Compulsory super is higher than ever at 12%. But cutting it would hurt low-paid workers most
- Written by: Mark Melatos, Associate Professor of Economics, University of Sydney
A central element of Australia’s superannuation system is the superannuation guarantee[1] (SG). This is the compulsory 12% of an employee’s earnings that an employer must pay into the employee’s nominated superannuation fund.
The compulsory contribution rate has risen steadily from 3%[2] when it was introduced in 1992 to 12% since July 1, 2025. Since July 2022, employers must pay the super guarantee to all employees, even the lowest-paid.
The expanded coverage of the superannuation guarantee, as well as the rise in the rate, has coincided with increased HECS/HELP[3] debts for university graduates, reduced housing affordability and a post-pandemic cost-of-living crisis that has reduced real wages[4].
This has led to concerns that the current 12% rate might be too high[5], especially for the young and those on lower incomes.
CC BY-NC[6] It’s easy to put off thinking about superannuation when retirement is years away.In this five-part series[7], we ask top experts to explain how to sort your super in a few simple steps, avoid greenwashing, and set goals for retirement. A reality check Australia’s retirement savings system is based on three pillars: compulsory superannuation the age pension, and voluntary retirement savings, which includes, notably for many Australians, the family home and additional superannuation contributions above the mandated minimum. Australia’s total superannuation assets – which include both compulsory and voluntary contributions – were worth A$4.5 trillion[8] in December 2025, while housing assets have been valued at $11.9 trillion[9]. For comparison, government assistance for seniors, such as the age pension, totals about $100 billion[10] every year. Hence, contrary to the media attention it receives, superannuation plays an important – but not dominant – role in retirement savings.
More specifically, arguments that a lower compulsory super rate would help younger people save to buy a house are not realistic for two reasons. First, even reducing the 12% rate by half – an extreme measure – would only add approximately $4,500 a year to take-home pay for someone on the average ordinary time annual income of $106,600[11]. While such a small amount is a drop in the housing affordability bucket, the power of compounding ensures that it adds significantly to one’s superannuation balance at retirement. Moreover, just as with government support for first home-owners, any addition to take-home pay will likely simply inflate house prices for first-home buyers[12], while also leaving them with less superannuation than otherwise. In short, reducing the superannuation guarantee rate will not improve housing affordability.
Trade offs to consider Determining whether the 12% rate is too high or too low is a thankless task. The most pertinent question is how individual workers wish to trade off their current spending against their desired living standard in retirement. The answer varies hugely from person to person[13]. It depends, among other things, on: their personal preferences the standard of living they experience during their working life their life expectancy how long they plan to work, and the long-term performance of financial markets and the global economy.
The superannuation system, let alone the compulsory contribution, is not designed to address this trade-off, certainly not on its own. Many Australians save too much for retirement According to the Productivity Commission, the original objectives of the super guarantee[14] were to provide an adequate (not desired) level of retirement income, relieve pressure on the age pension, and increase national savings. However, Treasury’s Retirement Income Review[15] found that members of a large super fund who died “left 90% of the balance they had at retirement”. Another study[16] found that “at death, age pensioners leave around 90% of the assessable assets they had at the point of retirement”.
The Grattan Institute argues[17] such households: will have a higher living standard in retirement than they enjoy in their working lives. That is, the rate of compulsory super contributions is higher than it should be, making Australians poorer during their working lives when they are typically under higher rates of financial stress. To blame an excessive super rate for over-saving is curious. Superannuation only accounts for 21% of Australia’s wealth[18], and much of this is voluntary contributions above the compulsory rate taking advantage of concessional taxation treatment[19]. Property ownership accounts for 51% of wealth holdings, and business and financial assets a further 20%[20]. The super guarantee is little more than a bit player.
If one wishes to apportion blame for retirement over-saving, the favourable tax treatment of super, property and shares are more likely candidates. Moreover, the super guarantee does not seem to significantly crowd out household saving outside the super system[22].
Most low-income earners are likely to rely substantially on government support – mainly the age pension – to guarantee an adequate standard of living in retirement.
Moreover, such households are likely save little outside super; for example, they are unlikely to own property or shares. So while a 12% rate may not be individually optimal, even for less wealthy households, it potentially plays an important role in topping up their retirement savings.
The real issue is inequity
Perhaps the real concern about the 12% rate relates to its economic incidence – who, ultimately, bears the cost.
While mixed, there is evidence that employers pass on the costs of compulsory super by paying their workers lower wages[23], forcing them to trade off lower spending now for higher retirement savings. But it does not necessarily follow that employers would pay higher wages if the rate were reduced.
Lower-paid, lower-skilled workers are more likely to be affected this way, since they face stiffer competition for their jobs and have less bargaining power with their employers.
While the rate is almost certainly too high for some workers and too low for others, it is just one plank of a very complex savings system.
References
- ^ superannuation guarantee (www.ato.gov.au)
- ^ risen steadily from 3% (www.superannuation.asn.au)
- ^ HECS/HELP (www.studyassist.gov.au)
- ^ reduced real wages (theconversation.com)
- ^ too high (www.superguide.com.au)
- ^ CC BY-NC (creativecommons.org)
- ^ five-part series (theconversation.com)
- ^ A$4.5 trillion (www.apra.gov.au)
- ^ $11.9 trillion (www.abs.gov.au)
- ^ totals about $100 billion (budget.gov.au)
- ^ average ordinary time annual income of $106,600 (www.abs.gov.au)
- ^ inflate house prices for first-home buyers (www.afr.com)
- ^ from person to person (www.morningstar.com.au)
- ^ original objectives of the super guarantee (assets.pc.gov.au)
- ^ Retirement Income Review (treasury.gov.au)
- ^ study (grattan.edu.au)
- ^ argues (grattan.edu.au)
- ^ 21% of Australia’s wealth (povertyandinequality.acoss.org.au)
- ^ concessional taxation treatment (www.rainmaker.com.au)
- ^ business and financial assets a further 20% (povertyandinequality.acoss.org.au)
- ^ Towfiqu Barbhuiya/Unsplash (unsplash.com)
- ^ outside the super system (treasury.gov.au)
- ^ paying their workers lower wages (treasury.gov.au)
