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Buy high, sell low: early super access and foregone returns

with Connor Wherrett and Edward Cavanough

 

In response to the COVID-19 pandemic, the Government allowed individuals affected to access up to a total of $20,000 from their superannuation. During the course of 2020, over three million Australians withdrew a total of $36.4 billion out of their super accounts. In March, the Institute published 9 reasons why accessing super early is a risky idea. A key reason why was our concern that the policy drives people to sell at the bottom of the market. Unfortunately, that appears to have been the case.

Why some Australians withdrew their super

During the course of the scheme, there was concern that the early access to super was used on gambling, as well as other purposes that the scheme wasn’t intended for. According to ABS data published April 2021, early access of superannuation was utilised by Australians for paying their mortgage, rent, bills, or paying down person debt obligations.

Figure 1: People withdrew from their superannuation accounts for payments  they should have been able to defer

Source: ABS Household financial resources Get the data Created with Datawrapper

The ABS and the Government greeted this statistic with celebration as a demonstration of the necessity of the scheme. However, these statistics are problematic. Australians shouldn’t have to withdraw from their super to meet these financial obligations. If Australians were struggling with mortgages, bills or credit cards during a pandemic, there should have been economic stimulus and a secure social safety net to provide for them.

Super funds have made a massive recovery since their bottom in April

Australian super funds, like the Australian economy generally, have made a healthy recovery from the lows of the pandemic. Compared to January 1, 2020– most leading super funds have now recovered up to 20% higher than that position, recovering from a temporary decline of 10-15% during the COVID-19 pandemic. 

Figure 2: Super funds indexes have now exceeded their pre-pandemic levels

Chart: Connor Wherrett Source: Get the data Created with Datawrapper

The investment performance in this chart represents an average of three of Australia’s most popular super funds. As shown, the early access to superannuation scheme was open for withdrawals in late April 2020, during the few months at the bottom of the market.

Australians who made super withdrawals have foregone this market gain

Any Australian who took part in the early access scheme has foregone this market recovery on the amount that they withdrew.

According to ABS figures, the average withdrawals were $7,728 and $7,536. McKell Institute estimates calculate that if an individual withdrew these figures at their first opportunity, they have foregone $2,420 in returns from market growth.

Similarly, an individual who withdrew the maximum allowable of $20,000 has already foregone $3,164 of additional savings. Another way of conceptualising these early withdrawals is that these individuals have taken credit with ~15% interest. In order to restore this money to their superannuation accounts in 2021, they will have to make a voluntary contribution that is 15.8% higher than the amount that they withdrew at.

In total, from the $36.4 billion that was withdrawn from superannuation early, a total of $4.7 billion of market gain has already been lost.

What the Government should have done instead

The first thing that the Government should have done is offer more targeted Government assistance programs to those in need, rather than giving them the option of paying off their super. Even if this would have required a higher amount of Government debt, the Government currently has the ability to borrow money for effectively little to no interest. As such, it would be far more equitable for the government to have withdrawn.

Alternatively, to do this, the Government should have enforced with banks, landlords, lenders, financial services and utility companies to offer deferred payment schemes to all customers. The banks themselves offered mortgage holidays, and State governments implemented moratoriums with regards to residential tenancy. However, more should have been done to avoid the necessity of Australians withdrawing from their super. Even if Australians were able to take out a loan in 2020 with an (astronomical) interest rate of 10%, this would have resulted in less foregone personal wealth than the early access to super scheme.

For instance, in Sarah’s case, if the Government offered $15,000 in direct payments to her, it would pay little interest back and Sarah’s super would be unaffected. Alternatively, it could intervene in tenancies and enforce a rent deferral scheme. Further, even if Sarah took a personal loan, she’d still be better off in a better financial position.

The losses will compound

It’s well known that superannuation invested early will multiply by retirement age. Therefore, $2,000 in lost interest today could well become $5,000 by retirement age, according to modelling by Super Consumers Australia. The lost investment growth calculated in this article is only the beginning of resulting losses from the early access to scheme. This is a particularly pronounced as young workers were the most likely to embrace the early access scheme. As such, almost any option for providing welfare to Australians would have been better than this.

 

Connor Wherrett is a Policy Officer, Edward Cavanough is Director of Policy, and Michael Buckland is the CEO at The McKell Institute. This article is general information and does not consider the circumstances of any investor.

 

12 Comments
Ruth
June 09, 2021

This article makes the assumption that the author knows best what to do with other people's money. It is also an assumption that superannuation will be the best place to put future savings. I doubt that it will be as there is an army of individuals/committees deciding what when and how superannuation can be accessed; who knows what that system will look like in the future? I suggest first home ownership (which is now happening) is a better place for those savings. As for a more targetted response, there was not sufficient time for that, and as for the suggestion even more money should have been borrowed, the author has no suggestion as to how to repay it (no productivity reforms, just raid others' savings). The only suggestion is to hit landlords, who are trying to provide for themselves, and who are providing accommodation for those who cannot afford their own home more cheaply than the government would provide it.

Kevin
June 05, 2021

I agree with Michael,on the basis of a stitch in time saves nine ,and my own experience.I think splitting hairs on the subject is not good.

Help them now,and the returns in the future will be worthwhile.The saving in pension costs in the future could well be great for the govt due to means testing. We just don't know .On the basis of the negative gearing that I got in the 1980s and early 90s this worked out great for the govt.

The tax rebates I got helped me.The 'you're rorting the system' comments from fellow workers never bothered me .I wanted to be positively geared as quickly as possible.I then spent years paying more tax than they did,I had a higher income.
The big pay off for the govt is now.They ( fellow workers) all get pensions,I get nothing, $36K a year for the govt is an excellent saving,plus the tax I still pay on a good income.

We need to think in terms of decades,not months.

The comments by Bluey and Geoff are good ,I never thought of that,take the money out and get a better return,well done .However reality is very few people invest in shares,the breakdown in the annual report tells me that.

Some people may have wasted that money,very few would have invested it .I think the vast majority would have needed it, and should have got targeted support .
Good article,I enjoyed it .

Bluey
June 03, 2021

Not sure why the assumption is that those who have taken out the $20,000 have forgone the market gain and future compounding. I put the first $10,000 in Cochlear's $140 SPP, and the second in NAB's $14.15 SPP. The gain is much more than the super funds 20%. Investing it into a worthwhile personal business or education might well be too. Applying for a loan [instead of taking it out of super] often comes with some hassle and humiliation.

Geoff
June 03, 2021

Exactly - the assumption that people took money out just to pay bills and the like is perhaps pushing it a little... lots of people may have done it for specific, other, reasons to achieve various financial objectives, and knew exactly what they were doing.

Peter
June 06, 2021

Bluey, the NAB SPP was massively scaled back. I don't see any way you received $10,000 of NAB shares in the SPP.

bluey
June 13, 2021

Yes it was scaled back but I received $29,988 worth because I own 28,000 shares.

Rob
June 02, 2021

Simplistic as it ignores the reality that the Govt "saved" $36 billion in support that would have been totally debt funded

That is a massive offset today and a future Govt can worry about Sarah tomorrow!

Graham W
June 02, 2021

I am not a landlord but I can't see why they have to subsidise renters. In the case study Sarah was stood down in April, assumingly she was up to date with her rent. Why did she need $7,500 on top of Jobkeeper to pay for two months rent and then need another $7,500. Seems to me a very common situation of folk not having a budget, no reserve funds and continuing to spend spend spend. Not the landlords problem.

Ramani
June 02, 2021

Isn’t hindsight wonderful?
When COVID hit us we knew nothing about it and leaders have had to gamble. They chose money more than lives, ask the surviving.
People who lost their jobs and had to defray existential expenses correctly concluded they should survive rather than preserve their nest eggs.
If savings cannot sustain us during severe crises we would elevate it to a mythical pedestal unfit for purpose.

Rod in Oz
June 02, 2021

John - I'm sure you are wrong there. The landlord is in a far more stable position just by being a landlord. The tenant is in a vulnerable position. There is such a thing as a "social conscience" and generally the "stronger" protects the "weaker". Super is best left untouched until retirement for the purpose of compounding.

John
June 02, 2021

So your suggestion is that instead of withdrawing super, Sarah should have her landlord bear the cost of receiving no rent.

The result - Sarah's super would have risen in line with the market.
- the landlord would have had less cash, which, if you are going to do a like for like analysis, then you have to assume that the landlord would have placed the rent received into the market.

Because the landlord didn't have the rent to invest, he lost EXACTLY the same return that Sarah had gained by your proposal.

Zero sum game - Sarah's gain is offset by the landlord's loss.

But what is "fair and equitable"? Why should the landlord suffer a loss, because his tenant doesn't pay WHEN THE TENANT HAD THE ABILITY TO PAY (by withdrawing super)

Landlords are not charities - they do not provide free accommodation. After all, many landlords are retirees and need the rent to pay for their own food, etc

Alex
June 09, 2021

The landlord has a 'safety net' in the form of negative gearing though, so their downside is effectively protected by the government (and other taxpayers). Sarah, on the other hand, has to dip to her own super to IN ORDER TO BE ABLE TO PAY HER RENT, not to mention foregoing future gains in her super.
Having said that, I agree with other comments that Sarah should have budgeted better and kept aside rainy day funds.

 

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