Interesting modelling from from Rice Warner Consultants, which shows that extracting money from superannuation to facilitate a property purchase will cost in later life and put a greater burden on state pensions down the track.
Universal superannuation was first provided to most Australian employees through industrial awards from 1986 and then via the SG from 1992. The original benefit “award super” was provided in lieu of a national increase in wages. Many members have wanted to get their hands on their deferred pay and there have been constant calls to allow young members to use their accrued super benefits as a housing deposit. Many of those with vested interests in the property industry have been touting the idea ever since.
The superannuation industry has tirelessly pointed out to various governments that the mandatory employer contribution is not sufficient to provide all Australians with a comfortable retirement. That is why, it is planned to increase contributions from the current level of 9.5% of salary to 12% by 2025. Given this, it is nonsensical to dilute retirement benefits further by allowing benefits to be used for other purposes.
The Financial System Inquiry (2014) recognised this and recommended the government adopt the objective of superannuation as providing income in retirement to substitute or supplement the Age Pension. Last November, the Financial Services Minister Kelly O’ Dwyer accepted the FSI recommendation without modification and it will become law as soon as a Senate committee has finished discussing the finer details of how this simple phrase should be worded.
Despite this clear objective, the Assistant Treasurer Michael Sukkar has ignored his own policy and this week suggested that he is reviewing whether young people could use their superannuation benefit as a deposit to buy a home. Perhaps he will regret this when he realises what such an asinine policy would cost future governments in increased Age Pension costs.
This policy would create higher activity and would push up the price of housing as more people compete for the same amount of housing stock. It would benefit real estate agents and mortgage brokers who would get higher commission without needing to do any extra work – one of the consequences of distorting capital markets. State governments would also benefit from the higher stamp duties on inflated house prices. Again, rewarding an inefficient tax.
Self-sufficiency in retirement
We know that current levels of superannuation savings will not make people self-sufficient in retirement. If we look at people who have attained the retirement age, some 45% are currently on a full Age Pension and 31% are on a part pension. That means only 24% are not drawing a government benefit – and some of these are still working.
In 30 years, we estimate that the higher levels of superannuation benefits and a small increase in the pension eligibility age will push down the numbers on a full Age Pension to 33% with a corresponding rise in those on the part pension to 45%. However, the numbers who are self-sufficient will not change much at all. This shows that people will need to put more of their own money into super to become self-sufficient and they certainly cannot afford to take any out before retirement.
We have modelled the impact on a member aged 35 on average earnings taking $100,000 out of their super account to use as a housing deposit. Our young member now loses the power of compound interest and, assuming they only receive SG contributions and don’t top up their super later in life, they will draw an extra $92,000 (present value) in Age Pension payments in their retirement years.
So, the Federal Government allows someone to draw $100,000 and then pays them an extra welfare benefit of $92,000 later in life!
Some have suggested the super fund would simply lend the money to the member and it would be repaid. This would reduce the pain, though the member would still lose out on years of fund earnings – and investment returns make up a much larger component of a retirement benefit than contributions made throughout a career. The fund administrators would also need to keep records of this new activity which will increase fees for all members.
Clearly, there are far cheaper ways of getting people into home ownership, by looking at addressing the supply and demand for housing in our capital cities. Using super as a piecemeal solution is not the way to fix the housing problem.