Scheme set to destroy retirement dreams

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One obvious effect is that any amounts withdrawn now won’t be available to those members on retirement; and it’s likely that these people will most likely qualify for a higher level of the Age Pension and/or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At this time, some $15 billion has been withdrawn from superannuation.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The $15 billion that’s already been withdrawn could have grown to $50 billion or more over a 25-year period.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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