to take into account diverse patterns of employment and job switching that occur in the workforce during a financial year. Whenever I read the term “sham contracting” in the report, I think this description is very much in the eye of the beholder.
It also should be noted that employers have up to four months to lodge the superannuation guarantee contributions they make on behalf of their workers. So just because a superannuation contribution doesn’t appear in the same financial year as the worker’s earnings it does not mean the contribution hasn’t been paid.
We know the figure in the report is wrong because there is a very high degree of compliance with the pay-as-you-earn tax system (more than 90 per cent). Employers who are disciplined in deducting workers’ tax liability are also likely to be disciplined in forwarding their workers’ superannuation entitlements.
But here’s the kicker: when businesses pay their own tax liabilities, it is possible to deduct the costs of superannuation contributions from taxable income only if it is demonstrated that the superannuation money actually has been paid. You see the government has thought of this issue in the past and has devised a low-cost means of ensuring that employers do pay the superannuation contributions on behalf of their workers.
Don’t get me wrong, there are instances where the superannuation guarantee is not paid. But this will be mainly in the case of failing businesses, and these businesses may not be paying the wages of contractors or the bills of suppliers. Workers may even be missing out on their full wages.
It is sad but true that some businesses will fail and, of course, workers become creditors in the event of a firm becoming bankrupt, at which point they may recover their superannuation entitlements. There is also scope to recover superannuation guarantee payments through the ATO.
The other estimate contained in the report relates to the cash economy. Again, what figure would we like here? Let’s face it, some workers are quite happy to participate in the cash economy because they avoid paying income tax. It is entirely possible that they are better off even if there is no superannuation component in the cash handed over.
But according to the arbitrary estimate contained in the report, there are 277,000 workers in the cash economy who are not receiving their full superannuation entitlements. And the average effect on workers is close to $3000 a year.
Of course, there is no doubting that the cash economy is alive and well, but no reliability can be attached to these estimates. Moreover, the report contains nothing sensible in terms of doing anything about the cash economy, which is of course a topic much larger than unpaid superannuation.
There is a funny loophole in the system that allows employers to use a modified salary base (after voluntary salary sacrifice payments to superannuation) to calculate their 9.5 per cent superannuation guarantee obligation. It’s not clear that it’s a really big deal, but workers would be well advised to check their pay slips and ensure that the SG is paid on the unmodified salary base.
In due course, it may be a good idea to combine SG payments with PAYE tax payments, to be paid by employers monthly. No one wants workers to miss out on their super entitlements.
But before this happens the government needs to sort out the default fund arrangement that provides the industry super funds with a quasi-monopoly position for award and agreement covered workers.
The Productivity Commission is investigating alternative methods whereby workers who fail to nominate a superannuation fund can be allocated one. It is important that the vice-like grip of the industry super funds is broken. As all economists know, monopolies are bad. It also will create a more even playing field in which all super funds are required to manage liquidity as well as maximising investment returns for members. Superannuation guarantee payments should not just come in like the tide for one group of super funds while others are locked out of the game.
In the meantime, the industry super funds would be well advised to stick to their legislated role of maximising the retirement benefits of their members and cease releasing questionable research.