The presence of COVID-19 around the world has raised many fundamental and critical questions for our society. These include the level of Government support to those in need, the extent of self-reliance, the appropriate level of Government debt, taxation reform and how we work, both now and in the longer term.
One of the measures that the Australian Government introduced during the pandemic is the ability for many Australians to access part of their superannuation during 2020. Indeed, two million Australians have seized this opportunity, which under normal circumstances would not be available.
This experiment raises the question as to whether superannuation should be available more freely to all Australians, possibly for a home deposit, educational expenses or general medical costs. However, such a development would gradually destroy the superannuation system as we know it, and thereby raise the question of what superannuation is for.
Before going into the detail, let’s step back and recognise that superannuation, together with the age pension, forms the backbone of Australia’s retirement income system. These two sources provide most of the regular income received by older Australians.
The primary purpose of the age pension is to alleviate poverty amongst older Australians and provide a modest level of income; that is, less than 30 per cent of the average wage for a single person.
This level of income is not sufficient to support the standard of living that most Australians wish to enjoy during their retirement years. Most of us will retire, and many of us will live for 20 or 30 years (or more) after we leave the paid workforce. Hence, there is a need for superannuation.
In simple terms, super means that a part of our wages is saved for our retirement years.
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The obvious consequence of accessing our super during our working years is that we will have less money in retirement. That is, the more we access before retirement, the less we will have in retirement.
Of course, the obvious question is: what is the right balance between spending now and saving for our future? There is no single answer that is right for everybody. However, given that most people will spend less than 45 years in the workforce, but at least 20 years retired, it is clear that we need to set aside significant funds for the future.
One of the strengths of the Australian super system is that our super money is normally preserved until we retire after age 60 or we reach age 65. Early access to super reduces the benefits of preservation. Whilst the early access arrangements during the COVID-19 pandemic are understandable, it is critical that the Government makes it very clear that there will be no further weakening of the preservation rules.
There are also other consequences of early access to super that go beyond the individual.
First, the investment policies of superannuation funds would need to be reviewed. If members are able to access their super more readily, funds will need to retain a higher level of liquid assets and invest a smaller proportion of their fund in illiquid long-term assets such as infrastructure. Such a development is also likely to lead to lower investment returns affecting all members.
Second, superannuation is a long-term investment and should have a time horizon measured in decades, not months or even years. Early availability of super assets to individuals would inevitably change the mindset and approach of fund trustees towards shorter term goals.
Third, early access inevitably means reduced retirement benefits which will change the future balance between the age pension and superannuation during retirement. With less super, future Government expenditure on the age pension and other means-tested benefits will inevitably be higher.
Fourth, reducing the level of future superannuation benefits is likely to increase the level of inequity between generations. This is particularly important with an ageing population. If there is less super available to provide retirement income, Government costs will increase at the same time as there is a reducing number of taxpayers within the community.
The role of superannuation must be maintained to provide income during retirement. That is its fundamental purpose. Any further tinkering with early access threatens the real benefits provided by superannuation to the detriment of future retirees, investment markets, Government finances and intergenerational equity.