The Prime Minister has announced that people who lose their jobs or have their hours cut because of the COVID-19 crisis will be able to take up to $20,000 from their super accounts – $10,000 this year and a further $10,000 next year.1 It’s a good move. It will put money in the hands of people when they need it most. Retirement incomes would fall if workers withdraw their super, but not by as much as you might expect, especially for middle-income earners. Instead it’s government, via higher Age Pension payments, that could bear much of the cost.
Early withdrawals may not mean big falls in retirement incomes
Our modelling suggests that a 35-year-old who takes the full $20,000 allowed from their super will see their balance at retirement fall by around $58,000.2 For someone earning the median wage of about $60,000 today, they can expect their total super income through retirement to fall by around $80,000 in today’s dollars. But their total retirement income would fall by only $20,000 in today’s dollars, or around $800 each year.3 The Age Pension is means tested – the higher your super balance, the less pension you get. So workers who take money from their super will lower their super balance at retirement, but they will receive more Age Pension – helping to soften the blow.
The story is a little different for high-income earners. The total retirement income of a worker earning around $110,000 a year today (more than 90 per of workers of that age) would fall by around $70,000, or around $2,700 a year, if they withdrew the full $20,000 from their super over the next few months. They would lose the same amount in superannuation as a middle-income earner, but receive less Age Pension to compensate, since they’re ineligible to receive an Age Pension for most or all of their retirement.
Of course, many workers would be withdrawing their super at a bad time: the value of the ASX 200 has already fallen by about 40 per cent in the past month. If markets recover next year, that $20,000 in withdrawn super could soon enough be worth about $30,000 again. If that’s the case then the hit to retirement incomes is larger: $33,000 over the course of retirement for the median worker and $106,000 for a worker at the 90th percentile of all wage earners. 4 But for many Australians facing bankruptcy in the coming months, it’s a trade-off that may well still be worth it.
Putting cash in people’s pockets now is the priority
Australians are in the middle of an enormous liquidity crunch due to COVID-19. More businesses are closing by the hour. Casual workers will be particularly hard hit, but many part-time and full-time employees will soon become unemployed or have their hours reduced.
Most workers, including many on middle and high incomes, don’t have much money in the bank for a rainy day. Half of Australian working households – those with at least one employed person – have less than $7,000 in the bank, including mortgage offset accounts. About 20 per cent have less than $500.
The Government is temporarily doubling the rate of Newstart and accelerating people’s access to the payment by relaxing the assets test. But even a higher rate of Newstart won’t cover many people’s costs, especially people who are on higher incomes. Even at the top, about 40 per cent of the highest fifth of income earners have less than 4 weeks’ income in the bank.
Diverting superannuation money from retirement into Australians’ wallets today is not without cost. But it will put money into the hands of people when they most need it. And they need it now.
Co Authors :
- Affected workers will be able to apply online through myGov to access up to $10,000 of their superannuation before 1 July 2020. They will also be able to access up to a further $10,000 from 1 July 2020 for approximately three months.
- At age 67 years. Assumes nominal returns of 6.65 per cent after fees; inflation of 2.5 per cent; and an effective tax on super earnings of 8 per cent in the accumulation phase. See our Balance Act working paper for our full set of retirement modelling assumptions.
- All figures adjusted to today’s dollars assuming inflation of 2.5 per cent. All other retirement income modelling assumptions as per Grattan Institute’s 2020 Balancing Act working paper.
- In this scenario we assume that workers effectively withdraw $30,000 from superannuation, rather than $20,000. We also do not model the effect of the unemployment that most people who access their super will be experiencing. However, previous Grattan work shows that even 5, 10, or 15-year career breaks have only a small effect on retirement incomes. Lower super savings are offset by higher retirement incomes.