Making cents out of the superannuation debate

And this being a debate on Australian super, misunderstanding and misdirection abounds.

Now, there is room for interpretation in some parts of the superannuation debate. For example, it is a matter of duelling models as to how much raising the superannuation guarantee rate will contribute to retirement incomes.

And it is a matter of judgement whether workers would be 'better off' with higher incomes in retirement or when they are working. Reasonable people can disagree on this. Some would argue that workers should be able to voluntarily make that choice, others believe people will make bad choices if left to their own devices.

However, there is no excuse for making claims that are simply wrong. And it is an incontrovertible fact that superannuation is 'paid for' through wages forgone. It is not, and never has been, an additional 'bonus' from businesses to workers that would be pocketed by employers but for legislation.

Leaving aside for a second the economics of the situation - or the number of economists and politicians who have made this exact point - even the internal logic of those arguing otherwise is irrevocably flawed.

The argument goes: businesses have all the power in the relationship with their employees. For most employees, they simply have to take whatever wages businesses choose to pay or are forced to pay by law. So when it comes to super, why would business pay more than they had to?

For example, as Australian Super's Ian Silk said in the AFR on Monday, "do we really expect all employers to provide an extra pay increase if they're no longer required to make the legislated super payments? For most workers this is not about more super or a pay rise; it's about the super increase or nothing".

The first part of that statement misunderstands what is being argued, and the second part is just wrong.

First, real wages are increasing. They may not be increasing by much, but they are unquestionably going up. Even the ACTU admits this, noting in a February press release that the annualised wage growth of 2.3% was "barely above inflation." This means real wage increases could absolutely be redirected to pay for super increases.

Second, even if real wages were flat, workers' wages would still be going up by the rate of inflation (around 2% a year).

The argument that super doesn't come from wages depends on ignoring this 2%. In the real world, if nominal wages were not rising at all it would certainly be harder for businesses to reduce take home pay to fund additional super payments, than it is to offer smaller pay increases.

Ironically, if you did subscribe to the view that employees just have to take whatever businesses choose to pay, then it wouldn't be hard at all.

However, given wages are increasing (at least nominally) this must mean the bare minimum that businesses have to pay is that 2% a year increase (on average).

In two years' time, businesses will have to pay an extra 0.5% super. Where will that money come from?

Well, if you accept the logic that businesses have all the power, wouldn't it come from the 2% increase? Why would businesses pay workers an additional 2.5% when they only have to pay 2%?

This is the key point: it's not that wages will now increase by 2.5% if the super guarantee is cancelled, it's that wages that would have increased by 2% in the absence of the increase in super contributions, will increase by just 1.5% if super goes up 0.5%.

The fact that it doesn't work exactly this way in practice is not only because the 'businesses have all the power' types are wrong about how the change would work mechanically, but that they are also wrong about the fundamental premise: employees do have bargaining power.

They won't just accept a 2.5% pay cut if super stays at its current level of 9.5% instead of raising to 12%. But given that super is part of overall remuneration they would likely accept a reduction in future pay in exchange for a 2.5% increase in super. Especially if they, like those who think businesses exist only to chisel every dollar out of their workers, misunderstand how super works.

But what about those on the minimum wage? Surely they can't just demand higher pay?

The link between super and wages is even more clear for those on the minimum wage. In the Annual Wage Review 2012-13 the Fair Work Commission said "the increase in minimum wages we have determined in this Review is lower than it otherwise would have been in the absence of the superannuation guarantee increase".

This precedent, cited again in 2013-14 in relation to another increase in the super guarantee rate, suggests the minimum wage would be adjusted to reflect increased super.

The last point to make here is that, in the real world, each worker would have a different view on the value of a 0.5% increase in super as opposed to a pay rise given in cash. Some would view deferred remuneration through super less favourably, and may accept slightly less than 0.5% provided they could get it now, others might prefer to take the super increase.

This choice is the very thing vested interests want to prevent, because then they would have to provide something of value for their fees.

It's worth emphasising that nothing prevents a worker from increasing their super contributions to 12% voluntarily. The question is whether they should be forced to. And once you understand that compulsory contributions and voluntary ones come from the same pocket (the worker's) the case for increasing the guarantee rate becomes far weaker.

Unbridled expansion of the super system is not an unqualified good. Some workers would arguably be better off outside super altogether; many may rightfully choose to take a pay rise over more super.

Workers should get to make those choices and in our compulsory system they don't. And the fact that such a suggestion is considered heresy gives some clue as to who the system really benefits.