The typical worker would see a fall in their retirement income of just over 1 per cent if they took out the full $20,000 allowed under the early super release scheme, new research argues.
- Grattan Institute research suggests that workers on a typical income will lose little more than 1 per cent of their retirement income by withdrawing $20,000 in super now
- Grattan’s Brendan Coates says this is because much of the fall in super income in retirement for middle-income earners is made up for by increased pension payments
- Former PM Paul Keating has slammed the early withdrawal scheme, saying it is income support by “people ratting their own savings”
The report by economist Brendan Coates from independent think tank the Grattan Institute finds that a 35-year-old worker on the median wage of around $60,000 a year who took out the full $20,000 would retire with a super balance that was about $58,000 lower, due to the lost earnings from those savings.
However, Mr Coates added that such a worker would end up just $900 a year worse-off in retirement, despite being $20,000 better off now.
“The reason is simple: for many Australians, most of what they lose in less accumulated super is made up for via larger age pension payments,” he explained.
That applies to workers in the bottom 30 per cent of employment earnings, who stand to receive a bigger disposable income from the combination of the age pension and their super savings than they did in the last five years of their working life.
However, Grattan’s research shows that it is an unusual combination of these very low-income earners and high-income earners who stand to lose the most in retirement from withdrawing money now.
In the case of the poor, that is because their super balances and earnings are low enough not to cost them any, or much, of the age pension through the income and assets test: any super income they receive is a tax-free pension top-up.
In the case of the rich, it is because they would not receive any, or much, age pension anyway, if their super earnings fell slightly.
However, for those in the middle of the income spectrum, Mr Coates said the Government will largely underwrite most of the lost income from reduced super savings via the age pension — assuming, of course, that the age pension exists in its current form and at its current rate by the time a 35-year-old retires in just over three decades.
Most retire on more than 70pc of their working incomes
With the OECD benchmark for an adequate retirement set at 70 per cent of pre-retirement incomes, Mr Coates said the vast majority of Australians, except for some higher-income earners, easily exceed that threshold.
“The median worker earning around $60,000, who takes out $20,000 in super at age 35, would see their replacement rate fall from 89 per cent to 88 per cent, assuming compulsory super stays at 9.5 per cent, still well above the 70 per cent benchmark,” he calculated.
“Even if COVID means they remain unemployed for the next three years, making no super contributions, that worker would still end up with a retirement income of 86 per cent of what they earned in the years before retirement.”
The battle over early super withdrawal heated up this week, with former prime minister Paul Keating, one of the fathers of compulsory superannuation, slamming the Government’s scheme.
“Of the income support in Australia to date during the COVID crisis, $32 billion has been found and paid for by the most vulnerable, lowest-paid people in the country,” he told a webinar hosted by Industry Super Australia.
“And $30 billion has been provided by the Commonwealth under JobKeeper [so far].
The superannuation sector has argued the erosion of balances under the early withdrawal scheme makes it even more critical that calls from some Liberal MPs to scrap a legislated increase to compulsory super are ignored.
The compulsory super contributions made by employers on behalf of their staff are currently set to rise from 9.5 to 10 per cent on July 1, 2021, before rising each July thereafter until they reach 12 per cent by July 1, 2025.
However, Mr Coates said previous Grattan Institute research has shown that 9.5 per cent compulsory contributions are more than adequate to fund a comfortable retirement for most workers, and that around 80 per cent of the increase in contributions would be funded via lower wage growth.
“Past Grattan work has shown that higher super comes at the expense of workers’ wages,” he said.
“And the Reserve Bank agrees: it’s forecasting lower growth in wages next year when compulsory super begins to rise.”
Mr Coates said, while these are already compelling arguments against increasing compulsory super contributions, COVID-19 makes increases over the next couple of years particularly bad timing.
“Scheduled increases will see household savings rise at a time when aggregate demand is weak,” he argued.
“Raising super in the midst of a deep recession would only slow the pace of economic recovery. And that would be bad news for all Australians, regardless of the size of their super account.”