As the Super Guarantee (SG) rate moves up to 12% in 2025 (11.5% from 1 July 2024), retirement savings will increase, especially for those entering the workforce now and in the future. Our world-class retirement savings system, which is the envy of many nations, will become exponentially larger, reflecting higher account balances and a significant pool of our national savings.
For this reason, it is important to enshrine the purpose of super into law now. It should not be looked at as a ‘honeypot’ for future governments to use on an ad hoc basis. Our current government is aware of this and is reviewing legislation that would provide certainty as to the purpose of superannuation.
The proposed definition of the purpose of super is: “To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”
Federal Treasurer Jim Chalmers has stated he wants to end the “super wars” by making sure any future changes to the system are compatible with its very objective. The three key points in this definition are “preserve savings”, “to deliver income”, and “a dignified retirement”.
Preservation rules are in place to prevent any drawing down of super prior to retirement (which includes age requirements). Delivering income refers to regular payments or an income stream which in effect replaces salary. And a dignified retirement refers to the adequacy of savings – enough for the retired worker to live comfortably after a lifetime of contributing to the Australian economy, tax, and the welfare of the nation.
COVID withdrawals
Part of the reason this is an issue now is because super was released during the height of the COVID pandemic. About $36 billion was withdrawn at that time from superannuation by 3 million Australians.
This large depletion of the superannuation pool will result in not only smaller retirement balances for the people who withdrew money, but also for society, with Australians having to pay increased levels of age pension for those who require it. This is because the people who dipped into their super will be forced to rely on the age pension later on.
The ‘adequacy’ element will have been reduced. Based on modelling by the Super Members Council, the long-term cost of the COVID withdrawals is expected to reach about $85 billion, with the cost to future taxpayers to fund that shortfall of about $3000 each.
And the Super Members Council has estimated that the full withdrawal of funds under the COVID rules could cost a 30-year-old $90,000-plus at retirement. Estimates suggest that six out of 10 early releases of super were made by workers under 35.
Detrimental dipping
Some on the right of the political spectrum put arguments forward such as, “It’s their money so why not let them use it?” or, “Housing is a right, so why shouldn’t we allow first home buyers to draw down their super for a home?”
These arguments, however attractive they may appear to be, miss the point of super, which is for retirement purposes only. Governments are put in place to solve difficult problems and that is what they must do, not dip into superannuation savings of Australian workers.
Assistant Treasurer Stephen Jones has stated, “It’s crystal clear that the former government’s raid on the super system had a devastating impact on the retirement savings of millions of Australians.” And the younger people who withdrew their super (in many cases the entire balance was withdrawn), the greater the loss due to the loss of compound interest.
Jones also stated, “It’s why the Albanese government is committed to legislating an objective of super to help prevent this sort of short-sightedness ever happening again.”
Although most withdrawals were used to address immediate financial needs, it was also noted that a large number of people used the money for gambling. Bernie Dean, from Industry Super, observed, “People faced a wicked choice between sacrificing their retirement savings and bailing themselves out during the early stages of the COVID pandemic. No government should ever force Australians to make that choice again”.