The great super fight
Many Australians have grabbed at the opportunity to withdraw from their superannuation early in an attempt to weather the COVID-19 recession. The scheme has reignited a philosophical debate about the purpose of super.
JobKeeper and JobSeeker aside, the early access to super scheme is the one government stimulus measure that has had the most rapid take-up. Under the scheme, subject to fulfilling certain hardship criteria as a result of the coronavirus, individuals could access up to $10,000 of their super in 2019-20 and a further $10,000 in 2020-21.
Since the inception of the scheme on 20 April through to 9 August, more than $31.1 billion has been paid out to individuals at an average of $7,689 for each individual.
Around 3 million applications were received by the Australian Prudential Regulation Authority for the 2019-20 financial year, while 1.1 million have been received for 2020-21 so far. Many desperate individuals have rightly raided their nest egg as a last resort when all other forms of access to financial support have been exhausted.
That being said, the policy has put into question the primary objective of the superannuation system as stated in the federal government’s Superannuation (Objective) Bill 2016, which is “to provide income in retirement to substitute or supplement the age pension”.
The young worse off, says Keating
Arguably the biggest heavyweight in the fight over super has been Paul Keating, former prime minister and architect of the system as we now know it. Unsurprisingly, he criticised the Morrison government over the policy saying it was putting the onus on younger people to bail out the economy and has put them even more on the back foot in building an income they can rely on at retirement.
“$32 billion has been found and paid for by the most vulnerable, lowest paid people in the country – that’s the people who’ve taken the $20,000 out,” Mr Keating said recently at an industry super event.
“The main burden of income support is people ratting their own savings to the tune of where now 600,000 young people, broadly young people under 35, have no superannuation accounts at all now.
“They lose all the compounding – the $20,000 would have multiplied itself by five and a half or six times over their lifetime, so it’s been a very poor choice to them.”
Financial comparison website Canstar released figures on the financial impact on an individual withdrawing $20,000 of their super at certain ages. While broadly hypothetical, an individual aged 25 withdrawing from a super balance of $20,000 would have over $100,000 less in their nest egg at age 67 than if they didn’t withdraw early.
An additional risk with the scheme is individuals could potentially trigger an automatic cancellation of their default insurance should their accounts drop below the $6,000 mark. Slater and Gordon senior associate (superannuation/ TPD) James Hunter said that if this occurs, your total, permanent and disability (TPD), life insurance and income protection may be cancelled.
“You will need to contact your superannuation fund to opt in to continue being covered,” Mr Hunter said.
“If you do not contact them to continue receiving this insurance, you may find yourself uninsured should the worst happen and you suffer a life-changing injury or illness.”
‘It’s their money,’ PM argues Despite the risks, the federal government has defended the early access to super policy. Prime Minister Scott Morrison justified the scheme on the basis that superannuation is owned by the individual and that they should be allowed to use that money in whatever way they think is best for them.
“It’s their money. The intent for which it is used is decided by the person whose money it is. The government doesn’t give people lectures about how they should spend their money,” he said.
“There are legitimate and appropriate rules to enable people in this time of hardship to access their own money to do with it what they believe is best for them.”
Further, Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume also said the scheme has helped many Australians during a very difficult period. “The average home loan at CBA is $450,000, current variable rates are 2.29 per cent – that’s interest of $10,000 so one withdrawal of early release is enough to keep an average family in their home for a year.
The vast majority have withdrawn because they are in financial hardship or they have created a buffer in case they are in hardship,” Ms Hume said.
“Along with the number of people that have withdrawn the money, there’s an economic theory called revealed preference, so this revealed preference about ‘when I’m in trouble, I need this money now rather than locking it up for 40 years’, that’s pretty powerful.”
It will be a number of years before the full effects of the early access to super scheme can be determined. One thing is very clear. The policy has supercharged the ideological struggle around what the entire purpose of superannuation should be, and has brought in over 3 million Australians as pawns in the fight. Regardless of which ideology wins out, it is they who will really lose out in the end.