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Superannuation early withdrawal risks collapsing retirement system


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Superannuation early withdrawal risks collapsing retirement system

Some of the most chilling sights of the COVID-19 pandemic in Australia were the long jobless queues, reminiscent of the Great Depression, outside Centrelink offices early last month.Key points:Almost $4 billion of super has been paid out early to 456,000 people so farSome experts estimate that between $30-50 billion will end up being withdrawn from…

Superannuation early withdrawal risks collapsing retirement system

Some of the most chilling sights of the COVID-19 pandemic in Australia were the long jobless queues, reminiscent of the Great Depression, outside Centrelink offices early last month.

Key points:

  • Almost $4 billion of super has been paid out early to 456,000 people so far
  • Some experts estimate that between $30-50 billion will end up being withdrawn from a super pool of around $3 trillion
  • Fund managers warn that super funds will generate lower returns for everyone if they have to set more money aside for early withdrawals

The queues no doubt helped galvanise the Federal Government to do something quickly to help those facing life on the dole.

Hence the decision to relax the hardship rules for the early release of super to allow people to withdraw up to $20,000 from their retirement savings.

The latest figures show nearly $4 billion has been paid out so far to 456,000 people, but some others, like long-term investor and venture capitalist Mark Carnegie, are worried.

“If it creates a precedent that says, finding a way to protect people’s retirement income is not something that society values, then I think we quickly cascade into a situation where people’s retirement incomes could end up being absolutely devastated by this,” Mr Carnegie told the ABC.

People are seen wearing face masks in a long queue outside the Centrelink office at Southport on Queensland's Gold Coast.

Dr Lowe said the unemployment rate would have been much higher without the JobKeeper wage subsidy.(AAP: Dan Peled)

Mr Carnegie wonders, if the Government had its time over again, if it would have gone down the “early release of super” route.

“With the JobKeeper package and other measures now in place, if you had the flexibility to look backwards, the decision on super is one I would have at least debated,” he said.

That is a view shared by the superannuation industry, which worries that what we are seeing now will be repeated next time there’s a crisis.

“If it’s seen as a regular opportunity to dip into [super] every time there’s a major national problem, that would really ruin the entire, great superannuation system that we have in Australia,” said Gerard Noonan, the chairman of industry fund Media Super.

That system is now worth around $3 trillion, although it shed about 10 per cent in March as global stock markets tanked.

Impact more dramatic in closed industries

When the dust settles on the coronavirus-inspired early release scheme, some estimate between $30 billion and $50 billion may have been pulled out. And, because of the nature of the workforces they cover, industry funds are doing the heavy lifting.

The average withdrawal has been between $7,000 and $8,000.

Australia’s biggest fund, Australian Super, has paid out $319 million to 40,000 people, which is a little under 2 per cent of its 2.1 million members.

However, Australian Super is currently processing another 45,000 applications, which means about 4 per cent of its members are looking for some money.

Hostplus, which among other things covers the hospitality industry that has been devastated by coronavirus, has had a higher percentage of its members apply.

Bartenders working behind a dimly-lit, upscale bar

Hospitality workers, many of whom have super with Hostplus, have been hardest hit by job losses.(unsplash.com)

It has paid $603 million to 85,000 people, or about 7 per cent of its membership, so far.

The much smaller Media Super, which has many members in the arts, has paid $20 million to 2,200 people, or around 3 per cent of its membership.

But Mr Noonan said the fund had plenty of cash, even if the crisis dragged on.

“Even if half of our members took out the full $20,000, we would probably need to find $200 million to cover that amount of money,” he said.

“We’ve got $600 million in cash or cash-like instruments.”

Some industry funds find it harder to access quick cash

But with their large investments in infrastructure, some industry funds have not found the cash easily, as evidenced by unsuccessful appeals to the Reserve Bank and the Federal Government for help.

“In our hearings that were held in November last year, a lot of the super funds dismissed the issues of liquidity and whether it was important enough to make sure they had enough cash on hand,” said Liberal MP Tim Wilson, who is the chair of the House of Representatives Economics Committee.

Mr Wilson’s committee has been investigating superannuation funds, and he has little sympathy for any fund which cannot pay up when members want their money back.

Valuations of those illiquid, unlisted assets, such as toll roads and other infrastructure, have also become an issue for critics of industry funds who point to the plunging share prices of listed infrastructure companies as a guide to where unlisted prices should be heading.

Media Super’s Gerard Noonan says such criticism ignores the fact that when the market was soaring, the listed infrastructure companies also soared, but unlisted assets did not.

“Our funds are down a little, it’s in the order of 5 per cent, but in the good times, we weren’t looking at 50 per cent returns, we were looking in the order of 15 to 20 per cent returns from those assets,” he said.

Super funds must be able to focus on long-term returns

Superannuation funds are very different to banks.

They invest their members’ money for the long term, aiming to have enough cash to pay retirement incomes and a few early withdrawals caused by death or hardship.

Whatever its merits, the Government’s decision to allow a flood of early withdrawals was something superannuation funds were never designed for.

Mark Carnegie said everyone will suffer if super funds have to change the way they invest to be prepared to regularly pay large numbers of people before they reach retirement age.

“You’re getting returns of 9, 10 or 11 per cent in an illiquid asset, and currently bonds earn 1, 2, or 3 per cent,” he said.

Hundreds of thousands of dollars, which will be the difference between a comfortable retirement doing the things you like, or just having the basics.

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