The Government is getting most things right. But no one is perfect in the face of a crisis.
For some of the most vulnerable people in society the Government’s message is effectively saying, “Use your own super to tide yourselves over and by the way, you’ll need to take it out at a massive loss, which you can never recoup.” As Chairman of SuperRatings, Jeff Bresnahan says, “There must be a better way.”
Under the current proposal, tens of billions of dollars of assets could need to be dumped into declining markets, meaning that some Australians seeking their $10,000 “tax free” super payment in mid-April, could inadvertently get as little as 70 cents in the dollar against what they would have got just two months ago.
Nearly all of the problems will arise because the eligibility criteria to access your super are way too generous. As Bresnahan says: “This shotgun approach has the potential to come back and bite the Government, hard. The focus absolutely needs to be on those who truly do need access to cash, and fast. Quite simply, those displaced from their jobs due to this horrific COVID-19 virus. In reality, those in hardship. This shouldn’t be a self-assessment process for all Australians”.
SuperRatings also encourages the Government to rethink just how they can get that money to those in need, whilst protecting their retirement nest eggs. Any of the following three options, or preferably a combination thereof, has the potential to protect our most vulnerable as well as retaining their superannuation balances:
- Allow funds to take a loan out from the RBA, to meet all claims. This loan would be secured against members’ benefits and repayable after say 5 years. This would then allow members to recoup lost investment earnings. The Government is protected, the member gets emergency funding, and the funds don’t have to dump assets into a declining market.
- A variation on (1) but with the ATO handling all claims, making all payments and retaining the loan register. This is a cleaner payment portal and still protects the Government, the member and the fund.
- Protect funds against having to sell into declining markets by ensuring that payments are only made to those in genuine hardship (e.g. those who have registered as unemployed, have been stood down, etc. and remain so after 4 weeks). At present, on a self-assessment basis, virtually all Australians, employed or not, could potentially make a claim.
SuperRatings believes the above provides a win/win scenario versus the upcoming lose/lose that Australia’s most vulnerable and those in, or near, retirement are going to cop. By winding back the eligibility criteria, the level of claims will be lower and hence more manageable. This in turn creates more flexibility for the Government on how to best work with the funds to ensure those in need receive assistance as quickly as possible.
Opening the floodgates to allow virtually anyone and everyone to drag up to $20,000 out of their super fund, with the current market volatility, is not the answer. All this after bipartisan governments have spent over 27 years – and half a working lifetime –getting Australians’ retirement savings into shape. As Bresnahan says “These are extraordinary times, but let’s make sure aid reaches those who need it, not everyone who asks”.
Compounding the issue is the loss of future benefits. $20,000 out of a 35 years old’s super account over the next twelve months foregoes around $80,000 in future benefits. As the graph shows, this affects everyone who withdraws money from super.
Impact of super withdrawals on future balances
Assumptions: based on ASIC’s MoneySmart calculator using a Growth option with an assumed investment return of 5.0% before fees and taxes on earnings.
The current potential for rorting the system is significant. If, as a result of unnecessary claiming, some funds are forced to consider freezing withdrawals to protect their remaining members, what will the Government do then? This is not new. Every financial crisis has resulted in a small number of investment funds being frozen, although this might be a first for super funds.
Bresnahan concluded: “The Government has less than three weeks to tweak what is a valid and morally sound strategy to protect, as best they can, the financial stability of those who have been displaced due to COVID-19 consequences. The idea is sound – the execution not the greatest.”
So, with some quick and effective decisions, SuperRatings believes the Government can protect those in most need, by providing emergency funding; whilst simultaneously retaining many Australians’ super for their retirement; and ultimately maintaining the integrity and confidence of the superannuation system overall