The Association of Superannuation Funds of Australia (ASFA) has called for caution in response to proposals to allow first homebuyers to access their superannuation to pay for home deposits or job training purposes.
ASFA CEO Ms Pauline Vamos says that while housing affordability and skills training are important areas that need to be addressed, this should not necessarily be at the expense of supporting people to achieve dignity in retirement.
"The current compulsory rate of the Superannuation Guarantee (9.5 per cent) is barely enough to allow most people to build enough retirement savings to fund a comfortable retirement. Raiding the nest egg early to pay for a home deposit or other purposes is likely to dramatically reduce people's final benefits.
"We know the earlier you start saving for your retirement, the more you benefit from returns and compound interest. This works in reverse when it comes to taking money out of super. If you take it out at a young age, the more you lose these benefits and the more your final balance will fall."
ASFA says that if a 30-year-old 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.
"Increased flexibility will only really work if contribution rates are significantly higher," says Ms Vamos.
"The cost of administering such schemes is also likely to have an impact on the retirement balances of people who don't access it. We've seen in the past that when funds set up schemes that involve complex administration, the cost falls on all members of the fund, regardless of whether they are accessing the scheme itself or not. It's questionable whether it's fair to ask other fund members to take a hit to their retirement savings in order to enable some members to use their super for other purposes."
Ms Vamos says there are also significant equity issues when it comes to releasing superannuation for home equity or other purposes.
"If people take money out of their super, it's likely at some point they will replace it through salary sacrifice, make additional contributions and receive a substantial tax concession for this. This 'double-dip' into the tax concession pot is likely to be highly skewed towards high-income earners, who are more likely to have the additional income available to do this."
Ms Vamos says using super to fund housing deposits could actually lead to worse outcomes when it comes to housing affordability.
"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," Ms Vamos concluded.
ASFA's analysis: withdrawing superannuation early
1. Drawing down on super leads to worse retirement outcomes
Proposals that allow individuals to draw down on their retirement savings for home deposits or training purposes 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 use it for other purposes without seriously compromising their eventual retirement income.
In other jurisdictions where schemes operate that allow people to use their superannuation for housing deposits, 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 proposals, the average balance 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.
2. 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 or other purposes. 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.
For further information, please contact:
Lisa Chikarovski: Manager – Consumer Strategy, Media and Public Affairs, 0451 949 300.
ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation, which aims to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice.