Early access to superannuation has formed part of the Morrison Government’s support package to help households get through the economic fallout caused by COVID-19. This proposal creates a number of risks both for superannuants and the broader economy.
This is the most widely identified hazard of the proposal. Individuals withdrawing part (or all) of their superannuation now will be doing so at the bottom of the cycle and will crystalize the losses that the funds have experienced over the last month. They will therefore miss-out on the rebound in asset prices that is expected as normality returns.
Analysis by Industry Super Australia shows that a 40 year old who accesses the full $20,000 could lose more than $63,000 from their retirement balance. For a 20-year old, that loss could be more than $120,000.
The first problem is compounded for other members of the funds. Superannuation is intended to operate as a long-term investment vehicle. The majority of funds have their money locked in assets like infrastructure, property, bonds and stocks. Some funds may have to sell assets – at the bottom of the market – to allow for this unexpected access. Those with sufficient liquidity to cover the cash call then won’t be able to use these reserves to purchase under-priced assets which would assist in their recovery.
While it is the government’s intention that the ATO handle and verify applications for early access, the super funds, which currently only manage payouts in limited and strictly controlled ways, will also bear significant administrative costs. These costs will likely be absorbed by the whole fund, costing everybody.
Since compulsory superannuation was set up to group workers from the same industry into similar funds, workers in the retail and hospitality funds will see their funds most significantly impacted. This would compound the injustice of the crisis, with the workers in industries most affected by COVID-19 experiencing a long term hit to their superannuation funds, irrespective of their personal decision to withdraw their funds.
If severely impacted funds are forced to sell assets, this policy will exacerbate an unnecessary divide within our community by generating an even bigger buying opportunity for households and funds that have been less directly impacted by the crisis.
Even though APRA has advised the government that “they do not expect this initiative to have a significant impact on the industry overall”, it would be imprudent to dismiss as inconsequential the concentrated impacts on funds impacted by this significant and rapid reversal in established policy.
As part of the Government’s economic response, the mandatory drawdown rates for retirees has been halved. As the Prime Minister has explained, this is to ensure “if you’re a self-funded retiree that you aren’t forced to pull money out in the middle of a bad market”.
Yet not only will early access cause working Australians to pull money out in the middle of a bad market, it risks exacerbating the market downturn for retirees and undermining the relief provided by halving the drawdown rate.
One of the biggest long-term risks with this policy is that it starts to treat superannuation accounts like regular bank accounts, even if they are only drawn upon when there’s an economic crisis.
The more we want our superannuation accounts to act like a bank account, the more it will deliver bank account-like returns: in 2018 term deposits were paying on average 2.4% for 1-year term or 2.75 for 5-years as compared to the long term average return of superannuation funds of 5.2% which is locked away until we retire.
Responsible funds will now need to alter their investment mix and include a higher degree of liquidity for the next emergency, possibly even the latter stages of this one (the current response is scalable after all).
If Australians accept that we go down this path, then we have to be prepared to accept the lower returns that come with it.
It’s not just superannuation funds that will behave differently. The ability to access super early will reshape the financial decisions of Australians themselves, who will now have the expectation that governments will let them access their superannuation if an economic crisis hits.
For some Australians, this might mean thinking even less about how they plan their finances. For others, it could mean deliberately taking on more leverage on the expectation they can fall back on their superannuation to bridge any repayments.
This creates an increased risk of financial contagion. Superannuation has acted as a buffer in financial markets by helping to segregate our immediate financial needs and decisions from our long-term ones, providing a source of reliability and stability. Mixing superannuation in with all the other assets households can use in a time of crisis removes that buffer and makes the superannuation sector more susceptible to shocks than it has been to date.
Some commentators in favour of withdrawing super early have argued it is a way to provide stimulus without risking a serious budget deficit. But avoiding adding to government debt levels in the short-term is not that same as avoiding creating new liabilities for the Federal Government, which this policy will still do.
This will largely come in the form of a higher aged pension bill, as demonstrated by the Grattan Institute, and lower revenue from the 15% tax on superannuation earnings (caused by lower balances and lower returns).
Put simply, early access to super does not offer taxpayers a cost-free alternative to direct government support.
Households don’t just help our economy by spending – their savings are an important source of capital for Australian businesses. Superannuation plays an ever growing role here.
In recent years, Australian superannuation funds have been increasing their appetite to lend directly to businesses and are helping to increase the level of locally-available debt funding.
If superannuation funds are expected to play a larger role in supporting short-term consumption, they well have less capacity to support businesses in this way.
As we get over this immediate crisis, this policy will mean less long-term capital available for businesses looking to invest and drive growth.
The Morrison Government has nominated two design principles for its economic response: to “deliver them through existing systems and mechanisms” and that they “scalable and sustainable”.
The long queues outside Centrelink offices and the crashing of the MyGov website highlight how challenging delivering timely support can be, even for a Government agency designed to do just that.
In contrast, superannuation funds haven’t been called upon to support working-age members in this way during previous economic crises. Although there are provisions for early access, these have been less 75,000 spread across all funds and a full financial year, a fraction of the 2.7 million applications the government itself is predicting. Making the ATO responsible for administering applications is the right call for reducing some implementation risks, but it doesn’t remove the workload on the funds nor eliminate the possibility of the payments going to the wrong people.
As for scalability, perhaps the biggest compliance risk is that the program turns out to be too scalable and taken up by too many people, including those not envisaged by the government. This would exacerbate the liquidity problems described earlier and introduce a level of systemic risk that the government would undoubtedly want to avoid. It is the self-assessed nature of this policy that makes this risk all too real, though the ATO can help limit it further by publishing guidance of its planned post-compliance activities and the size of proposed penalties.
The Prime Minister and other Ministers should further stress that early super access should be limited to those in real need, and highlight the penalties for inappropriate access. Further the announcement of the Job Keeper Allowance, which should help reduce the need for many Australians to call on their superannuation, makes a scale-back of early access responsible and proportionate.
Ultimately, all Australians have a role to play in minimising the impacts of this policy. If you can survive without accessing your superannuation, don’t access it. If you’re the beneficiary of other forms of taxpayer support, think twice before you make the financial situation worse for other members in your fund.
If we all treat early access as an option of last resort, then we will be helping strengthen our economy and ensure support is available for those who truly have no choice.
James Pawluk was a senior advisor to the Minister for Human Services during the Global Financial Crisis. Rachel Nolan is a former Queensland Finance Minister. Both are Executive Directors at the McKell Institute.