Conventional wisdom in Australia, informed by economic theory, history, and international experience, is that compulsory superannuation ultimately comes at the expense of workers’ wages. But there has been little empirical analysis on the relationship between higher super and lower wages. This working paper, using administrative data on 80,000 federal enterprise agreements made between 1991 and 2018, shows that the long-held conventional wisdom is right.
We find that, on average, about 80 per cent of the cost of increases in compulsory super is passed to workers through lower wage rises within the life of an enterprise agreement, typically 2-to-3 years. Our finding is conservative: it ignores the prospect that employers pass on some of the cost of super into higher prices, or by reducing other non-wage benefits to workers. And the proportion of compulsory super that comes from wages is likely to be even higher in the longer-term.
This paper directly measures the super-wages trade-off only for workers on federal enterprise agreements – nearly a third of employees. But other workers are also likely to bear the cost of higher compulsory super in the form of lower wages growth. The Fair Work Commission has made clear that when super goes up, award wages grow more slowly than they otherwise would. State enterprise agreements are unlikely to differ much from federal agreements, while workers covered by individual arrangements are likely to see a similar trade off.
t is unlikely that future super increases will be different from past increases. Wages growth has slowed in recent years, but nominal wages are still growing by more than 2 per cent a year, so employers have scope to slow the pace of wages growth if compulsory super contributions are increased. And none of the plausible reasons for lower wages growth – whether slower growth in productivity, technological change, globalisation, an under-performing economy, or weaker bargaining power among workers – helps explain why employers would foot any more of the bill for higher compulsory super this time around. In fact, if workers’ bargaining power has fallen, employers could be expected to be even less likely to bear the cost of higher compulsory super than in the past.
Under legislation supported by both sides of federal Parliament, compulsory super contributions are scheduled to increase incrementally from 9.5 per cent of wages now to 12 per cent by July 2025. Grattan Institute’s 2018 report, Money in retirement: more than enough, showed that the trade-off between more super in retirement and lower living standards while working isn’t worth it.
Most Australians can already look forward to a comfortable retirement, and raising compulsory super would force many Australians to save for a higher living standard in retirement than they enjoy when working. The new evidence in this paper reinforces our recommendation that the planned increase in compulsory super to 12 per cent of wages should be abandoned.