Impact of the increase in the Superannuation Guarantee on wage costs in the health sector

1. Impact of the increase in the Superannuation Guarantee on wage costs in the health sector Australian Labour Market Research Workshop, 29-30 November 2012 Marcia Keegan and Laurie Brown National Centre for Social and Economic Modelling

2. Introduction • Superannuation and the increase in the SG • Health system in Australia • Theoretical framework • Increase in labour costs as a result of the increase in the SG • Overall impact on labour market

3. Changes to the Superannuation Guarantee • Gradual increase from 9% to 12% over seven years • Officially, cost is borne by employers • Gradual increase has been designed so that employers can pass on increase in SG to employees through lower wage rises

4. Possible impacts on the health sector? • Acute and psychiatric hospitals across Australia collectively have multi-billion dollar budgets • Public hospitals: • 735 acute, 17 psychiatric • $33.7 billion recurrent expenditure • $21 billion in wage and salary payments • Private hospitals • 302 day facilities, 279 private acute and psychiatric hospitals • $8.4 billion recurrent expenditure • $4.3 billion salary payments (including on costs)

6. State and Federal health costs with 12% SG • The vast majority of public hospital funding comes from State and Federal government sources • A minority of private hospital funding comes from government sources • Note that even those private sources can be government subsidised • Will the increase in the SG increase the (very large) wage bills of public and private hospitals, thus increasing burdens on State and Federal governments?

7. Data sources • Public hospitals • Australian Hospital Statistics (AIHW) • 2005-06 to 2010-11 • Average staff salary (ex super) $87 090 (2010-11) • 263 623 FTE staff • Private hospitals • ABS Private Hospitals Report • Average staff salary (ex super) $77 150 • 55 053 FTE staff

8. Assumptions • 3% pa growth in FTE staff numbers per annum • 5% pa growth in nominal staff salaries • All employees are entitled to SG • Contractors engaged by hospitals are not entitled to increased payments as a result of increasing SG • Hospitals already paying more than the minimum SG (eg ACT, Tas) will increase their superannuation payments as the SG increases

9. Increase in SG payments to public hospital employees

10. Increase in SG payments to private hospital employees

11. How much of this cost can public and private acute and psychiatric hospitals pass onto employees?

12. How do employers/employees value super compared to wages? • As far as employers are concerned, a dollar paid in superannuation is the same as a dollar paid in wages • S = W • Most employees will prefer a dollar in wages to a dollar in super: • S = W (employees are indifferent to an extra dollar of super or wages) • S = 0 (employees place no value on additional super) • 0 < S < W (an extra dollar of super is valuable to the employee, but less valuable than an extra dollar of wages) • 0 < S < W is most likely, but we do not know the value of S relative to W

13. Impact on the labour market • Immediate effects of increasing SG: • Employers grant lower nominal wage rises than would be case if SG did not increase, overall costs remain the same • Employees receive lower growth in wages than they would usually expect, and additional SG payments do not fully compensate them for this loss -> wage cut • Wages fall • Employment declines, but less than wages

14. Increased SG, wages, employment

15. Do employers feel the full brunt of 12% SG? • Most of the cost of the increase in the SG will be borne by employees: • Employees generally place some value on superannuation, even if S < W • Labour supply is less elastic than labour demand • Consider the change in the subjective value of employees’ remuneration packages under the increase to 12% SG if: • S = 0.2*W • S = 0.8*W

16. Change in subjective value of average total remuneration package for public hospital employees (wages + subjective value of super)

17. Impacts on labour supply and demand • S = 0.8*W • Reduction in FTE positions by 0.11% by 2019-20 compared to the SG remaining at 9% • 323 public hospital FTEs and 75 private hospital FTEs are lost • Annual cost to hospitals is $150 pa per employee • S = 0.2*W • Reduction in FTE positions of 0.44% compared to the SG remaining at 9% • Around $600-$700 per employee in additional costs

18. Findings • By 2019-20, the increase in the SG is expected to add $1.394bn to the superannuation costs of public acute and psychiatric hospitals and $258 million to the costs of private hospitals • In general, public and private acute and psychiatric hospitals should be able to pass on the vast majority of these costs to employees through lower wage rises • The slow rate of increase in the SG – no more than 0.5% per year – is a small fraction of nominal wage growth (around 4-5% per year)

19. Caveats • Some employees may be able to convince particular hospitals to bear a greater share of the increase in SG costs: • Those with powerful unions • Those with skills in high demand • Those who place a very low value on superannuation • These calculations involve projections several years into the future and small fractions of total hospital costs, the results are very sensitive to assumptions