Superannuation versus housing: robbing one to pay another is silly

Letting people withdraw their superannuation for a home deposit may sound generous, but the idea fails on two key fronts.

Home ownership is vital, but stealing your own super isn’t the answer. Picture: iStock

It’s sad to see plans to get more young adults into their first home being split along political party lines, especially when everyone wants the same thing: more homeowners.

The Liberals recently reaffirmed their commitment to allow superannuation withdrawals for a home deposit. It was a policy they took to the last federal election – letting people take out up to 40 per cent of their super up to a maximum $50,000 – to help them buy their first home.

Predictably Labor doesn’t like this idea, and neither does the superannuation industry that watched people strip up to $20,000 each from their funds through the Coalition’s Covid-19 early release program. The industry has voiced its disappointment about super being used as a political football again and warned another round of early release won’t work for most people.

They are right. Allowing people to dip into their super again – so soon after Covid – is unlikely to work as well as the Liberals might think.

A house or a superannuation nest egg? People should be able to have both. Picture: iStock

The key reason for this is that most young adults simply don’t have enough money in superannuation to make a difference.

Their balances weren’t big even before the Covid early release scheme, where more than three million people were approved to withdraw almost $38bn from their nest eggs to help with living costs during the pandemic. Many ended up reducing their entire super balance back to zero.

New figures from the Australian Taxation Office show the median super fund balance of people aged 25-29 is $17,545 for males and $17,840 for females. For 30-34 year olds it’s $39,796 for males and $34,327 for females, and for 35-39 year olds it’s $70,181 and $54,391 respectively.

None of those super fund members could get anywhere near withdrawing the $50,000 maximum the Libs would allow. Grabbing 40 per cent of the highest median balances among the above data – males approaching 40 – equates to just $28,000, not much in a nation where the national median house price is now $1.03m and the median price for other dwellings is $671,000.

The super industry has argued the Liberal plan will only benefit people with big super balances, who are more likely to be higher income earners able to save a deposit themselves, or have help from wealthy parents or grandparents.

A big worry for me, a finance nerd who supports superannuation as a great way to grow wealth, is that it could seriously dent peoples’ enjoyment later in life. Super is the key difference between living a comfortable retirement for decades or just scraping by on the age pension.

Home ownership is a brilliant goal for any young adult and people should seek all the help they can through government incentives and family assistance where possible to get a foot in the door.

But doing this at the expense of most people’s second biggest asset, their super, is dangerous.

The power of compound interest works wonderfully well over a working life and $20,000 withdrawn decades early will lose the potential to grow to more than $325,000 over 40 years.

More needs to be done to help people get into the housing market, but decimating already-small super balances should not be the answer.

Originally published as Superannuation versus housing: robbing one to pay another is silly