PensionReforms' summary and comments
When a country forces its workers to save for retirement through a Tier 2 arrangement, contributions from workers and/or their employers are usually pay-related and total career contributions will therefore be a function of career-average pay and also the period spent in the workforce.  Lower contributions, other things held the same, mean lower retirement benefits from the Tier 2 scheme.  In Australia, this has implications for the Tier 1 pension that is both income and asset-tested.

In Australia (also, PensionReforms notes, in other countries with Tier 2 schemes), the pay/career effect of Tier 2 saving arrangements is magnified by the regressive system of tax advantages for 'superannuation' savings of all kinds, including Tier 2.  Tax breaks for retirement savings go disproportionately to those with the highest marginal rates of personal tax.  The higher paid are also better placed to make voluntary additional savings.

"Employment in a part-time capacity and, or, a low-paid, low status occupation places a significant constraint on the capacity of individuals to accumulate retirement savings. The policy shift towards this form of retirement income system thus has particular adverse consequences for women."

The report uses micro-simulations to estimate the expected Tier 2 retirement saving accumulations.  There are no longitudinal data so the report uses estimates based on data from a government survey.  Adjustments then allow for ".level of education, years of potential labour market experience, birthplace, marital status, presence and age of dependent children."  The report acknowledges the limitations of building possible profiles in this way.

"First, using one year's survey data to estimate lifetime earnings requires that some assumptions are made about the rate of earnings growth over time.  We assume that the real rate of earnings will remain constant at 1996 levels.  We also assume the absence of any productivity growth (e.g. associated with growth in overall levels of GDP).  Thus, any observed earnings growth over time has been entirely attributed to the effects of enhanced skills and knowledge (as reflected in length of labour market experience).  In reality the future pattern of wage growth may be different from this scenario.

"A second limitation is that our calculations are based on gross wage rates.  No allowance has been made for the personal income tax rates that apply to individuals with different income levels.  This feature of the estimation process will tend to overestimate the level of earnings inequality, for example, between men and women.  However, as superannuation contributions are based on gross income, the distortion caused to comparisons of superannuation savings will be minimal. 

"Third, the estimates are based on an assumption that current rates of return to labour market attributes such as experience will remain constant over time.  This also may not be realised and, as a result, actual levels of earnings and superannuation savings may differ from those predicted here."

Despite these limitations, the report is able to draw some, to PensionReforms, expected conclusions.  Although women generally may be better off than they were as far as private provision for retirement, so will everyone.  That is the nature of a compulsory Tier 2 scheme.  Relative to men, however, the picture is less comforting:
"Women who are employed on a part-time basis throughout most of their working life, or who have extended periods of absence from the workforce, will struggle to achieve income levels in retirement equivalent to the current full age pension.  Removal of the $450 threshold level and the 15 per cent employer contribution tax could make a significant difference to the level of superannuation funds accumulated by some Australian women."

The report concludes that perhaps the Tier 2 scheme has had too much focus in past debates:
"Many women with a weak attachment to the workforce will remain heavily dependent on the government age pension in retirement.  There is a danger that the current policy shift in favour of compulsory savings in private superannuation schemes will see a magnification of current retirement income inequities and a retreat by government from its obligations to all retirees." 

PensionReforms notes that, since the report, a government review group has recommended no change to the $450 threshold, the monthly before-tax pay above which the Tier 2 contributions start.  Also the review has yet to look at the tax implications of employer's contributions - see here.

PensionReforms thinks that the base data used have significant limitations (largely acknowledged by the authors) but the conclusions are much as might be expected.  The wider question not addressed in the report is why the government is creating these anomalies in lifetime overall remuneration patterns by forcing employees to save for retirement in a particular way and on a regulated basis.  Whenever a government intervenes in relationships between employers and employees (here with deferred remuneration), inevitable anomalies are created between different groups.  Even if those were fixed, others will probably arise.  The ultimate objective must therefore be to ensure that the distortions created by the interventions are more evenly distributed which is essentially what the report recommends.

The Australian government could argue that, because of the presence of the income/asset tested Tier 1 "Age Pension", there can be compensation ex post for some of the career-related distortions.  The report seems to think that "relying" on Tier 1 in this way is a disadvantage.  PensionReforms sees it as just another patch. (File size 691 KB;  27 pp) 343