Early release of superannuation a costly over-reaction

The damage to our savings is going to be more than we thought while the need for early access to super is less than forecast.

Many of those that have withdrawn savings from super under the early access scheme are unlikely to be able to catch back up again.

It’s time to review the runaway success of the early super release scheme.

If the outflows continue at their current pace, the government’s estimate on how much might be withdrawn in total will be woefully inadequate.

Around 2 million people have now voluntarily reduced the amount they have in superannuation by an average of $7500 each.

This group will never “catch up” — they have blown a hole in the nation’s savings for a generation.

At the end of the last full week of the 2020 financial year, $17.1bn had been withdrawn.

The terms of the program are that Australians in financial difficulty can take out up to $10,000 this financial year and another $10,000 next financial year.

If Australians take out as much again in the second round of the program, which starts this week on July 1, the total could swell well beyond the official government estimate of $27bn.

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In fact, the way the numbers are running, early independent forecasts on how much might be withdrawn — such as the $40bn range pencilled in by actuaries Rice Warner — now look feasible as awareness of the scheme becomes widespread.

And it’s worth recalling those estimates were made before the giant JobKeeper program was signed off. “Once JobKeeper was introduced our estimates on early super totals should have been much too high; the concerning issue is that they are not,” says Andrew Boal, CEO at Rice Warner.

Boal is one of a growing number of executives across the finance industry who now believe the program should be reviewed. “At the very least there should be more rigorous checking of eligibility. We should have spot checks and if people did not qualify they should put the money back in the system,” says Boal.

With the benefit of hindsight, we now know that the first weeks of the program in March and April were the worst possible time to withdraw money from super as the investment markets were at the bottom of the current cycle.

Leading superannuation funds have already declared that returns for this financial year will now be largely unchanged, with the losses of March and April recouped in May and June.

The independent research house, SuperRatings, estimated younger Australians using the scheme will pay dearly — a 35 year old taking out the full $20,000 would lose $80,000 in benefits by the time they retired.

Put simply, the scheme is now looking like an over-reaction during the peak of the crisis.

At best it helped some people in exceptionally difficult situations. It occasionally helped first home buyers to fund a mortgage deposit.

It also became an item on the diary for those willing to ‘‘arbitrage’’ the tax system, where individuals arranged their affairs in a way that exploited the salary sacrifice system with money withdrawn under the scheme.

The ATO has announced it will use data-matching technology to police the use of the program, including keeping tabs on who can and who cannot re-contribute money into super using funds withdrawn under the program.

Nobody is denying these are trying times — or that the volume of applicants may slow next financial year. But the government may well regret this move in retrospect since the damage to super savings is going to be more than expected and the need for the program is less than expected in the wake of the JobKeeper scheme.