An overview of the impacts of the early access superannuation scheme.
As a result of the COVID-19 pandemic, almost 600,000 people lost their job in April alone. Including the result for May, it is possible that over 1 million Australians have lost their job as a direct result of this pandemic. Many others had their working hours – and hence their incomes – cut. Even with the Jobkeeper and Jobseeker payments, many individuals are earning significantly less than their pre-crisis incomes, indicated by a 6.7% fall in wages paid across March and early April. This statistic is expected to be even higher now.
With these reduced incomes, a significant proportion of individuals and households are at risk of financial stress and meeting their day-to-day payment obligations. As a result, many have resorted to tapping into their savings and superannuation. The Federal Government has passed legislation allowing eligible residents to access up to $10,000 in superannuation prior to 30 June, and another $10,000 before 24 September. But superannuation is designed to provide us with an income in our retirement, not to provide us with emergency funds in the short-term. This usage of superannuation in a manner it was not designed for will have significant implications regarding income inequality and poverty in the future, among other impacts.
Figure 1 shows the age distribution of workers accessing their superannuation balance as of 11 May 2020. As can be seen, a highly disproportionate number of younger workers aged under 30 are accessing their balance, comprising one-third of all claims. Over 1.6 million employees have claimed funds by the end of May, which is a significant proportion of the Australian workforce (around 13% of the workforce).
Young people aged 30 or younger make up one-third of all applications for early access, with another one-third being between 31 and 40 years old. Why are more young people withdrawing? This is in part due to a disproportionate number of young employees being casual workers. For example, 75% of workers aged 15 to 19 and 41% of workers aged between 20 and 25 are casual workers – far above the national average of 25%. Casual workers are only eligible for the Jobkeeper payment if they have worked for the same employer since March 2019. Because of this additional restriction, many casual workers have been retrenched because they are more costly to their employer compared to other employees eligible for Jobkeeper. These casual workers are only eligible for the Jobseeker payment, which pays $400 less per fortnight.
By allowing an alternative source of income, access to superannuation can increase the disposable incomes of households and individuals, allowing them to meet their financial obligations in the short-term. However, it also deprives them of their future savings. Therefore, while allowing individuals access to their superannuation can offset short-term income inequality, it will increase wealth inequality because superannuation is often one of the few assets that lower-income individuals (many of whom are casual employees) possess.
Superannuation grows over time. Therefore, a (seemingly) small change of up to $20,000 today will become amplified into a much larger change as we near retirement age.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” – Albert Einstein
Sure, for workers who are nearing retirement age, withdrawing money might not matter that much. But let’s consider what happens if a young person aged 25 takes out the maximum amount of $20,000 this year. Let’s consider an average superannuation growth rate of 7.9%, and include any administration fees. By the time they are eligible for the Age Pension at 67, this single withdrawal would have cost them $102,824 in today’s dollars. Adjusted for 2% inflation annually, this is equal to losing $236,211 at retirement time.
And this is a conservative estimate due to the low inflation value. Therefore, the younger you are, the more disadvantaged you will be if you access your superannuation early. This can lead to entrenched wealth disadvantage amongst young adults, since they really do pay for not understanding compound interest. Since young workers disproportionately comprise those taking out early superannuation, coupled with their on-average lower superannuation balances, the issue of wealth inequality is compounded.
Because many employees will have significantly reduced superannuation balances in the future, they will become increasingly reliant on welfare payments such as Age Pension. Given that the Age Pension cost around $52 billion to fund in 2019, it is a significant burden on the Budget. This will lead to a re-allocation of funds from long-term investment (such as in infrastructure or education) towards satisfying short-term income support. The Federal Government’s investment in aggregate supply will therefore be negatively affected, potentially impacting on Australia’s long-term ability to grow without inflationary pressures. It therefore becomes apparent that the implementation of one policy can impact upon the effectiveness of other policies.
However, in the short-term, the ability for employees to access superannuation early may alleviate pressure on the Budget and aid economic recovery. Theoretically, the supplementary income attained from an individual's "nest egg" can be used to consume more goods and services. This will counteract the fall in aggregate demand associated with the COVID-19 induced recession. The impact of a boost to aggregate demand can be seen in Figure 2:
Here, an increase in aggregate demand from D1 to D2 corresponds with an increase in the aggregate quantity of goods and services consumed (and thus produced) from Q to Q1. This will counteract the current downward trend in aggregate demand.
However, this is purely a theoretical perspective. Individuals who access their superannuation early are most likely to be in financial distress, and have difficulty meeting day-to-day expenditures. While accessing their superannuation may provide them with the funds required to make ends meet, it is highly unlikely that any additional expenditure (such as on non-essential goods) will occur. Thus, the actual impact of the government's early access superannuation scheme may not be significant in aiding economic recovery. Other measures (such as the Jobkeeper and Jobseeker payments) must play a more prominent role in boosting domestic comsumption.
Thank you for reading, and stay tuned for next week's articles!