Using the benefits of the mining boom to increase retirement savings
As part of the Minerals Resource Rent Tax (MRRT) package, the government
has introduced legislation aimed at boosting the level of individual retirement
savings to help meet the challenges Australia will face with an ageing
population. This chapter discusses these proposals, which consist of:
a gradual increase in the superannuation guarantee (SG)
charge—the amount employers are required to contribute to their employees'
the abolition of the age limit associated with SG contributions;
the low income superannuation contribution—a measure to help boost
the superannuation balances of low income earners.
These measures are contained in:
the Superannuation Guarantee (Administration) Amendment Bill 2011
(SGAA Bill); and
schedules 4 and 5 to the Tax Laws Amendment (Stronger, Fairer,
Simpler and Other Measures) Bill 2011 (referred to as the Stronger, Fairer,
Revenue from the MRRT will help account for the fiscal cost arising from
these measures. Accordingly, these proposals are dependent on the commencement
of the MRRT.
Retirement income in Australia
Australia's retirement income policy has three pillars:
the means tested aged pension;
the compulsory SG system; and
voluntary superannuation savings.
In 1986, as part of the terms of a national wage settlement under the
Incomes and Prices Accord, three percentage points of wages contributed over
three years were allocated to savings and preserved in private pension accounts
until employees reached the age of 55. By 1991, 68 per cent of private sector
employees were covered by the three per cent scheme compared to 32 per cent in
The SG charge was introduced in 1992–93. It requires employers to pay
nine percentage points of their employees' wages and salaries into their
individual superannuation accounts. This legislation was phased in over ten
years, with the SG charge increasing by one percentage point every one to three
years until the nine per cent SG charge was reached in 2002–03. The maximum
contribution age for employee contributions has progressively increased from 65
to 70 (in 1997) and from 70 to 75 (in 2002). In 2003, requirements were
introduced for employers to pay SG contributions on a quarterly basis.
The benefits of the Keating Government's decision to introduce the
superannuation guarantee are obvious, although the following anecdote (based on
an experience before the superannuation guarantee was introduced) helps
demonstrate the advantages of a compulsory system with broad coverage:
I recall a meeting of the Australian Financial Review’s
bureau in Melbourne. There were 20 journalists who worked there and not a
single person—and they were all financial journalists—had any saving whatsoever
for their retirement. They had nothing laid aside. At an equivalent meeting of
financial journalists now ... we
would not find that situation occurring. In other words, there would be 100 per
cent cover from superannuation.
Australia's retirement income policy, however, faces some long-term
challenges. The period of retirement for many individuals may be longer as life
expectancy increases. The expected ageing of the population will also result in
fewer workers relative to the number of retirees, with the ratio of people of
working age compared to those aged 65 years or over projected to decline
from 5 to 1 in 2010 to 2.7 to 1 by 2050.
This will place pressure on economic growth and the government's fiscal
Figure 7.1: Proportion of the
Australian population aged 65 and over
Source: Australian Government,
Australia to 2050: future challenges—the 2010 intergenerational report,
February 2010, p. ix; based on ABS cat. no. 3105.0.65.001 (2008) and
Further to the challenges regarding Australia's ageing population and
the longer periods of retirement future retirees may experience, are issues of
gender equality. There is a clear gap in the average superannuation balances
between male and female employees:
The latest APRA data suggests that women retire with an
average of around $112,000 and men with an average of around $198,000. That is
an average, and of course in this case that disguises the fact that there is an
enormous range around that average.
The government's intent is to increase the stock of superannuation
savings to prepare for the ageing of Australia's population and to help improve
the superannuation balances of female employees. The Minister noted that while
compulsory superannuation's gradual introduction between 1992 and 2002 has
smoothed the 'transition path':
... in terms of providing adequate retirement safety, the
system still has great capacity to grow, to mature and to perform better for
individuals who get to retire after a whole working life of superannuation
Overview of the measures
Increase in the SG charge and
abolition of the age limit
The SGAA Bill proposes to increase the superannuation guarantee (SG)
charge from nine to 12 per cent. This increase will be gradual and will
commence in 2013–14. The SG charge will be increased by 0.25 percentage
points in 2013–14 and
2014–15, but from 2015–16 onwards it will increase annually by
0.5 percentage points until the 12 per cent target is reached in 2019–20
(see Table 7.1). The proposal is estimated to increase superannuation assets by
approximately $370 billion by 2029.
Table 7.1: Changes to the superannuation guarantee charge
SG charge (%)
Superannuation Guarantee (Administration) Amendment Bill 2011, schedule 1, item
In addition to the increase in the SG charge, amendments are proposed to
the age limit which applies under the SG system. Currently, employers' SG
liability applies to all workers under the age of 70. The first reading version
of the SGAA Bill sought to increase the SG age limit to make employers have SG obligations
for all of their workers under the age of 75. However, the Minister
noted in his Second Reading Speech that the bill would abolish the SG age
This was confirmed in an amendment made to the SGAA Bill by the government in
the House of Representatives. From 1 July 2013, employers' SG liability
will apply to all employees.
Prior to its passage by the House of Representatives, consequential
amendments were made to the Stronger, Fairer, Simpler Bill (through the
introduction of a new schedule 5) to enable employers to claim income tax deductions
for SG contributions made on behalf of employees aged 75 and over. Currently,
employers can only claim an income tax deduction for employer contributions
made on behalf of their employees up to the age of 75.
Low income superannuation
Most superannuation contributions (including an employer's SG contribution)
are taxed at a concessional flat rate of 15 per cent. However, low income
earners who earn less than $37,000 (and therefore whose marginal income tax
rate is 15 per cent or less) do not receive any special tax concessions for the
contributions made on their behalf. The superannuation contributions related to
these individuals, therefore, can be subject to a higher rate of tax than that
imposed on their ordinary income.
Schedule 4 to the Stronger, Fairer, Simpler Bill seeks to amend the Superannuation
(Government Co‑contribution for Low Income Earners) Act 2003 to
effectively provide that no tax is paid on superannuation contributions of
those earning up to $37,000 per annum; any money collected by the Commonwealth
due to the tax levied on superannuation contributions is instead returned to
the employee's superannuation. The tax reduction is limited to $500 per person
(which is the nine per cent SG liability for a person earning $37,000).
This measure is intended to apply from 2012–13.
The Minister's second reading speech on the bill noted that there are
currently 3.6 million low income Australians, including around 2.1 million
women, who receive no (or minimal) tax benefit from contributing to
superannuation given that the 15 per cent superannuation contribution tax is
above or equivalent to their income tax rate. The Minister added that the superannuation
savings of these 2.1 million women will be increased by $550 million in
Fiscal implications of the measures
The projected financial implications for the government associated with
the increase in the SG charge to 12 per cent, removal of the SG age limit and
the introduction of the low income superannuation contribution over the forward
estimates are presented in Table 7.2 below.
Table 7.2: Summary of the financial impact of the
Over the forward estimates (i.e. total)
Increasing the SG charge
Increasing the SG charge to 12% (A)
SG age limit
Removing the SG age limit
Making SG contributions related to employees 75+ tax
deductible for employers
Overall impact of SG age limit measures (B)
Low income superannuation contribution
Low income superannuation contribution (C)
Overall impact of increasing the SG charge and the
SG age limit measures (A+B)
Impact of all superannuation measures (A+B+C)
* In 2013–14, the
first year that employers are required to make a contribution for their
employees aged 70 and over (contributions which will be subject to tax at a
rate of 15 per cent) revenue is expected to increase. However, in 2014–15, this
addition to revenue will be offset when employers lodge their tax returns for
the 2013–14 financial year and claim a deduction for the superannuation amounts
paid to employees between the ages of 70 and 75.
Superannuation Guarantee (Administration) Amendment Bill 2011, Revised
Explanatory Memorandum, pp. 3–4.
The Financial Services Council (FSC) argued in its submission that the
increase in the SG charge to 12 per cent should not be 'considered solely
within a narrow debate around the costings of the reform in the short- to
medium-term as the long-term benefits of the reform significantly outweigh the
expected short-term budgetary implications'.
The most obvious long-term benefit is that higher personal savings will relieve
pressure on public finances through lower age pension costs.
Although the public sector's contribution to national saving will increase (as
a consequence of the concessional taxation of superannuation contributions),
the net fiscal cost will decline. The FSC noted Treasury's estimate of a
$10 billion reduction in these outlays by 2030 from the proposed 12 per
cent SG charge.
Figure 5.2: Public sector
contribution to national saving and the net fiscal cost with an increased SG
Source: Dr David Gruen and
Leigh Soding, 'Compulsory superannuation and national saving', Treasury Economic
Roundup, issue 3, 2011, p. 52; based on Treasury estimates.
Views on the increased superannuation guarantee charge
Support for the proposed increase
Many submitters supported the government's decision to increase
the SG charge on the basis that it is a prudent long-term economic
measure. The FSC, for example, argued that the proposed increase will lead to
long-term economic benefits and address the national shortfall in retirement
savings. Its submission cited actuarial research showing the current nine per
cent contribution rate will result in a retirement savings gap of $897 billion.
The FSC also cited research from the National Centre for Social and Economic
Modelling (NATSEM). Unsurprisingly, the greatest benefit from the increase in
the SG charge will be among younger cohorts of workers. Those aged
between 15 and 24 will have $150,000 added to their retirement incomes by age
65; those aged between 25 and 34 will have an additional $144,000 in retirement
savings by age 65.
The superannuation fund AustralianSuper supports the increased
SG charge on the basis of the boost it will give to Australia's retirement
savings in the face of an ageing population and longer life expectancy. Its
submission noted an online petition it conducted in 2011 seeking support for
increasing the SG to 12 per cent. It was signed by over 7,750 of its members. AustralianSuper also argued that the increase to 12 per cent
will ensure that almost all employees are 'retirement ready' (based on a
comfortable level of retirement):
Our retirement readiness indicator would suggest that for the
average 25- to 34-year-old their level of retirement readiness would increase
from the current system, which provides an RRI—a retirement readiness
indicator—of around 85 per cent, to 99 per cent under the proposed measures we
are considering today.
The Australian Council of Trade Unions (ACTU)
noted that unions are strong supporters of the increase in the SG charge to 12
per cent. In its submission, the ACTU cited research modelling by the
Australian Institute of Superannuation Trustees which indicates that a single
male on an average income who spends 40 years in employment would not achieve an
adequate retirement income with nine per cent, but would with 12 per cent.
Opposition to the increase in the
Opposition to the proposed increase in the SG charge came from business
and employer groups and was based on several grounds, but mainly focused on
concerns about the financial cost to employers and the unlikelihood that wage
restraint could be provided in a decentralised wage bargaining system.
The Australian Chamber of Commerce and Industry (ACCI) provided various
reasons as to why employers should not be liable for the higher SG charge.
These included that the increase in the SG charge:
is a $20 billion compulsory levy on payroll which will also be
borne indirectly by the community through less investment in 'jobs,
infrastructure and growth';
represents significant cost shifting by the Commonwealth to the
private sector and in particular to small and medium sized enterprises (SMEs)
which will pay about half of the costs caused by the bill. This raises 'serious
equity issues' for SMEs; and
unlike when superannuation was first negotiated in the mid-1980s,
the increase cannot be realistically funded by a wage–superannuation trade-off
given the less centralised nature of the wages system.
The ACCI argued that the committee should recommend that the government
amend the Fair Work laws so as to require minimum wage decisions by Fair Work
Australia to discount increases it may order by the relevant cost to employers
of the corresponding years of the seven proposed levy rises.
Other groups were more measured in their assessment. While suggesting
that the increased SG charge would impact the agricultural industry, the NFF
described it as 'insignificant' compared to the skills shortage facing the
Assessment of the impact of a higher SG charge on employers
It is difficult to assess the concerns raised from industry groups
regarding the increased SG charge without recalling the similar arguments that
were put forward in the early 1990s when the SG was first proposed. An example
of the types of claims being made at the time is a media release from the
Confederation of Australian Industry (CAI) from 1992, an extract of which was
read into Hansard. Mr Spicer, the Chief Executive of the CAI was
attributed as stating:
There are some people who seem to think that, unless
employers are bleeding to death, the workers are not getting their due. If the
SGL [superannuation guarantee levy] goes through there will be a lot more
employers bleeding. But anyone who believes that it would be good for workers
in Australia, or for anyone else, for that matter, is living in a world of
fantasy. The results of CAI's survey show that if the SGL is introduced jobs
will be lost, prices will rise, wages will fall and profitability will be down.
If we lived in a rational community, the Australian parliament could not
possibly be considering legislation of this kind at this time.
The ability to have a meaningful debate on increasing the SG charge is
complicated further by the vastly divergent views on who will bear the cost of
the increase. In its submission, the ACCI strongly contended that employers
would bear the full cost of the obligation, as unions would not agree to a
wage–superannuation trade-off once the increased SG charge is legislated.
For the analysis it undertook on the implications of a higher SG charge
for farming businesses, the NFF assumed that 75 per cent of the obligation
would be ultimately paid by the employer and 25 per cent met by the employee.
AustralianSuper offered a more reflective analysis, pointing out that various
sectors and workplaces respond to wage negotiations and changes to labour costs
in different ways:
When award superannuation was introduced in the early to
mid-1980s it was through the then Industrial Relations Commission, when we had
a centralised wage fixation regime and it was possible to do so. It is
recognised that we no longer have that system and so there will be a
decentralised application of this. In some workplaces, essentially where labour
is strong, there may be no offsetting in income. In other workplaces where
employers are relatively strong the reverse will apply and it will be fully
offset, and in many workplaces there will be some hybrid arrangement, one
assumes. So I do not think it is possible to make a generalised statement as
you were able to do in the mid-1980s. We have a much different system of
industrial regulation at workplaces, so it is not possible to make a simple
statement that will be true of the entire workforce.
Treasury, however, is of the view that the increase will be 'largely
borne by wages':
The lead time and the period over which it will be introduced
and the fact that businesses and employees will be able to sit down and build
this into their remuneration discussions we think will mean that it will be not
be in the main borne by business. It will largely fall on labour.
Other witnesses supported Treasury's argument that the timeline for the
proposed increases in the SG charge will result in employees ultimately meeting
the cost through adjusted rates of wage growth. CPA Australia wrote in its
submission that 'the gradual increase of 0.25% pa for two years and then 0.5%
pa over five years should be able to be absorbed into future wage increases
with minimal impost on employers'.
The FSC noted that this schedule provides sufficient time for individuals,
businesses and the industry to adjust to the reforms. It argued that the
schedule allows employers to take the increased SG contributions into
account when negotiating future wage settlements, ensuring that the incidence
will largely fall on individuals.
The experience of the initial introduction of the SG over the 1990s and
early 2000s is also useful for considering the impact on business. Treasury
notes that unit wages 'did not grow much' over the period of time that the SG
There are some areas where it is clearer that the increase in the SG
charge could directly impact businesses. The Chamber of Commerce and Industry
Queensland's submission noted that other costs for employers, such as WorkCover
premiums and state payroll tax liabilities will increase as wages are defined
to include superannuation contributions.
While this may be the case, it is worth noting that many smaller businesses are
not subject to payroll tax; Treasury advises that the payroll thresholds used
by state and territory governments 'are designed to exclude small employers'.
There are other factors which may mitigate any possible implications for
business. The ACTU argued that, through either workplace bargaining or
additional voluntary employer contributions, 40 per cent of employees were
already receiving superannuation contributions from their employers of more
than nine per cent;
although, as pointed out by the ACCI, the share of public sector would need to
be disaggregated from that figure for the purposes of debating the SG.
Finally, there is another approach to considering the impact of an
increased SG, as large superannuation savings can be positive for businesses, in
that they make a large source of domestic funds available for investment.
Some stakeholders called for the passage of the provisions related to
the increased SG to be delayed. The ACCI argued for debate on the provisions to
be deferred until the Fair Work Act Review Panel has reported to the government.
The ACCI pointed out that the measures are not due to commence until 2013.
More surprising, however, was the suggestion from the Australian Council
of Social Service (ACOSS) that the increase in the SG charge be delayed. While
the committee acknowledges ACOSS has strong equity concerns regarding the current
tax treatment of superannuation contributions, the committee was astonished by
its acknowledgment that it would prefer to see the increase in the SG charge
delayed until some unknown point in the future:
In relation to the superannuation guarantee we would prefer
to see a delay in the move from nine per cent to 12 per cent until we fix the
tax concession arrangements.
ACOSS's approach to these measures is disappointing. The committee
believes that the purist approach to policy adopted by ACOSS on this matter is
not in the interest of those it seeks to assist. There is an opportunity
available at this moment for the Parliament to act to ensure that employee
retirement savings are adequate. While there may be room to improve the
taxation arrangements for superannuation, waiting until these hypothetical
changes can be fully developed and implemented before lifting the SG charge appears
Impact on the aged care sector
Organisations representing the aged care sector
supported the proposed increase, but sought some form of compensation for the
increase in the SG charge due to the nature of the price setting arrangements
for aged care services. Aged and Community Services Australia explained:
Currently, the wages component of the price
paid to providers for care (75% of the price) is indexed annually in line with
Fair Work Australia's minimum wage adjustments, and the balance or non-wage
component (25%) is indexed to the equivalent of the Consumer Price Index. The
resulting indexation is substantially less than movements in Average Weekly
Ordinary Time Earnings, the Labour Price Index for the health and community
services sector and price changes as measured by the Consumer Price Index, and
does not reflect price movements in the sector.
... Under current arrangements, the 3%
increase in the superannuation guarantee rate will add to service delivery
costs, but the additional costs will not be reflected in the wages component of
the already inadequate indexation arrangements. As a consequence, providers
will have to absorb the increase through productivity gains either by
constraining wage increases or reducing staff levels.
Catholic Health Australia also argued that as the
not-for-profit charitable sector receives no benefit from any income tax
offsets, the government's annual care subsidy indexation formula include a
reimbursement of the cost.
The committee notes the concerns raised by Aged
and Community Services Australia and Catholic Health Australia, and wishes to
draw the government's attention to these issues. However, it considers they are
best dealt with through other processes, either as part of the government's
response to the Productivity Commission's recent report Caring for Older
Australians, or as the subject of separate, dedicated consideration.
Views on abolishing the SG charge age limit
Most submitters supported the decision to abolish the SG charge age
limit. The following example provided by the ACTU illustrated the rationale
behind the proposed change:
I personally have been in the experience of being at a
workplace where the worker who was tipping over the age threshold and who
wanted to keep working, his employer wanted him to keep working, yet he was
going to receive in that case a nine per cent pay cut. Given our ageing
workforce, people who can work and continue to make a good contribution to the
economy and to society, it is extremely counterintuitive to suggest that we
should have a system where they are penalised for continuing to work.
The concerns raised by the ACCI in its submission regarding the
inability for businesses to claim tax deductions for contributions made on
behalf of their employees aged over 75
appear to have been addressed by the amendments made to the Stronger, Fairer,
Simpler Bill in the House of Representatives (schedule 5 to that Bill).
Views on the low income superannuation contribution
The ACTU supported the decision that all
employees earning $37,000 or less will receive an automatic co-contribution
from government of up to $500 a year. However, it argued that reform of the way that the contributions of high
income earners are taxed is needed. It suggested that contributions could be
taxed at the individual's marginal tax rate, minus a fixed percentage point
offset. The Australian Manufacturing Workers Union also supported this
CPA Australia 'strongly supports' the low income
superannuation contribution, noting that it is of greater significance in the
short-term than the increase in the SG charge. However, it expressed concern
that the upper payment of $500 would not follow changes to marginal tax rate
thresholds. It suggested that that this maximum payment should be linked to the
upper threshold of the 15 per cent marginal tax rate bracket.
The consultancy firm Mercer also supported the
low income contribution measure. However, it argued that as the $37,000 income
threshold is not indexed, the number of low income earners entitled to the
government contribution is likely to diminish over time. Additionally, Mercer
(and CPA Australia) noted the contribution is based on the current nine per
cent SG and is not linked to any increases in the SG. Once the SG reaches 12
per cent, a government contribution of $666 would be required to fully offset
the tax on SG contributions for a person earning $37,000.
Mercer also argued that the $37,000 threshold should
be phased in over an income range of between $37,000 and $42,000. As the bill
is drafted, an extra dollar in earnings over the $37,000 threshold would result
in the loss of $500 in tax benefits.
The arguments regarding indexation and suggestions that the threshold be
phased in over an income range have merit. However, they would also add
complexity to the administration of the measures. The thresholds for many other
government payments and levies are structured in a similar way to the proposed
low income superannuation contribution, and the appropriateness of the
threshold could simply be reviewed from time to time.
The proposals contained in the MRRT package that will increase the
superannuation balances of employees, particularly the gradual increase in the
SG charge to 12 per cent, are important measures which will help meet the
challenges Australia will face with an ageing population. The implementation of
these changes at this time will help alleviate future pressure on Australia's
retirement income system, minimising the size of the adjustment that may be required
in the long‑run. They will also have a clear impact in lifting the
superannuation balances of female employees at retirement which, on average,
lag significantly behind their male counterparts. With this change, Australians
will have a greater chance of having a retirement income that is adequate to ensure
their standard of living can be maintained.
The superannuation changes are an important reform in their own right,
and a necessary next step in the history of the SG. However, the introduction
of the MRRT provides an opportunity for such a reform to be introduced, as the
MRRT's revenue will offset the impact on government finances the increased SG
charge will have, while also making company tax cuts and other favourable tax
changes for businesses possible. The committee is of the view that because the
SG charge will increase at a slow rate, staggered over a number of years,
businesses will be able to adjust and accommodate the reform, just as they did
when the SG was increased from three to nine per cent over the period 1992 to
Put simply, the measures aimed at increasing the individual superannuation
balances of employees will ensure that the benefits of the mining boom are felt
throughout the community for years to come.
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