The “public purse” benefits of default insurance policies in superannuation are doubtful due to increased demand for the age pension as premiums erode balances, the Productivity Commission says.

Budgetary “swings and roundabouts” mean the cover reduces the need for government disability support payments while increasing pension costs, according to a commission paper.

“Modelling suggests that when looking at the fiscal impact of insurance in superannuation, age pension effects matter, particularly for low and middle-income individuals.

“This casts doubt on the earlier estimates of others of a net fiscal benefit of insurance in superannuation.”

Government proposals to end default cover for under-25s and members with low balances have been backed by a Senate committee but are yet to pass Parliament.

The commission’s analysis – in a supplementary paper to its Superannuation: Assessing Efficiency and Competitiveness draft report – also supports an opt-in model for young members. It recommends an independent review within four years to evaluate the impact of the change and other measures, and to assess if further reforms are needed.

The draft report, released in May, says insurance premiums can erode the balance of some disadvantaged members with duplicate policies by as much as $125,000.

Rice Warner and KPMG have both identified fiscal benefits to the Government from default cover as social security outlays are reduced.

The Productivity Commission says the analyses are partial, because neither considers the effect of account balance erosion on age pension eligibility.

The commission’s “cameo modelling” suggests a net fiscal benefit for the Government is most likely in the area of income protection cover for single individuals.

Further analysis using a more comprehensive model is needed to determine if insurance in super delivers overall net fiscal benefits or costs, it says.