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There is currently a debate about the plan to raise minimum superannuation contributions from 9.5%. This ‘superannuation guarantee’ (SG) is scheduled to slowly increase until 2025, when it reaches 12%. However, recent research from the ANU College of Business and Economics highlights the importance of not taking a one-size-fits-all approach.
The study, from Associate Professor Geoff Warren, Dr Gaurav Khemka, and PhD candidate Yifu Tang, modelled the "optimal" SG rates for a variety of income brackets and the different target income objectives during retirement. They varied a wide range of assumptions in order to gauge what matters for setting the "right" SG level.
Their results show that there is no clear-cut SG level that works for everyone.
“Our analysis generates a wide range of optimal SGs. This highlights that a single SG rate is a blunt instrument being applied against a background where fund members can differ in many ways. There is also a marked sensitivity to assumptions,” Geoff and his co-authors say.
In a related submission to the Government’s Retirement Income Review, the researchers suggest that it may be more appropriate to allow more flexibility around super contributions, rather than requiring everyone to contribute more just because it may benefit some.
Further, the research explains that increasing the overall SG rate only makes sense under certain conditions or policy assumptions. This suggests that greater clarity is required around the intentions behind superannuation policy.
“Our results suggest that an increase in the SG might be justified if the policy objective involves either replacing the Age Pension, or requiring members to self-insure against various risks by saving more, just in case things don’t turn out as expected. We strongly suspect that many of those arguing for a higher SG are implicitly taking a different position on some, if not all, of these key assumptions,” they conclude.
A higher SG rate would be attractive to superannuation members if employers pay for it, but the authors point out that it is not clear whether this is the case. For instance, it is possible that the cost of a higher SG will be passed on to workers in terms of wage offsets, price increases or lower employment levels.
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This work has been featured broadly in the media, including ABC radio, SMH, AFR, and Investment Magazine.