The Association of Superannuation Funds of Australia (ASFA) has called for caution in response to a proposal to allow first home buyers to access their superannuation to pay for home deposits.
There are three key reasons why such caution needs to be exercised. Firstly, it is likely that policies that allow people to draw down on their retirement savings to fund home deposits will lead to worse outcomes in retirement.
Secondly, the proposal is likely to impact the equity of the superannuation system, by benefitting those on higher incomes, more so than those on lower incomes.
Finally, no solution can be applied to ‘solve’ housing affordability without a clear understanding of why the issue has arisen, and a thorough analysis of the implications of using various policy levers to resolve it.
- Drawing down on super leads to worse retirement outcomes
While housing affordability is an important issue that needs to be addressed, it should not be at the expense of supporting people to achieve dignity in retirement. In this respect, proposals that allow individuals to draw down on their retirement savings for home deposits have the capacity to have a drastic impact on their retirement outcomes.
There are three key factors that contribute to this:
a. Australia’s compulsory super contribution rate is not high enough to enable such a policy
In Australia, at the current rate of compulsory super contributions (9.5 per cent) and even at the eventual rate of 12 per cent, most individuals do not have sufficient leeway in their retirement savings to finance the purchase of a home without seriously compromising their eventual retirement income. Therefore, if housing affordability was connected to the super system, the current contribution rate of 9.5 per cent would need to be increased to cover the retirement savings shortfall.
In other jurisdictions where similar schemes operate, the contribution rate is much higher. For example, in Singapore, under its Central Provident Fund (CPF) housing scheme, contribution rates are 36 per cent (20 per cent employer contributions, 16 per cent employee contributions). In the absence of higher contribution rates, the impact on retirement savings could be devastating.
The following case study illustrates this: according to the ASFA Retirement Standard, a single person will need a superannuation balance of around $430,000 to live a comfortable lifestyle in retirement. A single 30-year-old person on an average salary of $60,000 per year is likely to accumulate this much over a lifetime.
If this person takes out $25,000 to put towards a home deposit, by age 67, they will have $54,000 less in their superannuation account, or a total balance of $364,000. This means they will fall substantially short of the retirement savings they need to live with comfort and dignity in retirement.
b. Average superannuation balances are not high enough to support the proposal
Australia’s superannuation system is still maturing, and average balances are still relatively low. For those in the 30 to 34 age group, the most likely target for such a proposal, average balances for males is around $33,000, and for females it is $23,000. The median figure (with 50 per cent of the group below and 50 per cent above) is lower, at $21,000 for males and only $14,000 for females.
This means drawing down up to $25,000 on their super, to fund a housing deposit, would leave them with little to no retirement savings. This would impact their ability to build their superannuation, as they would not be able to take advantage of the effects of compound interest.
c. Similar schemes in other countries have had poor repatriation rates
While it is proposed that the money drawn out of super be repaid over a number of years, the experience with other similar schemes has been that repatriation rates are poor. For example, under the Canadian Home Buyers’ Plan, over 50 per cent of those making withdrawals do not repay the amount withdrawn in full or, in some cases, even in part. This has a drastic impact on their final pension balance at retirement.
- Release of superannuation for home ownership is not equitable
There also are significant equity issues when it comes to allowing the release of concessionally taxed superannuation contributions for home equity. This is because people on higher incomes could, through salary sacrifice, replace any amount released for housing by making additional contributions, and receive a substantial tax concession for this. In addition, these tax concessions would not deliver any lower Age Pension expenditure in the future, as the contributions would merely replenish the savings forgone and not boost super balances further.
It is for this and other reasons that, in the past, the Australian Treasury has not supported the release of superannuation monies to support home ownership. In addition, its view was that most of the superannuation money released would go to individuals who will achieve home ownership any way. Given the drastic impact on future retirement savings, such a measure appears to be highly detrimental without significant benefit.
- Housing affordability should not be tied to retirement income policy
Housing affordability is a serious issue that needs to be addressed, however, the policy considerations are very different to those relating to retirement income policy.
Housing affordability is best addressed through policy measures directed at making housing more affordable, including through the release of land, rezoning, the lowering of stamp duty, the funding of assisted housing and other measures designed to reduce costs and increase supply.
Policies that merely increase the capacity of individuals to pay for housing often have the effect of driving up housing prices, eroding any positive impact on housing affordability.
For further information, please contact:
Lisa Chikarovski, Media Manager, 0451 949 300