Superannuation and fiscal illusion

There is a lot of debate about today on who pays for super – so I thought I’d link to an op-ed I had at the Drum last year.

The acceptance of compulsory superannuation relies on something called fiscal illusion. The burden of superannuation is obscured, leading many people to think they’re getting something for nothing – or very little. The illusion revolves around the fact that superannuation is an “employer contribution” – many people think superannuation is paid by employers and not employees.

Strictly speaking it is paid by employers – they write the cheque – but the burden of superannuation falls on the employee. Wages are reduced to the extent of the superannuation payment. So an increase in superannuation contributions means a reduction in take-home pay.

Of course proponents of superannuation don’t like that argument. They might point to the fact that wages have risen since compulsory superannuation was introduced and that wages are determined by a whole host of factors, and so on. All of that is exactly correct. Nonetheless superannuation is part of the total employment cost that employers have to bear and forms part of the total remuneration package that employees earn.

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43 Responses to Superannuation and fiscal illusion

  1. Token

    110 comments to the article and only 17 references to the IPA, certainly not one of your better efforts Sinc.

  2. sean

    If only we have a Milton Firedmann Guardian Angel for every citizen who would indicate there is ‘no free lunch’ everytime a politician tries to sell something for nothing.

  3. Skuter

    Hi Sinc,
    Minor point, but isn’t the burden shared between employees and employers depending on the relativities between the elasticities of labour supply and labour demand? Now, you may be correct that in the end, the employees bear most if not all of the burden, in terms of reduced wages, but do you have any empirical evidence to support this? In this instance, I think the burden might be felt by the most marginal workers and the unemployed and those not in the labour force that want a job, given the likely belligerence of the unions on this issue…They are likely to suffer from reduced employment prospects, but I don’t know that wages growth will necessarily budge that much. Of course, how does one establish the counterfactual and slower employment growth will lead to downward pressure on wages. Interested in your thoughts…

  4. rodclarke

    Sinc

    1)

    Strictly speaking it is paid by employers – they write the cheque – but the burden of superannuation falls on the employee. Wages are reduced to the extent of the superannuation payment. So an increase in superannuation contributions means a reduction in take-home pay.

    agree 100%

    2) 15 out of the 25 companies in Australia with the highest profit margins are super funds (High company margins = their customers and being screwed)

    Ref page 20 of the Jan 27 issue of BRW magazine.

    or subscription required
    http://brw.com.au/p/sections/features/best_profit_margins_BYm2JMNT2SlK8kLMfFz7VP?hl

  5. Winston SMITH

    “Strictly speaking it is paid by employers – they write the cheque – but the burden of superannuation falls on the employee. Wages are reduced to the extent of the superannuation payment. So an increase in superannuation contributions means a reduction in take-home pay.”

    Realistically speaking, if the government then starts raiding the super funds to support its green agenda, i.e. build desal plants, isn’t it then a tax increase?

  6. Token

    Realistically speaking, if the government then starts raiding the super funds to support its green agenda, i.e. build desal plants, isn’t it then a tax increase?

    Realisitically we should change the name of our country to Argentina.

  7. Sleetmute

    Strictly speaking it is paid by employers – they write the cheque – but the burden of superannuation falls on the employee. Wages are reduced to the extent of the superannuation payment.

    Clearly, businesses don’t see it that way:

    Business groups yesterday demanded the government press unions to support trade-offs between wage increases and the rise in the superannuation guarantee levy that is forecast to saddle business with $20 billion a year in extra costs, souring Labor’s celebrations over the passage of its new mining tax.

  8. TerjeP

    Sleetmute – the second passage is just the process of realisation of what you quote in the first passage.

  9. Biota

    I was owner/operator of a small business (30 empl) when SGC first came in. It was immediately on top of the wages being currently paid and was a hard hit on profits and cash flow. This was never recognised. It took a while to change pay to include super.

    This change up to 15% will have a similar impact.

  10. Slightly off topic but about the same general thing.

    The political considerations must be considered and it is easy to say don’t support an increase in the super guarantee even though 75% of the population does rightly or wrongly. My personal view is that I support raising super but with major qualifications which do not exist at the moment. As in I don’t support now but I could.

    My major issues are: That there is no requirement to use a percentage of the super payout as a pension which means many pensioners are just blowing there super to go on the old age pension not saving the public purse much, That the super industry is opaque and not subject to the same standards as listed companies which they should be (including so called not for profit and any not for profit organisation should declare all incomes of workers so outsiders can see if they are not for profit including charities etc.), Wages should be held back including increases in the minimum wage in an open way so people realise that this money to increase their super is wages.

    The tax cut of company rate means nothing to small business. Most small businesses are not incorporated and those that are have to be making relatively good profits for it to make a difference.

    I suspect if my qualifications were met the support for increased super may not be so forthcoming.

  11. Token

    Andrew Bolt highlights comments by Shorten, stuff-up by Brodtman

    Remember this when you watch him on 7:30, Brodtman is Chris Uhlman’s wife

  12. Let people access their super to buy their own house… perhaps then, not so many would be suffering “mortgage stress”. They say people suffer mortgage stress when it takes 40% of their NET income – imagine if 10% of their GROSS income wasn’t being quarantined (to say nothing of income tax!)

  13. brc

    Back a while (when Mining Tax ver 1 was proposed?) Lindsay Tanner was on Q&A spouting off rubbish about superannuation. A young woman in the audience got up and asked him why he contradicted his earlier point. Tanner scoffed at her and said ‘I have never said that’. She countered with ‘I have a recording of the interview right here on my phone’. Tanner looked white. Snowcone Tony fudged, fumbled and moved on quickly.

    Turns out the interview she had recorded was one were Tanner was pointing out that employees pay all the super costs and do so via reduced pay. So she was right after all, and Tanner should have had his goose cooked on the show, but Tony the ALP man saved the day.

    A long time back when I actually worked for salaried money (shiver) the package was given as ‘TEC’ which stood for something like ‘total employee compensation’. This included the super figure. So if you had a ‘$100,000 package’ the super was already included that, and your take home was TEC – super – PAYE. You can’t get much clearer than that who is paying the superannuation.

    The only exception is if you have a generous employer who will match voluntary super contributions, which are pretty rare I think.

  14. Sleetmute

    TerjeP, I guess what I’m saying is that businesses don’t believe (or at least they pretend not to believe) in the theory regarding the incidence of increases in the SGL any more than unions do.

  15. brc

    @Fleeced I don’t support any more government efforts to underpin the housing market. What it needs is a gradual deflation to the point where most of the productive capital in the country is tied up in non-productive usage.

    Now, if you said that people could use up to 10% or something of their super to invest in small businesses as a direct investment, then I would maybe agree. It’s a tad unfair that only large and listed companies can get access to the super capital pool.

    Sure, some (most?) people will lose their cash, but others will make a good return, and small business could find a source of funds other than a bank. It’s not like the current situation where your super money is channelled into the stock market by default hasn’t produced any losses.

  16. brc

    ach, correction. What the housing market needs to do is deflate slowly, and capital start being used for productive purposes rather than non-productive housing.

  17. Mother Hubbard's Dog

    Brodtman is Chris Uhlman’s wife

    Pretty clear who has the brains in that partnership.

  18. @Fleeced I don’t support any more government efforts to underpin the housing market.

    You’d rather them underpin the super funds?

  19. That Brodtmann interview was hilarious… hope he gets a link for the audio.

  20. sean

    Surely the ALP mean increased super for public servants?

    It’s a tad unfair that only large and listed companies can get access to the super capital pool.

    How so? Loans from the super funds?

  21. Skuter

    How so? Loans from the super funds?

    I would have thought from super funds purchasing company shares and possibly through purchasing highly rated debt instruments…

  22. Sinclair Davidson

    Skuter/Sleetmute – no empirical evidence that I know of. There are short-run and long-run effects. In SR this increase will come out of profit and LR out of wages. There might be some marginal workers priced out of the market by super (or indeed any positive price on labour).

  23. Skuter

    Surely the ALP mean increased super for public servants?

    They are also talking about a relatively small cost to the budget in terms of reduced tax revenue as a result of concessional taxation of super as opposed to income…either way, they are trying to con the public into thinking that the government is meeting all of the costs…

  24. Fleeced

    They say people suffer mortgage stress when it takes 40% of their NET income – imagine if 10% of their GROSS income wasn’t being quarantined (to say nothing of income tax!)

    Because it would achieve nothing as the majority of people suffering mortgage stress bought the most expensive house they could and would still do so with extra money. It would only be a one off gain for those with mortgage stress now.

  25. dakingisdead

    I cannot believe that we are still having this discusion as to who actually pays the super.

    “Employers contributions” has always been a falacious phrase. Anyone on salary in the private sector know this with immediate effect when they recieve their revised salary advise, the flow through into the wages sector is a little more delayed if there is an immediate application but is easliy factored in with a delayed implementation.

    Even the unions are having to admit this fact at last!

  26. brc

    It’s a tad unfair that only large and listed companies can get access to the super capital pool.

    How so? Loans from the super funds?

    Large and listed companies can access both debt + equity markets to raise more capital. Super funds only participate in these markets. Ergo, if your business gets big enough to list on the ASX, you can raise capital by way of peoples’ retirement funds.

    Thus large businesses get an advantage with size from being able to access to superannuation savings pool. A small/medium business that is growing and could use capital cannot access this savings pool, unless by a specialised fund. So I can’t put a small portion of my super money into a friends promising business.

    That’s what I mean.

  27. Token

    I cannot believe that we are still having this discusion as to who actually pays the super.

    When a company evaluates the cost of labour in Australia v an alternate country, the Super Contribution is included.

  28. kelly liddle is right on the money: “many pensioners are just blowing there super to go on the old age pension not saving the public purse much”.

    Most super ends up being a tax-sheltered freebie to the saver since the optimal strategy is always to SQUANDER as much super as possible before retirement. This is standard advice from anyone who knows the basics of the super system. Much, if not most of this “saving” is spent on a foreign holiday.

    Thanks, taxpayers, for my (much awaited) free foreign holiday PLUS pension. Your kindness (and mindlessness) much appreciated. Details:

    http://sabhlokcity.com/2011/12/young-australians-are-desperate-to-feed-me-in-my-old-age-why-should-i-refuse/

  29. brc

    There might be some marginal workers priced out of the market by super (or indeed any positive price on labour).

    Don’t be scared to say it. There are marginal workers priced out of the market by any type of minimum wage or entitlement.

    One could argue whether this is ‘fair’ or not, and whether whether the rules should stay or not, but you can’t argue the fact that people with a wage value underneath the minimum regulated cost go without employment.

    I’d happily pay someone 5 bucks an hour to wash my car, but I’m not allowed to unless I’m using child labour. Quite a perverse world, when you think about it.

  30. pete m

    How about some smarty pants journo ask a Labor member, if the govt were required to now pay super on top of the Newstart allowance, how they would pay for it, and would future increases in the allowance be trimmed to account for super.

    My local newsagent has young employees work during the week, but never on the weekend.

  31. rodclarke

    It’s a tad unfair that only large and listed companies can get access to the super capital pool.

    I should know the answer to this but I’ll ask anyway – can I use an SMSF to invest in shares in my own company that I am the director of?

  32. Sanjeev
    I read the “who am i” on your blog and all I can say is good luck.

  33. mareeS

    Comeoffit, rodclarke. Yes you should know this. SMSF funds can’t be used for anything within arm’s length of the trustees, or their families, or their business interests.

    How stupid do you think the tax dept is (OK, I know, but they have this covered).

  34. Jumpnmcar

    A rise in super is inflationary and the tax that is said to be funding it is inflationary.On top of co2 tax the official interest rate should plummet.

    Have i got that right?

  35. Jumpnmcar

    Sorry, not plummet, “rocket ” as they try to contain inflation.

  36. wreckage

    can I use an SMSF to invest in shares in my own company that I am the director of?

    No. But you can, for example, have a trust holding land that you lease off it at market rates.

  37. brc

    @rodclarke : you’ve already got your answer from others. Investing in your own business is a no-no. But borrowing against the fund and buying leveraged property for someone else to use is A-OK.

    ‘Angel’ investing is a big part of small business formation. People should be allowed to use a small portion of super for this type of investment. The USA has reasonably simple tests on ‘sophisticated investors’ – some simple tests could be applied to super funds to allow more risky investment for a minor part of the portfolio. Ie, fund size > x, annual super contributions > y.

    It’s a lot better idea than changing the rules to allow people to enter the property market with leverage, for no other reason than the property market needs underpinning because every other source of funds is exhausted.

  38. Tim Quilty

    You can buy your business premises and lease them back to yourself. Real property can be bought. You should be able to lend to yourself at a market interest rate, but that is right out.
    Though I did the audits for a couple of unrelated SMSFs a while back (think they were neighbours) where they had each leant money to the members of the other fund. Technically no problem with that that I could see, though I think the firm told them we didn’t want to have to audit both funds in future years…

  39. Sephardic septugenarian

    The truly disappointing character of discussions about compulsory super is the lack of analysis of the compulsion and its effects.
    Over 20 years, Australians have been required to put x% (currently 9) of income into a fund. Often the fund is chosen for them (“default” fund) at their place of work. Often that fund is an industry fund.
    I invite any person subject to this regime to discover easily whether they would have been better off putting that money into a mortgage or into a plain bond of some kind.
    It is also impossible to know what the trustess, managers, advisers, asset consultants, etc are paid.
    It is not possible to know what the main factors are in determining the difference between the gross and net returns.
    Conflict of interest is not disclosed.
    Nor are the sources of money for the very many expensive travel and other functions provided to trustees and others.
    Instead of wondering about the “cost” of this we should be wondering what benefits have actually flowed to household savings, capital formation, etc. I reckon the signs are cthat we created a very large gravy train.

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