The Australian Business Review
22 May 2020
James Kirby – Wealth Editor
The controversial decision to allow early access to superannuation has lit a fuse. Suddenly everything is on the table. Is the system actually successful? Would investors be better off putting their money elsewhere?
It has also opened doors that were previously shut for the government. Having broken the taboo of “upsetting the super system”, more changes will come. As actuary Michael Rice puts it: “We now have a huge debt and the government will be looking to pay it off, so superannuation will not be as sacred as it was in the past.”
In effect, the super system has been cracked open — a target for everyone on the left and right of public policy but perhaps most squarely in the sights of the Australian Taxation Office.
With $15bn already flowing out of super, there has been consternation around younger people taking out everything they have saved — roughly 100,000 have drained their accounts.
Under the terms of the scheme, anyone of any age can take out a total of $20,000 over the next two financial years.
But perhaps the unexpected dimension of this story so far is the realisation that so few people understand that super is their own money kept locked away in a tax-protected environment until retirement.
In recent weeks I have been running a free Q&A Facebook webcast and it’s alarming that so many people know so little about how the system works. Despite a quarter of a century of mandatory contributions, people who are well versed in property or share investing still don’t realise that super is not an investment choice but a tax framework in which you can make investment choices.
There are highly resilient myths about self-managed super funds: speculation that people “need their super” to access property developments or at worst that they can somehow have a new home through super. (In general, you don’t “need” super for property, you need access to capital. You can’t use your super for your home — the family home is already a tax shelter being exempt as a primary residence from capital gains tax.)
But the questions around early super release schemes are the most intriguing, largely because the subject is brand new.
One recurring question is: “Can you take the money out of super and buy your first home?” The answer here is yes — there are no rules on what you do with the funds. That’s why there have been reports of people using newly released super money for online gambling.
In principle I’ve been against the early release of super because younger people will pay a huge price in the long run for missing out on the compounding effect of investing over their working life.
But now that the early release proposal has become reality, there have been situations where I am forced to consider the issue more deeply.
Until this crisis broke, the biggest issue for younger people is not so much paying mortgages (where interest rates are at historic lows) but getting the deposit for homes.
In some cases a person may well be better off getting $20,000 to complete a deposit on their first home rather than having that money in super. There are benefits in home ownership that spread far wider than we can immediately calculate just as there are some super funds that perform less successfully than others.
Dilemmas in the super system are rarely simple to solve. No wonder policy specialists are now scouring the system for more potential opportunities.
At Pitcher Partners, Brad Twentyman has promoted a proposal that the 9.5 per cent super guarantee contribution could be cut in half during these difficult times so that all workers have more money to spend.
If this proposal was successful while the early release scheme is running, we would have money literally draining out of the front and back end of the super system: is that the best way forward? The debate on these issues will intensify ahead of the release of the Retirement Income Review in July.
Before the government trawls the system for new tax revenue it urgently needs two changes. First, we need a huge improvement in education around the system — it should be taught in schools and in every workplace.
Second, the system needs incentives. There is a black spot for super savings between $400,000 and $700,000 — on a week to week income basis many people in this zone may be better off on a full government pension. This is the biggest failing in the system, it has to be re-engineered.