February 06, 2013

Horse 1437 - 9% to 12% ? Super.

There has been suggestion in some media outlets that increasing the superannuation rate from 9% to 12% is going to hurt job growth. I however prefer to maintain that it won't make even the slightest difference at all and that the reason that it was suggested was because the financial sector would like to fleece more management fees off the top.

To wit:

It is 20X1.
Assume for instance that a wage earner is paid $80,000 a year. The total wage bill to the employer is $87,200 which is that amount plus 9%. From the employer's perspective, it really makes no difference at all if that $87,200 is made up of 9% super, or 22% super or even 0% super. The bottom line is that however it is made up, it is still a total expense of $87,200.

Take a trip to 20X2.
Our economy grows at roughly 4% and total wage packages are indexed at this.
$87,200 plus inflation is $90,688. If this is made of super at 9%, then the paid wage is $83,200. If however it was to be made up of super at 12% then the wages for 20X2 will be $80,971 and the super paid will be $9,717. The net result is still $90,688 so as far as the employer is concerned it is no difference at all. The employee will still be getting a monetary increase to their wage of $971 so as far as they're concerned, they still have to live with whatever the rules are.

The real difference is that under a 9% super system, the total collected by the super fund will be $7,488 as opposed to $9,717 under the 12% system. The difference to the super fund is $2,229 which they have to invest or about $44 in management fees for doing precisely nothing.
$44 by itself doesn't really seem like a lot but if you were to multiply that by the millions of wage earners paying into the superannuation system, that starts to add up to an awful lot of basically free money for doing diddly squat.

After doing tax returns for many self-managed super funds, I came to the conclusion a long time ago that people who managed their own money, even if they did worse overall than the retail funds, were still better off because they weren't paying management fees. In principle I understand why future governments don't like paying pensions and therefore why they'd like the responsibility to fall on people to pay for their own retirement, however management fees collected on the way through do nothing more than impose a tax by stealth on the poor and or stupid.
If you do have anymore than about half a million in super, then common sense suggests that you should set up your own Self Managed Super Fund. If you don't, then although you're still subject to the same law, you'll be paying tribute for no good reason at all.

As far as employers are concerned they'll still continue to look at the total cost of employing someone irrespective of how the component costs are made up. Total wage growth and employment costs will continue to follow the Golden Rule:
"Whoever has the gold, makes the rule"
Employees will just be fleeced a little more, it's just that some of us won't get the wool pulled over our eyes.
And Retail Super Funds? They're like Jason and the Argonauts chasing the golden fleece.

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