Overcoming the Gender Earnings Gap

There are many ways in which women get a raw deal in society but the gender pay gap is one of the most invidious.

Not only are women on average paid less than their male colleagues, they are also penalised because they take more breaks from full-time paid employment to have children and sometimes also work part-time.

These penalties are not just felt at the time the income is not earned but come back to bite during retirement in the form of a much smaller superannuation nest egg.

Recent research by Treasury found that the “motherhood penalty” was very steep, with a woman’s earnings falling by an average 55% in the first five years of becoming a parent while men’s earnings remain steady.

With super based on salary, those years of income disadvantage are reflected in a smaller lump sum which then misses out on the significant benefit of compounding investment earnings over time.

Losing $1m in Income and 25% off Lump Sum

The lifetime earnings shortage has been estimated as being as high as $1 million while the dent in superannuation nest eggs makes them around 25% smaller than a man’s.

In terms of a couple, there are advantages in having a more equal spread between the partners super sums, particularly as women on average live longer than men.

Longer term there are moves afoot to close the gender earnings gap and the associated superannuation shortfall, with a recent innovation being super payments being made on maternity leave payments.

However, the gender earnings gap has been remarkably difficult to budge so far so there are some strategies that can be employed in the interim to especially beef up superannuation payments.

Underappreciated Co-Contribution Strategy Can Really Help

One of the most under-appreciated government handouts that can really boost your final super among is the co-contribution strategy.

This strategy can turbocharge anybody’s super balance but can be particularly useful for women who would otherwise suffer from a smaller super balance.

Another strategy which targets couples is called the spouse co-contribution scheme, which is also a really powerful way to keep the spouse who is not working or is earning less on the path to a better superannuation final balance.

Starting Early is a Big Help

Some of the most important contributions to super are the early ones due to the cascading effects of compound interest over time so even a smaller contribution made early enough can go a long way towards equalising the effect for a woman compared to a man.

Say, for example, a parent sets up a super account for their teenage daughter who is working in a part-time job.

Under the super co-contribution scheme, if an after-tax contribution of $1000 is made in a year, it will attract an automatic government co-contribution of $500 once the child has filled out a tax return.

That equates to getting $1,500 into long-term growth assets for just $19.25 a week – one of the best bargains you will ever see.

To help with cash flow, it is possible to make payments monthly to the super fund.

Over the long term, this will prove to be an exceptional investment with the only caveat being that super is only accessible after retirement at age 60.

Repeated over enough years, such a reasonably small contribution will mushroom into the sort of sizable six figure lump sum that will really help to boost a female super account much closer to its male equivalent.

The only other requirement is that taxable income needs to be below $62,488 a year for the co-contribution to be paid.

Spouse Contribution Keeps Super Rising

The spouse co-contribution is a different solution that is ideal for keeping a female super account growing during breaks from employment caused by having children or providing care.

As the name suggests, the spouse co-contribution is made by the partner who gets up to a $540 tax offset for making a $3,000 contribution towards the spouse’s superannuation.

The main limitation is that the spouse’s annual income should be $37,000 or less.

While neither the spouse co-contribution or the co-contribution are specifically designed for women and will work just as well for men, they are both an ideal solution for dealing with the issue of the gender earnings gap and the associated superannuation gap.

Ideally these issues will be solved more directly by closing the gender pay gap but with a little bit of creativity and strategy, both super schemes have the ability to use some government money to bolster female finances.