Does an Increase in the Superannuation Guarantee Mean a Pay Cut?

How an increase in Superannuation Guarantee may result in a pay cut?

In Australia, the Superannuation Guarantee (SG) has been rising over the last few years. It will reach 12% from the 1 July 2025. A cross-section of Australian workers have voiced their concerns, as they are worried this change may lead to involuntary pay cuts as businesses absorb this higher guarantee.  

However, the Association of Superannuation Fund of Australia (ASFA) says the higher rate paves the way to a comfortable retirement. An ASFA study shows raising the SG will help pad the super nest egg of an average 30-year-old Australian worker by $19,000.  

Despite the risk of imposing unwelcome pay cuts, the Super guarantee rate will continue to rise by 0.5% each year until it peaks at 12% in 2025. 

ASFA Deputy CEO and Chief Policy Officer Glen McCrea explains the relentless drive to crest the SG rate at 12%.  

“Currently only 25% of Australians achieve a self-funded retirement. By 2050, that number is set to double as a result of the super system moving to 12%.”  

McCrea further explains that a 12% SG rate can bolster the average Superannuation account by up to $85,000 at retirement. 

How does raising the lead to a pay cut?

While higher superannuation payments promise sunny retirement for everyone, the source of the additional nest egg funds triggers concerns. 

Workers with a salary plus Super are unlikely to take involuntary pay cuts. However, employees whose pay packages include the Super will endure a shrinking income. Such workers will likely take an involuntary pay cut as employers can legally ask them to fund the additional SG out of pocket.   

In most cases, employers that offer Super as part of the total pay package defer to reducing an employee’s base pay and channelling the difference toward the higher SG. As a result, employees are left grappling with reduced income in the face of mounting household expenses.  

Take a fine-toothed comb to your employment contract to understand how the planned SG raise will affect your income going forward.  

Who’ll likely take an involuntary pay cut come July 1? 

Employees of large public-listed companies such as AGL, Telstra, and Macquarie Group will likely see their paychecks docked. The companies are on record asking their employees to pay the higher Superannuation payments out of pocket.  

A study by the research firm Mercer found that two-thirds of the 145 companies that use a total pay package approach plan on passing at least a fraction of the cost to their workers. While Australian employee unions have castigated this move, there’s little they can do about it.  

How much income will Australian workers lose by funding the Super Guarantee?

Despite promising a sizable nest egg, the higher SG will have a significant impact on the pretax income of workers funding it out of their pockets. Canstar estimates that workers earning $70,000 will lose over $37,000 over the next two decades. Employees earning $110,000 will be worse off since their income will shrink by over $59,000 over the same period.