Super has been a hot topic of discussion since media reports emerged that the government was considering a change to compulsory contributions. So what would the ability to opt out of super mean for low income earners?

In February 2016 there were murmurings of a shakeup to the current super system, as the media circulated reports that low income earners may soon be able to ‘opt out’ of super contributions.

While Treasurer Scott Morrison says the government is not considering changes to compulsory superannuation1, Deputy Prime Minister Barnaby Joyce and other Cabinet Ministers have publicly backed the idea. They argue that by accessing super contributions straight away, low income earners would be in a better financial position to invest in a long term asset, such as property, that could provide them with an income in retirement.2

WHAT WOULD CHANGE?

The move would give workers with salaries of less than $37,000 per year immediate access to the funds currently paid by their employers into super. This would effectively give them a 9.5% pay rise, or the equivalent of up to $60 per week.

But Pauline Vamos, CEO of Association of Super Funds Australia, has warned against the change ― cautioning that the proposal may be a ‘short-term fix’ that would leave around 4 million low-income earners worse off in the long term.

WHAT WOULD IT MEAN FOR WORKERS?

Offering part time and casual workers a way to opt out of super could put them at risk of failing to make effective long-term investments — and falling short when it comes to retirement. With the Age Pension at under $400 per week (for a single person)3, even a small amount of super to supplement this payment can make an enormous difference to the quality of life for retirees.

Low income earners would also lose the additional benefit of accessing life insurance through their super ― for many, life insurance premiums would be unaffordable outside of super. Rice Warner reports have estimated that over 95% of Australian families already have inadequate insurance, making us one of the most underinsured nations in the world.4

HOW CAN WE HELP LOW INCOME EARNERS?

Supporters of the opt-out proposal claim that the super system is already failing low income earners, as they end up reliant on the Age Pension regardless.

An alternative solution might be to reconsider the way super contributions are taxed ― changing from an across-the-board rate of 15%, to a sliding scale based on income.5 In this way, we could make the super system work better for lower paid workers, and help ensure financial security in the longer term and in retirement. 

[1] The Australian, Morrison rules out super opt-out for low income workers, February 2016

[2] Sydney Morning Herald, Barnaby Joyce backs allowing low income earners to opt out of compulsory super, February 2016

[3] Australian Taxation Office, Payment Rates for Age Pension

[4] NATSEM, Understanding the social and economic cost of underinsurance, 2010

[5] Australian Financial Review, David Murray says current super system not helping low-income earners, February 2016 

Posted: March 14, 2016