As the Federal election approaches, the superannuation industry will need to become more active in defending its preservation model, particularly against those who want to tap into it for housing.
While preserving superannuation savings until retirement is a key feature of the compulsory system, which has been in place in Australia for more than thirty years, the Liberal Party’s platform of allowing people to pull as much as $50,000 out of their super for a deposit on a home is gaining traction.
NSW Liberal Senator and Opposition shadow assistant minister for home ownership, Andrew Bragg, is gaining momentum with his focus on the housing crisis, with early access to super being one of his party’s key planks.
While many in the super sector see it as an election gimmick that would not provide much real help to struggling home buyers, the sector needs to be increasingly vigilant in countering the super versus housing debate.
The superannuation sector, which now controls almost $4 trillion in assets, has become part of the financial establishment in Australia but the housing crisis is fuelling a new challenge for it to justify its current operating model.
There are two aspects of the debate: whether there should be early access to super to solve social issues (such as housing or getting through the pandemic); and whether buying a house is a better long-term form of saving than putting money in super.
The compulsory super system was based around ordinary Australians having both – their own home, plus a superannuation savings pot available when they retire.
But the housing crisis, particularly in major cities, has shifted the debate in recent years, with some now seeing the issue as either/or, with the proposed early withdrawal from super for a deposit being the first step in swinging the pendulum back towards the prioritising housing over superannuation savings.
Some months ago, I wrote a column pointing out that superannuation is increasingly being seen as a honey pot to solve social ills. If the Liberals win government at the next election this will pave the way for the next step.
Astute campaigning
The escalating housing crisis and the approach of the election, along with astute political campaigning by Bragg, a former executive with the Financial Services Council, is shifting the dial even more.
The Super Members Council has sought to counter the argument with a recent paper entitled “Securing Australia’s super-powered future.”
The paper sets out a range of arguments against the Opposition’s policy of accessing super for a housing deposit.
It argues that allowing people to withdraw up to $50,000 from super is “unlikely to be the difference between home ownership or not” and could actually push up housing prices even further.
It estimates that, at best, having access to $50,000 will allow a potential buyer to bring forward their housing purchase by two years, but that allowing early access to super for home deposits could raise the median house price in capital cities in Australia by nine per cent.
It would also increase median rents by $3000 a year as investors who put their properties out for rent increase their charges to tenants to cover the higher purchase price.
It also points out that having to meet requests from members for early access to super for a home deposit will force super funds to hold more liquidity, reducing investment returns.
It points to the experience in New Zealand where the KiwiSaver scheme, which was set up in 2007, has allowed access to the scheme for first home buyers.
It argues that the experience in New Zealand highlights the potential impact of such a move in Australia on investment returns with KiwiSaver returns showing returns of 0.79 per cent a year lower than My Super options in Australia over the past 10 years.
The paper also points out that housing costs in New Zealand have increased at a rate nearly double that in Australia in the years since early access to super for housing was introduced.
By 2023, it says, the median house price in New Zealand rose by 130 per cent on 2010 prices, while the median housing price in Australia only rose by 71 per cent over the same period.
Long-term benefits of compulsion
The paper points out the long-term benefits of the compulsory super system in providing a pool of capital for infrastructure investments, pointing out that the system is estimated to inject some $180 billion a year into the economy over the next five years.
But when it comes to the electorate, the focus will be on the specifics of whether someone would be better off taking money out of super to fund the deposit on a home, or keeping it in super.
The paper undertakes modelling which it says shows that a couple who withdrew a combined $55,000 from their super at the age of 30 and bought a home two years earlier than they otherwise would have, would have $165,400 less in “lifetime disposable income after housing costs”.
It has made the calculation taking into account the higher cost of housing, including higher mortgage repayments, if the early access scheme was allowed, as well as the lower income from having a lower superannuation balance at retirement.
That model has many assumptions and conditions would vary dramatically depending on the member’s personal situation and how much the housing market rose over the 30 years after they bought a house.
It is far from being a rock-solid argument, given the need for a range of assumptions and the vastly different potential situations, including home price growth.
At its heart is the Council’s argument that having access to super to fund a deposit “is unlikely to be the difference between home ownership or not and is therefore unlikely to lead to a material increase in home ownership rates for individuals as measured in retirement.”
This is a big assumption.
For some people in areas where house prices are not too high, having access to $50,000 to fund a deposit could make a significant difference.
Politically, the easy policy of allowing young home buyers to dip into their super could prove to be very attractive to the electorate.
Potential beneficiaries certainly won’t be doing the modelling that SMC has done – with many wanting the secure cash bird-in-the-hand as opposed to finding out they may have been better off keeping it in super.
There is also the “thin edge of the wedge” argument that allowing home buyers to take money out of super for housing will pave the way for other ideas for early access to the system, undermining one of its key features – the trade-off of tax deductions in return for preservation.
It is a complex argument where the inherent virtues of compulsory superannuation over home ownership cannot be taken for granted by the sector.
It is a debate that will heat up, and those in the sector need to think hard about defending superannuation preservation but also being able to debate the super-versus-housing issue on its merits.
