Wage Suppression a Time Bomb in Superannuation System

by Jim Stanford

The record-slow pace of wage growth in Australia’s economy is not just making it difficult for families to balance their budgets, it also threatens severe long-run damage to Australia’s superannuation retirement system.  That’s the finding of new research from the Centre for Future Work at the Australia Institute.

A key factor behind the wage slowdown in Australia has been the aggressive measures implemented by employers in recent years to suppress wage growth, and even to significantly cut wages.  These actions directly undermine superannuation savings, and hence the future retirement incomes of affected workers.

This new report from the Centre for Future Work simulates the impacts of eight specific wage suppression strategies on workers’ superannuation balances – ranging from temporary wage freezes, to wage caps, to more dramatic actions (such as widespread wage theft in retail and fast food franchises, reduced penalty rates for Sunday work, and the outright termination of enterprise agreements).  In every case, workers’ superannuation payments are negatively affected by the suppression in wages below normal trajectories.  The damage is then compounded over many years by the subsequent loss of investment income on foregone superannuation contributions.

The report estimates that for a 40-year-old worker experiencing one of the simulated wage-suppressing measures, superannuation balances would be cut by between $30,000 and $270,000 by the time they retire.  Simulated effects depend on the worker’s starting income, gender, inflation, and other factors.

The worst impacts are experienced in the case of enterprise agreement termination, an increasingly common strategy invoked by employers to cut wages by 40 percent or more.  If allowed to stay in place, wage cuts on this scale produce losses in workers’ superannuation savings that can exceed one-quarter million dollars per person.

Aggregated across the millions of Australian workers who have experienced one or more of these wage-suppressing strategies, the overall costs of continuing wage suppression on superannuation savings would ultimately amount to many tens of billions of dollars.  Based on plausible estimates of the number of workers affected by wage suppression, the report predicts a total loss of superannuation savings that could reach $100 billion (in real 2017 dollar terms). In essence, employers’ efforts to suppress wage growth have planted a time bomb in Australia’s retirement system

Government (and hence all Australians) will also bear a significant share of the resulting costs: tax revenues on superannuation contributions and investment income will be lower, and payouts of Age Pension benefits will be significantly larger (since workers’ own superannuation incomes will be reduced).  The report estimates the damage to government budgets at between $31 and $37 billion (in real 2017 dollar terms) if these wage suppression measures are allowed to stand.

This report was commissioned by the Transportation Workers Union.

Full report