Macroeconomic and Welfare Effects of the 2010 Changes to Mandatory Superannuation

In this paper we investigate the macroeconomic and welfare effects of the major changes of the mandatory superannuation reform proposed in the 2010-11 Australian federal budget. These changes include gradual increases in the mandatory employer contributions from 9 to 12 percent of gross earnings and a policy that effectively removes the concessional 15 percent tax on mandatory contributions for workers with annual taxable income of up to $37,000. Using a computable overlapping generations model that incorporates main aspects of mandatory superannuation, the means tested age pension and progressive personal income taxation, we find significantly larger superannuation asset accumulations as a result of the reform, which generate increases in domestic total assets and household saving. The reform improves self-funding in retirement, with government expenditures on the age pension falling by almost 4.6 percent in the long run. The reform also has positive impacts on households' long run welfare, with higher income households solely benefiting from the increased superannuation contributions while lower income households from the contribution tax removal. The aggregate efficiency calculations indicate that the superannuation reform improves efficiency, generating a gain of almost 0.8 percent or $11,753 in initial resources for each future generation.