Allowing Early Access to Super Remains Controversial

Paying Down Debt (and Gambling)

A lot of the money went to paying down credit card debt, which is arguably a good idea even when you take into account the lower super balance at retirement, as long as the withdrawer uses the opportunity to remain more disciplined with their finances.

Unfortunately, that does not seem to have been the case for the majorit,y who already had higher than average credit card debts when they took the option of grabbing the money.

Institute of Family Studies and other academic studies showed that withdrawers were about twice as likely to be behind on debt repayments as non-withdrawers.

That means there was some genuine need for the money but also that those needing the help most already had poor financial discipline which may or may not have been related to the COVID experience.

Those who withdrew also increased their spending on both essential and discretionary items, paid back high-interest debts, boosted their savings, and for a while became less likely to miss debt payments.

The average withdrawer also spent 7% more per month on groceries than the average age- and income-matched non-withdrawer, 12% more on utilities such as gas and electricity, 16% more on discretionary shopping, and 20% more on “entertainment,” a Commonwealth Bank category that includes gambling.

Many also started expensive new buy now, pay later loans to increase their spending power and the withdrawals also helped greatly to turbocharge the property market.

Importantly, however, the cash did not generally provide much long-term relief for their financial situation.

Three-Month Sugar Hit

The withdrawers were less likely to fall behind on debt repayments for the three months after the payment but after three months they became just as likely as their peers to fall behind on paying debts.

The key point here is that giving people early access to their super has both short term and long-term effects.

In the short term, it did provide some relief but after three months the effects were quickly waning.

While for some it was a useful lifeline, for others it was a short-term sugar hit that dealt with the most pressing debts but in just a few months it was back to business as usual.

In the long term, removing up to $20,000 from a lowly taxed superannuation structure was a disaster that it is difficult to overstate.

Analysis by the Super Members Council found that the eventual total bill for Australians of the early release scheme could be as high as $85 billion—mainly due to the higher pension costs of those who withdrew their savings needing to rely more heavily on government support in retirement.

$3k Bill for Average 20-Year-Old

It projected that all current 20-year-olds are projected to pay about $3,000 more tax to cover the higher pension bill caused by the scheme, with the combination of higher pension payments and lower super tax receipts expected to peak at $2.5 billion a year by the mid-2060’s.

The Council’s analysis found that a 30-year-old who withdrew $20,000 from super could have about $93,600 less at retirement—leaving them dramatically worse off in their lifetimes. 

With compound earnings making up three quarters of a super balance at retirement, it will be very difficult to recoup these losses.

As Super Members Council CEO Misha Schubert put it:

“These are the devastating consequences of schemes that break super’s preservation rules. People are left with far less money at retirement, and the next generation – our children and grandchildren – will have to pay higher taxes to pick up the bill for higher pension costs.” 

Dubious Super Ideas

None of this is political commentary—after all, the Labor government has worryingly been speaking for years about encouraging super funds to invest in areas such as renewable energy and housing, while many Coalition MP’s have also been keen to allow people to access their super to buy a home.

Rather it is a warning that the consequences of disrupting the long-term nature of superannuation by allowing early withdrawals are costly and have serious consequences, both for those who withdraw and taxpayers in general.

Amid Australia’s many economic issues such as slow productivity growth and rising government debt, super stands as a rare triumph.

Pension Spending Lags

Unlike other developed nations, our spending on pensions for the elderly is not rising as more baby boomers retire, with Australia spending 2.6% of GDP on pensions compared to the current OECD average of 9%.

ASFA figures predict pension spending will decline from 2.6% to just 2.1% of GDP by 2060, compared to the OECD average which will rise from 9.0% to 10.4% of GDP.

Our super system may be far from perfect, with far too much complexity and poor access to affordable advice, but it is one of just a few farsighted competitive advantages we have as a country.

We have plenty of actual intractable problems politicians could concentrate on – resources taxation, affordable housing, and productivity to name just a few – without going to the bother of coming up with ideas to disrupt one of the few areas in which we are already international leaders.