Enabling Australians to withdraw up to $20,000 from their superannuation funds has been one of the more controversial government policies for dealing with the coronavirus pandemic.
Eligible Australians were allowed to withdraw up to $10,000 in the 2020 financial year (FY20) from their superannuation accounts, and have access to a further $10,000 in FY21 (up until December).
The early super withdrawal scheme is being administrated by the Australian Taxation Office (ATO).
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What are the arguments?
Proponents argue that it is necessary for Aussies undergoing financial and economic hardship to have access to 'their' money to ride out the crisis.
On the other hand, critics of the scheme argue that it is undermining the retirement safety net of our country. Reports that anyone who applies to access the money has been allowed to withdraw from super, regardless of hardship, have further damaged the scheme's credibility (although the ATO is reportedly following these up).
Regardless of your views, it's hard to argue with damning new analysis that has just been released.
ASX exchange-traded funds (ETFs) provider BetaShares has released modelling of the early super withdrawal scheme. It makes for some fascinating reading, to say the least.
Early super withdrawals prove costly
Its headline finding is that the $30 billion (as of 29 July) in early super withdrawals will cost the retirement system between $100 billion and $130 billion in the coming years. This is made up of lost returns from investments that would have added value had they remained within a fund. Extra pension payments the government will have to pay as a result are also included.
BetaShares CEO, Alex Vynokur, had this to say of the early superannuation withdrawal modelling:
This was a well-intentioned but misguided policy from the start. The true cost of allowing people to access their super early will ultimately be paid by future Australian governments and taxpayers… An amount between $100 billion and $130 billion represents a very significant future shortfall (which will only increase as further super is released early). It will need to be funded by future Australian governments and therefore the Australian public will ultimately bear the cost, as those who have withdrawn super will be less able to fully fund their own retirement needs.
The BetaShares modelling also shows that young Australians have the most to lose from this policy. It estimates that a $10,000 withdrawal represents a lost $70,400 in retirement funds for an investor with 40 years until retirement, using consumer price index (CPI) + 5% modelling. If CPI + 7% is used, the figure jumps to $149,745. This comes after Treasury figures quoted by BetaShares revealed that half of all early super release claims are being made by people aged under 35.
The report also quotes data that reveals 64% of people who accessed early release "spent the money on discretionary items such as clothing, food, gambling and alcohol".
Sobering stuff indeed!
