Scheme set to destroy many retirement dreams

Superannuation Early Release Scheme presents big issues for future retirees.

Woman is going to break a piggy bank with a hammer

The COVID-19 pandemic has stopped ships and planes, isolated citizens, slowed down economies and eradicated jobs. Governments around the world took unprecedented action to rescue the health of their populations and safeguard their economies.

One of the measures taken by the government here in Australia was the Early Release Scheme (ERS), which allows eligible members of superannuation funds (unemployed, small businesses and others) to get early access to the money held there.

This was capped at $10,000 of their retirement fund before 30 June 2020, and up to another $10,000 in the 202021 financial year.

The scheme is intended to provide additional support to those who needed it most.

This may be likened to a parent, in desperate need for immediate cash, raiding their child’s piggy bank. The piggy bank contents were supposed to be kept in a safe place until sometime in the future. A place for children to add extra dollars to be used for a future cherished purchase.

While the ERS reduced the need for the federal government to provide further supplementary income – saving immediate cash outflow and future government debt – it has deeper consequences for those who have accessed ‘their money’ and for superannuation funds.

A future problem
One obvious effect is that any amounts withdrawn now won’t be available to those members on retirement; and it’s likely that these people will most likely qualify for a higher level of the Age Pension and/or have a lower retirement fund.

At this time, some $15 billion has been withdrawn from superannuation.

Around 40 per cent of applications have been made by people under the age of 30 – this is an average of about $7500 per person under 30 and about $6 billion in total.

But, it also means that these members will effectively lose about $42,000 in their fund at the age of retirement and those members will most likely qualify for a greater portion of the Age Pension.

In the long term, future governments will have the responsibility to fund these shortfalls in retirement benefits, effectively kicking the funding problem into the future.

Another effect is the opportunity cost of allowing the early drawdown of superannuation funds.

The $15 billion that’s already been withdrawn could have grown to $50 billion or more over a 25-year period. This would have allowed superannuation funds to make a range of investments for the general health and wealth of the economy.

If JobKeeper had been extended to cover more of the workforce, then the ERS may have been avoided. The $60 billion miscalculation of the cost of JobKeeper may have saved the $15 billion of withdrawals.

Meeting demand
The early access of super during COVID-19 is a rare event, and superannuation funds have had to face up to systematic risk. This is the risk of dramatic circumstances that affect a whole economy in an unusual way.

The ERS scheme has resulted in a run down of cash and more liquid securities to meet the withdrawals, which has caused the asset allocation to shift to a greater portion of growth style assets.

In order to rebalance, some funds may need to sell growth securities at lower prices ,which will have a flow-on effect on the balances held by other superannuation fund members.

Some funds may have run down their liquid stocks to an uncomfortable level to meet the demand. Although slowing, the second tranche of withdrawals is only weeks away.

An analysis by credit bureau illion and consultancy AlphaBeta of the bank transactions of 13,000 people who withdrew money under the scheme indicated that about 40 per cent had experienced no drop in income during the coronavirus crisis.

The report suggested that those members were able to withdraw money under the scheme because the ATO wasn’t conducting income checks before approving withdrawals.

The same dataset also showed 64 per cent of money withdrawn via the scheme was spent on discretionary goods and debt repayment.

This may have suited the government’s aim to provide funds for people to spend in order to stimulate the flagging economy, but the data set also revealed that 11 per cent of the additional spending was on gambling.

The gender gap
The effect on women may be a lot harsher.

Women, in general, have lower superannuation balances – on average retiring with 31 per cent less than men. So, although women live an average of six to seven years longer than men, they are living with a lower income for a longer period.

As a greater proportion of people in part-time and low-paid jobs are women, some women may have had little choice but to access funds now and let the future look after itself.

Analysis of applications by clients of financial services company AMP shows that women are withdrawing a greater proportion of their super balance as part of the ERS.

On average, women have withdrawn more of their super balances compared with men and 14 per cent of women are clearing out their entire super balance compared to 12 per cent of men.

These withdrawals are widening the gender superannuation gap.

Figures from the Australian Bureau of Statistics (ABS) show that of all the jobs lost in Australia during COVID-19, women made up 55 per cent of the unemployed, and work hours for women have also reduced more than men’s hours.

Women are also more highly represented in those occupations that suffered most during the pandemic and many have desperately needed to access extra funding. However, the long-term consequence will have a far deeper impact on the retirement savings of women.

The gendered impact continues with the recent announcement that free childcare will end – three months earlier than expected – which will place another difficult financial decision on women.

So, it appears that those with a short-sighted view of superannuation, and many women struggling financially during the pandemic, are those who will lose out the most, with a greater financial burden loaded onto the public purse.

Warren McKeown is a teaching fellow in the department of accounting, faculty of business and economics at the University of Melbourne.

Have you needed to raid your super? Or do you believe you may have to in the 202021 financial year? Are you concerned about the implications? 

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    Chris B T
    1st Jul 2020
    The Biggest Problem for Women/Low Deposit Holders in Super Funds, are the Funds eroding their "Nest Egg Funds" with the fees and useless insurance/schemes.Making it difficult to change or Group Funds together.
    My daughter had her fund diminished by the stalling and stupid requests to delay till nothing left.
    A lot of women would be caught out as well as low deposit holders.
    I told her to take out as much as she can but "The Cookie Jar Was Empty"
    1st Jul 2020
    Well people can always cancel the insurances in their superfund. I did when I realised that I would never be claiming on them and I had no debts to pay off and even if I did claim I would be unlikely to get much in anycase as the bar is now so high - not to mention only about 18 months to age pension application age.

    And tou can always lower the insurance amount too. The problem is few people take any interest in their superfund from the day they start contributing to the day they draw it out in retirement.
    1st Jul 2020
    I am not sure if all industry funds are the same, but I worked in the steel industry, you could not cancel the insurance part of your policy, you could reduce it, you had to take a minimum of 4 units, as you got older the amount you would receive diminished quite significantly, eg at age 30 the policy was worth about $1 million, at age 60 the policy was worth about $30 thousand, I guess it was risk based.
    1st Jul 2020
    I cancelled my insurance in my industry fund years ago
    Chris B T
    2nd Jul 2020
    The funds are or were imposing these Insurances/schemes without consent from member of fund and trailing in nature. With young ones and women moving from different work places some 12 to 18 months later they receive a statement with the charges.
    To me a "Fund" can only add these charges with Your Consent Only.
    The employer can be late in processing the Payment to Fund/application, this is also a problem by the delaying information getting to the individual as well.
    All well and good to say cancel the shoddy/worthless insurance when your not made aware of these in the first place.
    1st Jul 2020
    Typical response from the super FAT CATS Industry, they are all crying that there money not ours is being allowed to see the light of day from there greedy paws. I bet the fund managers and hanger ons are all in a state of panic.... LOL

    There fees are the biggest killer of super..especially for women// I watched my wife's modest super be eaten up with fees and charges
    1st Jul 2020
    If you have a super fund taking too much in fees you have the wrong fund. There are big variances in fees across the funds, just need to shop around.
    And I doubt the fund managers are in a state of panic, these withdrawals are a small fraction of the balances held.
    Karl Marx
    1st Jul 2020
    Panos, you forgot to also mention the super far BIGGER FAT CATS retail funds whose only agenda is was to rip off as much as possible from investors to fund their own mega million nest eggs & sometimes this was done illegally
    1st Jul 2020
    I found the killer was not the account keeping fees and charges but the life and accident insurances that continued after I stopped working at a company. Went to consolidate super a couple of years later and found that my $10K or so had reduced to $400!!
    1st Jul 2020
    Our in panic mode, think long term not shot term.A run on toilet paper a run on super just hope we don't get a run on the banks down the track.
    1st Jul 2020
    Don't think that will happen about the banks....No one has any money to create a run on the banks except the wealthy and they are not worried...they are rolling in it.....
    Karl Marx
    1st Jul 2020
    The way Centrelink & the Australian governments operates don't be surprised if down the track they take into account any early release of super & calculate into it interest then add that to your assets so they can pay less pension.
    1st Jul 2020
    Well, labor will prob be in power by then so all will be good!! Plenty of money (borrowed) for all!!
    Karl Marx
    1st Jul 2020
    Doesn't matter who will be in government hyperbole, they will treat pensioners & retirees with the same disdain that has been shown for the past 20 years or more.
    5th Jul 2020
    Labor started this hugely expensive saving vehicle to build a great big financial industry. They also came up with the asset and income test discrimination. I doubt they will help savers as they see them all as the Wealthy who need bringing down a peg or two.
    1st Jul 2020
    The article by W. Mckeown is one of the best articles I"ve ever seen in this forum. Unless you were in dire need of a dollar or two, and I do understand people could be facing bad times and need to provide for their kids and family, I don't see what squandering your hard earned savings will achieve, with the dire consequences of having insufficient retirement funds. Do you need a new car? do you need a better or bigger house? Do you need luxury items you can do without? Is your 55" TV not enough? or do you require a status symbol to impress your neighbours? I don't have statistics on what people spend their super on, but there must be a gullible group who are mentally conditioned over the past 30 years or so to buy anything advertised on TV. I don't watch commercial stations for this reason, but occasionally they might have a documentary or something interesting, so I force myself to watch. Well; the commercial came on. Guess what they were advertising. I couldn't believe my eyes.

    They had a metal cabinet to dry clothes, I remember 50 years ago sold for $30, which I kept in the garage to dry wood glue items. It contained a cabinet exactly the same size as that advertised, with the hype that the cabinet will not only dry clothes, but filter and purify the air. I thought it was an attractive proposition now that winter is here and drying clothes difficult. BLOODY HELL !!!!!!!!!! the advertised price on the side of the add was over $2,900. Seriously, except for the brainwashed gullible zombies, who would buy something you could make for $50 or less? at this price. The advertisers repeated this add ad nauseum. DING! DING! no alarm bells, just soothing sleep music so the add would be welded inside the brain.

    At least I managed a good laugh. I will never switch to that channel again, so there you advertising shonkers.
    1st Jul 2020
    Trouble is JoJozep, it is seldom about 'need' and nearly always about 'want'.
    1st Jul 2020
    The problem is lack of education for a great many; they saw the opportunity, took it whether there was need or not....further down the road they will realise the folly of it all. I wont be around to see it...I dont care what they do!
    5th Jul 2020
    Further down the road they won't see the folly. They'll let the Government take care of them.

    It seems not being responsible for yourself is widespread.

    I read a report from one of the tenants in the public housing in Melbourne locked down. It was all about the Government should have done this for us, or that for us. Working people who couldn't put up a notice in their language in their lift or buy their own mask or antiseptic wipes. It's gone too far.
    6th Jul 2020
    A fool and his money are soon parted, so goes the saying.

    The Government should have stipulated that Super raids must only be used for medical or other emergencies OR for rent or a deposit on a house. Instead, they only saw it as public-funded stimulus, to be spent on any whim, including drug dealings, I'm sure. Betcha plenty of black market crims stood over their dopey clients, threatening them with a beating (or worse, their family's) or their Super in lieu.
    6th Jul 2020
    Rae, you seem to be blaming people for being uneducated or not understanding English. It doesn't help. As a matter of fact it just makes things much worse.

    Do you think the government should be telling everyone in every language that 'news' on the internet is tainted by idiots like Trump? I'd prefer my Gov to go too far by molly-coddling people rather than throwing them to the wolves, as Trump has done to hundreds of thousands of American citizens. He's still refusing to wear a mask and he's still lying about the dangers of COVID-19. I absolutely agree that people should take responsibility for themselves, if they can. But can you blame dumb Americans when their leader acts as he does?

    Leaders in Aboriginal communities have shone through in this pandemic, making sure their local people are educated, safe and protected. A lesson to other groups. Also a lesson to the government, proving that solutions can only be effective when they come from within, not imposed from without through a white lens. This is what the Uluru Statement is asking for - a voice in Parliament on issues that affect their communities. Self-determination.
    1st Jul 2020
    Superannuation is a double edged sword for most wage earners. Its hard to live with the loss of control of your funds, high fees and often poor or biased advice, but its also attractive to have an untaxed income after you retire. My wife and have been retired for some years now; I have a an income stream for life but cannot access any lump sum and my wife had super through a well known retail fund. Several years ago we decided to cash in my wife's super in full and take the untaxed lump sum. We did this to eliminate fees and to take control of our own money. At the time my wife was drawing an annual allocated pension, but most of the annual "return" was the return of her own savings as the fund paid a very low return after fees were deducted. No regrets - we control the money, invest as we choose, still pay no tax and no longer require the services of a financial adviser. Without compulsory saving through super we would not be able to afford our current lifestyle, modest though it is. Industry funds outperform all retail funds and offer lower fees - if we had kept our money in a fund we would have selected one of the better performing industry funds - you know, the ones that the current Morrison LNP government spent years trying to discredit and control!
    1st Jul 2020
    This is all Shit! Look how many people lost a future not so log ago when the stock market crashed and they have a hide to say you are going to loose $$$$ for taking some money out!!! GRAP!
    1st Jul 2020
    I lost more of my own investments in the GFC than I lost in super. Once again I was reminded diversification is your friend when it comes to investments.
    1st Jul 2020
    There is some irony to this whole debacle. Due to the crash in the stock market all funds have had their value reduced, significantly at between 10-20%, so it could be argued that turning your super into cash is smart thinking. Having said that, there is world of difference between both the performance and fees of industry funds and that of retail funds. If you stick with a retail fund good luck, but don't expect any favours and it's your money.
    My wife and I closed our SMSF a couple of years back and placed our dollars with an industry fund. Better returns, after all they are experts in investing, and lower fees after we paid our accountant etc and spent a lot of time studying "the market".
    In our late seventies we are pretty happy with an industry fund with a tax free income and low fees.
    No wonder Scomo and Co hates industry funds they don't get a quid from them and outperform their Retail Fund mates (and donors) by miles. And of course their ideologically opposed to anything introduced by their opponents, whether or not it benefits Australians. No wonder they were keen to reduce the investment in industry funds via the ERS and bugger what happens in the future
    1st Jul 2020
    Excellent analysis Horace.
    Horace Cope
    1st Jul 2020
    "Have you needed to raid your super? Or do you believe you may have to in the 2020–21 financial year? Are you concerned about the implications? "

    No, we have not needed to withdraw from our super nor will we need to in the current financial year. No, I'm not concerned about the implications. What seems to have been overlooked in this article is why the government allowed the withdrawals to be applied for. There is a number of people who have lost their job and have mortgages/rental to meet, food to be bought and utilities to be paid. These are the people for whom the super withdrawals were allowed. There will always be people who will take advantage of any system where money is involved but they are in the minority. Incidentally, the figure of $15B is 0.55% of the balance held in super funds and this doesn't allow for SMSF.

    Sadly, the position of women and their super has been brought up once more. This is done on a regular basis in this forum and whilst women have less in super than men, the reasons are never put forward. There is no pay gap despite the screams of those who make that claim. Industrial awards have not defined any difference in gender for decades so women are paid the same hourly rate as men. For those professional people who negotiate a salary, poor negotiation skills should not form any part of why there may be a salary difference. The erroneous pay gap argument is predicated on tax returns, not pay scales, and it's obvious that if one person works more hours than another then they will have a higher income.

    It also follows that as women have less funds in super because they work less hours then if they withdraw the same amount as men then their withdrawal will be a higher percentage of the balance. Whilst extrapolations have been made to predict the shortfall at retirement age, there has been no suggestion that there may be a legislation change for those wishing to reinstate the amounts withdrawn when the workplace gets back to some normalcy.
    1st Jul 2020
    "any difference in gender for decades so women are paid the same hourly rate as men."

    WOW, what a statement you have made, you are not living in the real world, your so far out of touch with it.
    1st Jul 2020
    Excellent analysis Horace.
    1st Jul 2020
    Horace Cope ABS and WEGA both show a gender pay gap favouring full time working men over full time working men. Of course there are employers who do not discriminate but. many do.
    Your insistence on the contrary is very boring.
    1st Jul 2020
    Interesting the judgemental comment that some used their withdrawal for gambling, - what is investing in the stock market?
    Gambling.- had to chuckle.
    1st Jul 2020
    Have not and will not access my Super. It is for my partner as much as me, when I check out. Have not changed what has been good to me for 10 years and seen it grow.
    Young people just see $$$$$
    1st Jul 2020
    spot on! as I said above lack of financial education. I have not taken any money out of super or sold any shares. I am just riding the pandemic out like a great many others who also saved for the rainy day!
    1st Jul 2020
    Anyone who needed to withdraw funds, should be allowed to “put them back” in future years without penalty.
    Karl Marx
    1st Jul 2020
    You can, it's called salary sacrifice unless you mean to put but in over & above the current $25k annual limit
    1st Jul 2020
    As per above article, approx 60% of ppl who've used ERS to withdraw funds are 30+yr olds. Good on 'em if have no jobs & need to pay for mortgages, food, children & pets, heaps of bills, car upkeep+++ Jobkeeper $750/wk won't pay for all above. Those withdrawals provide peace of mind re not increasing any debts. Also most ppl in their late30s,40s & even 50s have retired "BabyBoomer" parents who have no debts & own their homes (many now worth $1M+) which they will inherit when parents ensurance that these "demonised Super Withdrawers" may only need a part-pension in future - as long as don't have more than 2 or 3 siblings & most importantly, don't alienate their parents!!?
    2nd Jul 2020
    The expected inheritance of assets of Mum and Dad is not a retirement plan!
    2nd Jul 2020
    I am not convinced that waiting for an inheritance is such a bad retirement plan? Surely it cannot be that hard to prevent mum and dad from squandering the family nest egg and preserve the future windfall. The greatest uncertainty is mum and dad not dropping off the perch at the most opportune time and inconveniently hanging on.
    3rd Jul 2020
    Yes, this rotten Government has allowed you to access up to $20,000 of your own money.
    5th Jul 2020
    Many got the money out while it was still there.

    They can still pay off a home over their lives and save a few hundred thousand and get a full aged pension which is appearing to be the better option now anyway.

    If Superannuation funds weren't so expensive to run they'd make more sense but for the bottom three deciles of income earners they do not make any sense at all in my opinion.

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