The superannuation early withdrawal scheme was arguably the most controversial of the Australian Federal Government’s measures to combat the COVID-19 pandemic.
The reactions ranged all of the way from former Prime Minister Paul Keating’s claim that vulnerable people had been forced into “ratting their own savings” to Victorian MP Tim Wilson who said it helped young Australians “realise their super needn’t be controlled by a faceless fund manager’’.
They are both entitled to their opinions, but the reality seems to lie somewhere in the middle, with official figures showing that many who withdrew their super early were reasonably sensible in how they spent the money.
Most withdrawals went to pay debts, bills, rent and savings
There is no doubt that some of the cash was splurged on gambling, clothing, furniture and alcohol.
However, Australian Bureau of Statistics (ABS) figures show that the vast majority of that $36.4 billion was used to pay mortgages, rent, personal debts or other household bills.
With interest rates on credit cards and personal loans still above 20% in many cases, it could be argued that individuals may have even outperformed what they could have achieved within super – assuming they manage to re-contribute what they withdrew to bolster their retirement fund over time.
The ABS stats showed that 29% of those who withdrew super used it to pay their mortgage or rent, while 27% used it for household bills and 15% used it to pay down credit card or personal debts and 13% added the cash to their savings.
That means the vast bulk of the average $17,441 withdrawal went to understandable and reasonably responsible spending on debts, shelter, bills or savings.
The pandemic is not over yet
It is worth remembering that the full impact of the pandemic is not over yet, with JobKeeper payments ceasing at the end of March and not yet reflected in the unemployment figures – not to mention the chances that COVID-19 could still wreak plenty of damage in Australia due to our very low immunisation levels and the chances of further outbreaks with highly infectious strains cropping up.
In that context, even the 13% who added to their savings effectively have a sort of financial back up plan, even though current interest rates hardly make now an encouraging time to be a saver.
While the other contributions to paying off debts will also add to household resilience should there be further shocks such as unemployment or reduced hours.
There is a considerable complication though, with an estimated half a million young Australians now having drained their super all the way to zero.
How to get a zero super balance back on track
Given the average withdrawal was $17,441, that leaves these young people with a considerable task ahead of them to bump their retirement savings back up to where they were – particularly if they want to also compensate for lost super earnings in the interim.
Like all investment challenges, this one is best approached by combining the effects of automatic payments with time and tax advantages to end up with a successful strategy.
The long established but under-used strategy of salary sacrifice is best suited to this reflation project.
Salary sacrifice can reduce tax and boost super
Upping weekly super payments by “sacrificing’’ some salary, the super balance can be boosted over time and depending on the individual’s tax rate, the net amount of salary received each week will not fall by as much as is being contributed to super.
By leaving the salary sacrifice in place longer than required to make up the amount of super that has been withdrawn, the super earnings that were missed by making withdrawals can also be compensated for.
Spouse contributions and co-contributions can also be claimed where applicable, boosting the ability to catch up on reduced super balances.
It may take quite a few years but a super salary sacrifice strategy may enable young workers to save their COVID-19 cake and eat it as well.