A big part of the Morrison Government’s response to COVID-19 has been allowing people early access to their superannuation. At the same time, compulsory super contributions are legislated to climb from 9.5 per cent of wages to 12 per cent over the next five years.
Many in the super industry argue that these scheduled increases must go ahead to repair the damage done to the super balances of Australians who withdrew some or all of their super during the COVID crisis.
But new Grattan Institute modelling shows that most Australians will have a comfortable retirement even if they’ve spent some of their super early.
Withdrawing super early will cost you less than you might think
Under the Government’s scheme, people who have lost their job, or 20 per cent of their work, were allowed to withdraw up to $10,000 from their super between April and June, and can take out another $10,000 between July and September.
Since April, 2.9 million people have applied for early access to their super, totalling $30.7 billion to date. Over 500,000 Australians have cleared out their super accounts entirely. And Treasury now expects total withdrawals to reach $42 billion by Christmas.
Retirement incomes will fall for workers who have withdrawn their super, but not by as much as you might expect. The government, via higher Age Pension payments, will bear much of the cost.
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.
Someone earning the median wage of about $60,000 today can expect their total super income through retirement to fall by about $80,000 in today’s dollars. But their total retirement income would fall by only $24,000 in today’s dollars, or about $900 each year, because their lower super balance at retirement would be largely offset by larger pension payments.1
The story is a little different for the lowest and highest income earners. They would lose the same amount in accumulated superannuation as a middle-income earner, but receive less extra Age Pension to compensate.
Australians that have withdrawn their super early will still have adequate retirement incomes
System defaults like the rate compulsory super need to be set so they work for most Australians. And while around one in five Australians have accessed their super early, that leaves four in five that haven’t.
Policy makers can only justify forcibly lowering someone’s living standards during their working life – by lifting compulsory super – if we are protecting them from even worse outcomes in retirement.
Nonetheless, our modelling shows that Australians can look forward to a comfortable retirement with compulsory super contributions of 9.5 per cent, even if they take the full $20,000 from their super.
Workers on all but the highest incomes will retire on incomes at least 70 per cent of their pre-retirement (post-tax) earnings – the so-called ‘replacement rate’ benchmark used by the OECD and others.
The median worker earning around $60,000 who takes out $20,000 in super at age 35 would see their replacement rate fall from 89 per cent to 88 per cent, assuming compulsory super stays at 9.5 per cent, still well above the 70 per cent benchmark.2
Even if COVID means they remain unemployed for the next three years, making no super contributions, that worker would still end up with a retirement income of 86 per cent of what they earned in the years before retirement. And the more than 500,000 Australians that have emptied their super accounts completely, the impact on their retirement incomes is likely to be smaller since they have, by definition, withdrawn less than $20,000.
Retirement incomes would also remain adequate even for the many Australians who access their super early and work part-time or go on to take significant career breaks, such as to care for children. For example, someone who works for 32 years at the median income, and takes out $20,000 in super, will see their retirement income drop from 87 per cent to 85 per cent of their pre-retirement earnings. A median worker that only works 27 years and takes $20,000 in super would see their retirement income fall from 84 per cent to 81 per cent of their pre-retirement earnings.
The prospect of lower super returns – more likely because of the COVID recession – barely alters these findings.3 The reason is simple: for many Australians, most of what they lose in less accumulated super is made up for via larger Age Pension payments.
Many low-income workers will still receive a pay rise when they retire, even if they withdraw the full $20,000 from their super today.
Of course, some low-income Australians remain at risk of poverty in retirement – especially those who rent. But struggle even more before they retire.
And boosting Rent Assistance would do far more than higher compulsory super to help these vulnerable Australians, and without reducing their take-home pay before they retire as higher compulsory super would.
COVID-19 is just one more reason why compulsory super shouldn’t rise
Before COVID-19, there were good reasons to abandon the planned increases in compulsory super. COVID-19 is just one more reason.
Higher compulsory super would reduce workers’ take-home pay and do little to boost the retirement incomes of many Australians, while widening the gender gap in retirement incomes. The Government’s early release scheme does nothing to change that story.
The government will bear much of the cost of the super early release scheme via higher pension payments when today’s workers retire.
But raising compulsory super to 12 per cent would make the problem worse, since higher super costs the budget more in extra super tax breaks than it saves in lower Age Pension spending for decades to come.4 It’s a $2 billion a year hit to the budget once super hits 12 per cent, and those extra super tax breaks skew heavily to the wealthiest 20 per cent of Australian workers.
But most importantly, higher compulsory super would also exacerbate the economic problems caused by COVID-19. Past Grattan work has shown that higher super comes at the expense of workers’ wages. And the Reserve Bank agrees: it’s forecasting lower growth in wages next year when compulsory super begins to rise.
Scheduled increases will see household savings rise at a time when aggregate demand is weak.
Raising super in the midst of a deep recession would only slow the pace of economic recovery. And that would be bad news for all Australians, regardless of the size of their super account.
Co Authors :
- All figures in this post assume compulsory super contributions remain at 9.5 per cent of wages. A previous post estimated the annual hit to retirement incomes from withdrawing $20,000 in super for a median worker aged 35 at $800 a year or $20,000 over their entire retirement, assuming compulsory super contributions increase to 12 per cent as currently legislated.
- All figures in this post assume workers own their homes in retirement. For replacement rate projections for renters see our Balancing Act working paper. Workers in their 40s and 50s can expect to replace an even higher share of their pre-retirement incomes. While they will have accumulated less super, the Age Pension will replace a larger of their pre-retirement incomes.
- Grattan assumes nominal investment returns of 7.5 per cent during working life and 6.5 per cent during retirement (before fees), substantially lower than the average returns enjoyed by superannuation fund members in recent years. If returns are 1 per cent lower on average the replacement rate for the median worker falls by around 3 percentage points, and remain well above the 70 per cent benchmark.
- Treasury analysis in 2013 estimated that the revenue foregone from superannuation tax breaks as a result of moving to a 12 per cent Super Guarantee, together with past increases in the Super Guarantee, exceed the budgetary savings from lower Age Pension spending by 0.4 per cent of GDP a year. Eventually – by 2050 – the net budgetary cost of super tax breaks will “only” be 0.2 per cent of GDP a year. Recent changes to curb super tax breaks and tighten the Age Pension assets test will reduce the annual budgetary cost of support for retirement incomes by around 0.1 per cent of GDP