The Moral Panic Over the Early Release of Super

Not financial advice

The hundreds of thousands of people who have taken advantage of the COVID-19 early release of super scheme has led to concerns that those doing so are compromising their retirement livings standards. There is also a fair bit of commentary disapproving of the various uses to which withdrawals are supposedly being put, home deposits being one.

Superannuation has always involved a trade-off between living standards today and living standards in retirement. It is designed to smooth consumption over the life-cycle. If consumption smoothing is the goal, then superannuation saving (like any other saving) should be a wash in life-cycle terms. Your individual mileage may vary.

The pandemic is one of the most significant adverse shocks anyone currently of working age is likely to experience in their life-time. For many people, these are desperate times and they are likely to heavily discount the future. If consumption smoothing is the goal, then accessing super now makes a lot of sense, just as it makes sense in normal times to save out of current income for what might otherwise be an income and consumption-poor retirement. The inter-temporal transfer of consumption can go in either direction.

The early release of super on hardship grounds is perfectly consistent with the economic goals of the super system. I leave aside what I think is an often silly debate about the notional goals of the super system, as if these goals can be defined independently of actual economic behaviour and incentives. The economic function of the system is sufficiently well-defined.

Some of the criticism of the COVID-19 early release scheme is about people who may not need the funds any more than usual, but nonetheless qualify by meeting the technical criteria for the scheme. But as with other forms of pandemic relief, it is better that some people who don’t need it get it than that people who do need it miss out. Schemes that try too hard to make this distinction become costly and slow to implement. If those who don’t need it increase their spending as a consequence, that is not inconsistent with one of the objectives of policy, which is to maintain current spending.

For its part, the super industry has been highlighting the prospective loss of retirement income from withdrawing up to $20k. These estimates are entirely a function of the assumptions we choose to make about rates of return, fees etc. But they are only meaningful compared to a counter-factual use of the funds. If the counter-factual is $20k in increased current consumption, these estimates are reasonable enough, but also likely irrelevant to someone facing a catastrophic loss of income. Moreover, these individuals can always step-up their voluntary contributions in future when times are better to address the shortfall.

Withdrawing super in and of itself makes no immediate difference to an individual’s balance sheet. They sell their superannuation assets (possibly at lower prices than they were acquired, again, YMMV) and receive cash in return. If they use the funds to pay-off mortgage or other debt, then the reduction in their super assets is offset by a reduction in their other liabilities. Remember that for those who are not credit or income constrained, super saving is likely offset by dissaving through other savings vehicles, most notably, housing. Withdrawing super does not change their net saving position.

Whether they are then better or worse-off in life-cycle terms is entirely a function of the assumptions we make about the future, most of which will only be right or wrong ex-post not ex-ante.

Consider a super assets-housing equity swap. Yes, we lose up to $20k of exposure to future super asset returns, minus fees and taxes, as well as some of our past returns if cashing out of super at lower asset prices. But we also need to factor in the risk of unknown future changes in rules which may see our super balance taxed more heavily in future than we currently expect.

Recall that the government doesn’t want you saving too much either and will penalise you if you do. What the government considers too much has changed over time more or less consistently against the saver. Early release may help some people avoid these caps in future. And you may lose some future government benefits by having a larger super balance.

Reduced mortgage debt/increased housing equity gives you greater exposure to an asset class that has equity-like returns in Australia historically (I’m not saying this is a good thing, it’s just the way it’s been). We should probably concede that early release of super might bid-up house prices at the margin, but that’s a function of the supply problems that yield equity-like returns to housing in the first place. However, the pandemic may also reduce migration-driven gains in house prices in the near future. There is a lot going on here, with greater than usual uncertainty. In any event, those returns are tax-free for owner-occupiers and can be converted into income in retirement.

Moreover, property rights in housing equity are far more politically secure than property rights in super. Super lends itself to policy tinkering at the margins in ways that can leave some individuals seriously worse-off. Superannuation policy suffers a massive dynamic inconsistency problem. What it is optimal for the government to promise to do today may look very different to governments in the future. Discounting for the probability of future adverse tax and other rule changes, increased mortgage equity looks the safer bet.

Swapping super assets for increased housing equity looks quite rational in life-cycle terms ex ante. Ex-post, we shall see. Remember that owner-occupation is just as important a determinant of retirement living standards as superannuation balances. A super for housing equity swap is entirely consistent with the economic and public policy purposes of superannuation, but through another savings vehicle.

It is neither irrational nor inconsistent with the objectives of public policy to swap superannuation assets either for current consumption or to reduce liabilities/increase saving via other assets. Again, this is not financial advice, just a set of observations meant to put the early release scheme in an economic context rather than some morality play narrative about people being insufficiently virtuous.

See my 2012 monograph, Compulsory Super at 20: Libertarian Paternalism without the Libertarianism for further elaboration of some of the points discussed above.