Australia’s $2.7 trillion superannuation system fighting for its future following early release scheme

Australia’s $2.7 trillion superannuation system has probably never faced so many challenges to its future existence.

Perhaps the greatest challenge comes after the $20,000 super early release scheme, which has so far seen 50,000 Australian totally clean out their super funds and a total of $14.8 billion withdrawn by more than 2 million Australians – with the potential to double those numbers as the new financial year allows for a second wave of applications.

Even more worrying is the analysis of what has happened to these superannuation withdrawals, which were meant to be a last resort for people struggling with a lack of income during the Covid-19 pandemic.

Super release money largely squandered

Analysis by illion and AlphaBeta – part of Accenture – showed that 40% of Australians who had withdrawn super early had either suffered no decrease in income or had received government benefits to cover any loss.

Even worse, the funds were not primarily used to pay down loans but rather two thirds was spent on “discretionary items” including clothing, furniture and alcohol, with more than 10% spent on gambling.

As AlphaBeta founder Andrew Charlton put it, very broad eligibility requirements with “no requirement for any supporting evidence, no income verification and no need to prove that the lost income hadn’t been made up with government support” and the arrival of cash within five days led to the popularity of the scheme.

“For many people, this was a moment of opportunistic spending, rather than an hour of need,” Mr Charlton said.

Super now seen as a magic genie

It is clear to see where this is all heading, with superannuation – which has always been regarded as an “untouchable” retirement income system now being seen as a magic genie, that can produce tax free cash with every rub of the lamp.

While many who have taken advantage of the early withdrawal system claim they will make up the money in their funds down the track, the bald reality is that for most people that will never happen and even if it does, the value of compounding returns will have been lost for some time.

Federal Liberal MP John Alexander is the first of many who are calling for the early super release scheme to be broadened – in this case to help super members buy their own home.

Super now sought to prop up the housing market

Despite being a former chair of a House of Representatives Economics Committee inquiry into home ownership in 2015, Mr Alexander apparently fails to see the very real dangers of such as idea.

Firstly, that it has the potential to artificially inflate house prices and actually worsen housing affordability and secondly that it concentrates superannuation assets into one tiny sliver of the investment landscape – residential real estate.

Any super fund that concentrated its investment portfolio in such a way would be rightly condemned for being financially irresponsible.

Yet Mr Alexander believes that the Australian housing market is in such trouble that it needs the inflow of superannuation money to keep growing.

Even worse, he thinks that the property bought through superannuation could later be used as a line of credit to help fund retirement income – keeping the highly concentrated investment focus well into retirement.

Precedent of early release could lead to rash of further schemes

The real problem with all of this is not that the relatively small percentage of superannuation funds withdrawn through this scheme will kill off the entire system – it is that a precedent has been struck and the purpose of superannuation is seen to have shifted from retirement incomes to a general emergency fund that can be raided at any time for a worthwhile purpose.

There will never be a shortage of such worthwhile purposes but the enthusiasm with which Australians embraced the “magic money genie’’ approach illustrates the obvious dangers.

At its most basic form, superannuation is a form of delayed gratification – you lose a portion of your salary each week but in return you get a tax advantaged retirement fund that has hopefully been boosted enough by investment returns to allow for a much more comfortable retirement.

The lower tax on the super fund compared to ordinary income acts as an incentive to soften the blow of the long term and compulsory loss of some income.

Purpose of super has now been muddled

As much as anything else this super release scheme has muddled that message greatly and it will now be that much easier to gradually disassemble superannuation over time for any number of “worthwhile’’ reasons.

There is no shortage of agitators within the Liberal Party who have no love of the current superannuation system, which they see as largely an instrument of the Labor movement, given the involvement of industry funds and former union leaders.

Indeed, one of the internal arguments in favour of the Royal Commission into banks and superannuation was that it would expose the depth of problems within the industry super funds.

Instead, the spotlight mostly fell on for-profit funds which exhibited a staggering array of high fees, poor investment returns and outright rorts for all to see.

Current super landscape is far from perfect

None of this is to say that the Australian superannuation system as it is currently configured is perfect – far from it.

Investment fees are still broadly too high which is particularly damaging in a low return environment.

Too many super funds still treat their members with contempt and keep them in the dark about what is happening with their money and why.

Too many “default’’ funds are bad choices and there are still examples of people who effectively don’t have a choice about which superannuation fund they choose.

Some of these issues are being addressed with the massive consolidation of super funds offering a partial solution.

The big banks are now effectively out of the industry – with a few exceptions – and the industry funds are consolidating furiously to get benefits of scale.

Much of this change has been driven by the Royal Commission and APRA’s controversial but effective ‘heat map’ which identified the worst performing funds out of 97 default funds examined for returns and costs.

Getting super guarantee up to 12% will be uphill battle

What has become obvious through the early release scheme is that there will now be a battle to get the superannuation guarantee percentage of income lifted from its current 9.5% level to 10% from July 1, 2021.

That super guarantee rate is due to rise to 12.00% by the middle of 2025 but already we have seen the super guarantee schedule slide by seven years and it will be under pressure to slide again, with the main argument being that increasing the super guarantee restricts wage rises.

Even if the wage rise restriction is true – and it is still a matter for debate – there is little doubt that diverting a sliver of extra income into superannuation is in the long and short-term interests of all workers.

It is also in the national interest, given the build-up of the national savings pool is vastly preferable to the sort of ill-disciplined rush of discretionary consumer spending on alcohol and gambling that the early release scheme has led to.