Compulsory superannuation under pressure in economic slowdown

By Gavin Clancy

Australia’s compulsory superannuation regime began in 1992, when employers became legally required to provide a prescribed minimum level of support for the retirement savings of eligible employees.

Starting as a three per cent contribution of an employee’s wage or salary, that contribution is now 9.5 per cent into an approved fund.

According to the Association of Superannuation Funds of Australia (ASFA), around $2.7 billion of assets are held in the nation’s superannuation funds. 

From the outset, the superannuation guarantee system was designed to provide and build a fund for retirement. Superannuation was preserved in an approved fund until a certain age, originally 55 but now rising to 60.

Only in dire situations – such as a medical emergency – could superannuation funds be withdrawn before the legal preservation age.

Now, another emergency – COVID-19 – has changed the rules.

In March, as the economy shut down during the spread of coronavirus, the Federal Government announced that it would allow Australians who had lost their jobs or were working less hours to access their superannuation funds.

That meant being able to apply to the Australian Taxation Office to access up to $10,000 of their superannuation before July 1, 2020, and a further $10,000 from July 1 until September 24, 2020.

Clearly, it’s been a popular measure.

By late June, the ATO had approved more than two million applications to withdraw almost $16 billion in funds. 

For couples, being able to access up to $40,000 over a few months could prove a welcome boost to their finances, especially if they were required to meet mortgage, rental, school or living expenses during a time of unemployment and uncertainty. 

Of course, if the funds were not ultimately required, superannuation fund members could always re-contribute the money back to their fund.

But industry superannuation funds are less convinced of the move, warning that the withdrawal of funds would have a major impact on future retirement balances.

Analysis by Industry Super Funds Australia says that a 25-year-old who accessed the full $20,000 in early-release would lose more than $95,000 from their retirement balance, while 30 and 40-year-old fund members would lose $80,000 and $54,000 respectively.

The Australian Tax Office has also increased vigilance after reports that the early-release scheme had been subject to scamming via illegal access of the relevant website for application of withdrawals.

Meanwhile, the operation of the early-release scheme has intensified the public and political debate over the ongoing role of industry superannuation funds, which cover most employees working to award conditions in Australia.

ASFA figures for June 2020 show that the 36 industry funds account for more than one-quarter of total assets held in superannuation and more than one-third of the 27.5 million superannuation accounts.

Influential Federal Coalition MPs are querying the role of industry funds, which have strong trade union representation.

One NSW Senator, Andrew Bragg, has canvassed whether low-income employees should be required by law to contribute to compulsory superannuation. Other MPs have floated the idea that superannuation fund members should be allowed to divert some of their compulsory contributions to savings for first-home purchases.

And now, plans to lift the compulsory superannuation contribution rate from 9.5 per cent to 12 per cent in coming years is coming under scrutiny.

Australia is on track to record its first economic recession in almost 30 years.

Personal savings are and will come under pressure. If the recession is prolonged, expect to hear and read more about fund members being able to access some of their funds immediately - without waiting years or decades for their retirement.