One of the main pillars of support for workers during the very painful COVID-19 pandemic has been the ability to access up to $20,000 of superannuation to meet urgent living expenses.
It is a strategy that has attracted a lot of support and a lot of critics but it has proved highly popular as more than 2.6 million Australians have got early access to $32.5 billion of superannuation.
The final total now expected to reach at least $42 billion as more financially strapped Victorians lose their jobs.
The arguments for early access – and for a potential third payment of $10,000 – are likely to have strengthened due to the employment killing stage four lockdown in Victoria which has now led the Reserve Bank to raise its unemployment expectations to a peak of 10 per cent in December 2020.
Super battle mainly on party lines
While much of the dissent is along political lines, there is also strong disagreement on policy grounds which basically split into the pro-super camp who want the superannuation system strengthened with salary deductions rising over time to 12% and the anti-super camp, who want superannuation gradually dismantled or shrunk over time.
One of the groups in the second camp is the Grattan Institute, which have just released research showing that the typical worker would only see a fall in their retirement income of just over 1% if they took out the full $20,000 allowed under the early super release scheme.
Economist Brendan Coates said the reason the withdrawals will prove to be so trivial to retirement incomes is that much of the fall in super income in retirement for middle-income earners is made up for by increased pension payments
Withdrawals won’t harm retirement incomes
The Grattan Institute report found that a 35-year-old worker on the median wage of around $60,000 a year who took out the full $20,000 would retire with a super balance that was about $58,000 lower, in today’s dollars, due to the lost earnings from those savings.
However, in income terms that worker would end up just $900 a year worse-off in retirement, despite having an extra $20,000 in cash now.
“The reason is simple: for many Australians, most of what they lose in less accumulated super is made up for via larger age pension payments,” he said.
“Many low-income workers will still receive a pay rise when they retire, even if they withdraw the full $20,000 from their super today.”
Of course, the major flaw in this argument is that it assumes that the Age Pension remains in place exactly as it is now – a fairly dangerous assumption for anyone contemplating retirement several decades into the future.
Keating says workers forced to “rat” their own savings
The anti-super approach has been rubbished by one of the architects of the super system, former PM Paul Keating who slammed the early withdrawal scheme, saying it is income support by “people ratting their own savings”.
“Of the income support in Australia to date during the COVID crisis, $32 billion has been found and paid for by the most vulnerable, lowest-paid people in the country,” Mr Keating said.
“And $30 billion has been provided by the Commonwealth under JobKeeper [so far].
“The main burden of income support is people ratting their own savings.”
Legislated super and a third withdrawal the next super battleground
This battle over what is already happening in the form of super withdrawals brings into sharp focus the two big battles still to come – moves to have a third super withdrawal and also to reduce or cancel the legislated future super increases which are currently planned to increase the 9.5% of salary deducted up to 12% by 2025.
The rate is scheduled to rise to 10% in July next year and gradually increase until it reaches 12% by July 2025.
Hume denies super cleanout and says young hit by crisis
Assistant minister for superannuation Jane Hume has denied Mr Keating’s claims and has given qualified support to continuing the super increases, saying it would be “very difficult to unwind” the legislated increases.
She questioned the unofficial estimates that 590,000 young people are now without super, saying that some claimants may have drawn down on the balance of dormant duplicate accounts and that up to 320,000 temporary visa holders have drawn down on their super savings that would have been cleaned out anyway when they left the country.
“This financial crisis has disproportionately affected young people and people in their early 20s are likely to have a small amount in super, so that would not be surprising, said Ms Hume.
“What is a surprise is the alarmist rhetoric that is being accompanied with release of unsubstantiated statistics.”
She said it was “extraordinary that a man in a Zegna suit on a generous parliamentary pension’’ was sneering at the “decisions made by ordinary Australians who are facing some of the most challenging economic circumstances we’ve ever seen.”
Ms Hume defended Australians’ use of their super to pay bills, pay down debt and “build financial resilience” but would not directly rule out the possibility of a third tranche of withdrawals – an action some including Industry Superannuation Australia chair, Greg Combet, see as the next attack on the superannuation system.
The major argument used against the legislated increases in superannuation is that they will lead to smaller wage rises.
Mr Coates said previous Grattan Institute research has shown that the current 9.5% compulsory contributions are more than adequate to fund a comfortable retirement for most workers, and that around 80 per cent of the increase in contributions would be funded via lower wage growth.
“Past Grattan work has shown that higher super comes at the expense of workers’ wages,” he said.
“And the Reserve Bank agrees: it’s forecasting lower growth in wages next year when compulsory super begins to rise.”
Mr Coates said it was particularly bad timing that lower wage rises would be coming at the same time as workers were trying to recover from the COVID-19 induced recession.
“Raising super in the midst of a deep recession would only slow the pace of economic recovery. And that would be bad news for all Australians, regardless of the size of their super account,” he said.
Some good news for super balances
Despite all of the gloomy predictions about superannuation, there is at least some good news that will unexpectedly boost the accounts of many Australian workers by up to $2 billion.
The amnesty scheme allows employers to repay missed superannuation payments before September 7, and many employers are expected to seize the chance to avoid heavy penalties that will apply once the amnesty is over.
Even if businesses are in a difficult financial position to make good missed super payments, it is possible to instigate a payment plan before the amnesty expires.
The Australian Tax Office has now written to 860,000 businesses reminding them of the looming deadline for the program which allows businesses declare they have failed to pay their employees their correct super amounts during their employment.
Businesses that take part in the amnesty can either repay the unpaid amounts of superannuation in full with interest or be put on a repayment plan to repay the money.