SG below 10% fails super objective

Rice Warner has weighed into one of the longest running debates in the superannuation sector, saying a superannuation guarantee under 10% fails its primary objective.

The researcher believes the superannuation guarantee (SG) should increase in line with its legislated requirement to reach 12.5% by 2025, arguing an SG below 10% would see the system fail its primary objective.

Pointing out compulsory super was designed primarily to substitute or supplement the Age Pension, Rice Warner said the system's objective was broad, and did not deal with adequacy.

However, it said "intuitively" the rate of SG should be set at a level where it could provide most Australians a "comfortable (but not extravagant)" retirement when combined with the Age Pension, recognising its role in protecting against longevity risks.

"An SG below 10% would result in median income earners relying on the Age Pension for most of their retirement income," Rice Warner said.

"While this would provide a comfortable living standard for middle-income Australians under many scenarios, it's not a desirable result if we want people to be self-sufficient in retirement.

"It does not meet the primary objective of the superannuation system."

Noting a system without the Age Pension might need an SG between 15% and 20%, the researcher said Australia's predicament ensured the SG could be less than 15%, but it insisted anything below 10% would not be enough.

"A higher level will provide a more comfortable lifestyle for a greater number of retirees.  However, higher levels will also require adjustments to tax and contribution thresholds in order to moderate the benefit for those in the top income deciles," the researcher said.

"Consequently, current policy (with the SG rising to 12% as legislated) would provide most Australians with an adequate retirement income and allow for some reforms to the Age Pension when the system matures."

The researcher also took on the Grattan Institute's campaign for the SG to be cemented at 9.5% on the basis "higher compulsory super contributions are ultimately funded by lower wages", putting forward the argument that despite wage growth sitting below what it was when previous SG increases occurred, small movements were still possible.

"We disagree that increasing the SG will lead to lower living standards," Rice Warner said.

"When previous increases were made, real wage rises still occurred.  While wage growth does not currently exceed inflation to the same extent as the last two decades, it is still higher, suggesting that small incremental increases to the SG can continue to be made."

Rounding out its argument, the researcher said the nation could not rely entirely on the super system continuing to deliver the high real rates of return that it has for the last 30 years. If super continued to perform as it has, a lower rate of SG might be possible, Rice Warner said.

In lieu of that guarantee, the firm would rather see Australia "pre-fund reasonable retirement benefits" to avoid tax hikes covering any unfunded costs in future.

Read more: SGSuperRice WarnerSuperannuationAge PensionGrattan Institute
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