Despite overhaul attempts, super still fails lower income earners

Efforts by the Australian Government to make the superannuation system fairer have failed to flow through to lower-income earners.

Australia’s superannuation system is rated among the world’s best. Almost $3 trillion in retirement savings has been amassed in recent decades through a system of compulsory and voluntary super contributions, supported by targeted tax concessions and other incentives.

But the system has had its shortcomings, and in recent years the Australian Government has made changes in response to concerns that some key objectives of the system are not being fully met.

Chief among the concerns is that the benefits of universal super have failed to flow through to lower-income earners.

At the same time, critics say high-income earners in the past may have enjoyed overly generous superannuation tax incentives, leaving the system open to exploitation by the relatively well off – at significant cost to government revenue.

Initiatives to address these issues have included:

  • The introduction of a government superannuation co-contribution to assist lower-income earners to accumulate retirement savings
  • Annual caps on voluntary super contributions to ensure that tax concessions are not exploited, especially by high earners
  • The introduction of an additional 15% tax on voluntary contributions by higher earners.

But have these initiatives, and subsequent amendments to their operation, fulfilled their objectives?  And what have been the net impacts on the overall savings of households in the target groups?

Researchers at the Monash Centre for Financial Studies (MCFS) were commissioned by the Australian Treasury to investigate these and other key questions about the superannuation system. The investigation, conducted by researchers Dr Ummul Ruthbah and Dr Nga Pham, was completed in the second half of 2020.

Primary data for the study was sourced from the Australian Government’s Household Income and Labour Dynamics in Australia (HILDA) survey, which collects information about household disposable income and expenditure annually, and household wealth data at four-year intervals.

The researchers ran a detailed statistical analysis of the data covering the years 2005 to 2018, with the final year sample (2018) comprising 23,237 individuals living in 9,693 households.


Mixed outcomes

The investigation produced mixed results for the Government. On the upside, the researchers found that the imposition of an additional 15 per cent tax on discretionary contributions by higher-income earners had not caused any significant shift by this group towards abandoning voluntary super savings.

The researchers also found that the annual cap on concessional contributions to super has had only marginal impacts on private household saving and wealth.

On the downside, however, the researchers concluded that the Government’s co-contribution to super accounts of lower-income earners has had little impact.

The mandatory superannuation guarantee (SG) for Australian wage and salary earners was launched in 1992, with an initial rate of 3 per cent. After a series of increases, the SG rate is now 9.25 per cent and is scheduled to rise to 12 per cent by 2025.

Compared to other forms of saving, superannuation contributions and earnings are taxed at generous concessional rates, and withdrawals after retirement are tax-exempt.

Yet, while the system has led to huge increases in the nation’s collective retirement savings pool,  previous research by MCFS, published in the first half of 2020, confirmed that many Australians – particularly lower-income earners – remain likely to end up with insufficient savings to support a comfortable retirement.


To try to help low earners boost their retirement savings, the Australian Government in 2003 introduced a co-contribution scheme, matching individuals’ contributions up to a specified limit. Co-contributions are currently capped at $500 annually.

However, in their latest study, the MCFS researchers found the co-contribution had been associated with only marginal increases in the wealth of eligible households.

The study indeed reported, somewhat counter-intuitively, a slight increase in non-super savings.

For households with at least one member eligible for the co-contribution, a statistically insignificant net increase of 0.5 per cent in non-super saving was observed.

Dr Ruthbah and Dr Pham suggested a possible explanation for this unexpected outcome: that the co-payment enables people to achieve a higher super balance while contributing less of their own money – thus freeing up extra cash for more liquid and readily accessible non-super alternatives.

The analysis found there would be little impact on the saving or wealth of low-income earners if the Government increased the co-contribution cap, or changed the rate of government co-contribution.

Tax on higher earners

Dr Ruthbah and Dr Pham also ran a detailed analysis of the savings and wealth effects of the so-called Division 293 tax, which was introduced in 2012 as an additional curb on concessions available to higher-income earners.

Currently, the tax applies to people whose combined annual income, including super contributions, exceed $250,000.

The researchers found that the tax leads to an average 12.7 per cent reduction in the private saving of affected households.

However, as an additional 15 per cent tax on individual taxable contributions is still less than what these individuals would have to pay if they saved that amount outside the superannuation system, they found the tax clearly “does not eliminate all incentives for these households to contribute voluntarily to their super”.

To identify how the Division 293 tax affects the wealth of affected households, the researchers compared their wealth to that of households earning marginally less than the tax threshold of $250,000, controlling for all other household characteristics. ‘’We found no evidence that the households subject to the tax were worse off because of it,’’ they reported.

Caps on concessional super contributions

To avoid exploitation of super tax concessions by the relatively well-off at the expense of tax revenue, the Government has imposed annual caps on concessional contributions.

The same study found that households reduced private saving when the cap increased, perhaps to take advantage of the ability to contribute more to their super.

The increase in concessional super contributions had positively impacted households’ super balance as well as their total wealth, though that impact came with some time lag.

Published on 19 Jan 2021