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The Morrison government’s superannuation changes risk turning the scheme into ‘privately funded unemployment insurance’. By Mike Seccombe.

Super funds transformed by Liberal ideology

Treasurer Josh Frydenberg tables the Coronavirus Economic Response Package Omnibus Bill 2020 in the house of representatives on March 23.
Credit: AAP Image / Lukas Coch

If you want to understand the realpolitik of the Morrison government’s response to the economic crisis brought on by Covid-19, a good place to start is with the relief package that passed parliament on March 24.

The Coronavirus Economic Response Package Omnibus Act 2020 contained all manner of disparate measures, including asset writeoffs for business, stimulus payments to households, free childcare, an increase in unemployment payments and changes to superannuation.

One of those changes, notes James Pawluk, executive director for superannuation policy at the McKell Institute, halved the rate at which retirees were mandated to draw down their superannuation each year. He quotes the prime minister’s explanation of the measure, that it was meant to ensure “if you’re a self-funded retiree that you aren’t forced to pull money out in the middle of a bad market”.

This was neither unprecedented nor unreasonable, says Pawluk. The Rudd government did the same during the global financial crisis, to help protect the finances of older Australians. The extraordinary thing this time was that the same bill provided for working Australians to do exactly what Morrison was protecting retirees from – that is, drawing down money from their superannuation at the worst possible time.

The early access scheme, announced by the government without any consultation with the sector, allows people to take up to $20,000 out of their accrued super savings. So far, according to peak body Industry Super Australia (ISA), some 560,000 people have completely cleaned out their super accounts – 460,000 of them under the age of 35. About $32 billion has been withdrawn and Treasury estimates that could rise to $42 billion. The super industry fears it could be even more.

Not only are those people losing now by pulling out their money in the middle of a bad market, they also lose much more in the long term, because they forgo the compounding effect of keeping the money in the system for decades. The ultimate cost to those retirement nest eggs could be a couple of hundred billion dollars, along with a concomitant cost to future taxpayers required to fund more in pensions.

But the consequences are even bigger than that. The unprecedented early withdrawal scheme fundamentally changes the purpose of superannuation, says Pawluk, from being a vehicle of saving for retirement to being effectively a form of national insurance against hard times.

The government has portrayed the scheme as allowing people access to “their” money to help them through a time of financial hardship. But that is a limited truth. The greater truth, as former prime minister Paul Keating noted this week, is the other way around: early access to super savings is less about the government helping people through a time of hardship than about those people helping the government through a time of hardship, by shifting much of the cost of economic stimulus to a subset of the population.

“Of the income support in Australia to date, in this Covid emergency, $32 billion has been found and paid for by the most vulnerable, lowest-paid people in the country – that’s the people who’ve taken the $20,000 out – and $30 billion has been provided by the Commonwealth under JobSeeker and JobKeeper,” Keating said at an event organised by ISA.

“The main burden of income support is people ratting their own savings to the tune of where now 600,000 young people, broadly young people, under 35, have no superannuation accounts at all now.

“They lose all the compounding – the $20,000 would have multiplied itself by five-and-a-half or six times over their lifetime – so it’s been a very poor choice for them.”

As for the differential treatment of retirees and working-age people, Pawluk interprets it this way: the government was “effectively saying to older Australians, ‘You don’t have to help stimulate the economy out of this recession’, and saying to younger Australians, ‘You do’ ”.

He invokes realpolitik to explain it: “They were looking after their base.”

The reality is that older Australians and those with substantial assets are key to the survival of conservative governments. Those who have now emptied their super accounts, disproportionately held in union-affiliated funds, are not.

Whatever the motivation, the fact is that in the Covid-19 economic crisis the people hardest hit have been young, those in low-paid and insecure work, and particularly women. And, as Keating noted, those are substantially the same people who have drawn down their superannuation.

And they are not the only casualties. The early access scheme has inflicted damage on the entire superannuation system – particularly on the $700 billion industry funds – and all those in them.

According to ISA, the non-profit super sector calculates the cost to its funds at about 35 basis points in earnings over the first three months of the early access scheme, which equates to an average loss per member of $251 – even for those who withdrew no money.

The reason for this, explains Matt Linden, deputy chief executive of ISA, is that in order to meet the demand for the early release of super, “the funds have had to shift their asset allocation from growth assets into cash, which basically earns members nothing, almost nothing”.

And that, if it were to continue, says Garry Weaven, would defeat the whole purpose of superannuation as an investment vehicle.

Weaven was assistant secretary of the ACTU in the 1980s, and deeply involved in setting up the compulsory superannuation system. He subsequently chaired a number of industry funds and served on the boards of ISA and, until last year, IFM Investors, which manages investments for 60 funds in Australia, as well as clients in 17 countries, and has close to $120 billion under management.

He sees a potential “tragedy for long-term retirement welfare” in what the Morrison government is doing.

“The danger is that this becomes a more or less permanent form of privately funded unemployment insurance,” he says.

If it became the case “that every time there was an uptick in unemployment, there was another raid, there would be an enormous impact, because funds would have to go completely to cash and near cash options for their investment strategy”, says Weaven.

“The concomitant to that would be, ‘What do you want super for?’ Because it doesn’t provide a decent return.”

So far, Linden stresses, the impact has been manageable. But there are concerning signs. The early access option originally was scheduled to finish at the end of next month, but a couple of weeks ago the government announced it would be extended for another three months, to the end of the year. This brought a flurry of strong statements from the sector, entreating the government to go no further.

“No one doubts there is real financial hardship out there and superannuation has an important role to play – but the system was never designed to be a broad-based social insurance model,” says Linden. “The level of contributions to sustainably support that would be at least twice the current levels.”

Weaven worries that “the more desperate the employment situation gets the more there will be pressure” to continue the early access scheme.

“The only thing that saves that from becoming an inevitable outcome is the impact it would have on capital markets, if you crippled the superannuation system,” he says.

“Because the system’s got to about $3 trillion – maybe a bit less now – and is enormously important in keeping the markets alive on both the debt and equity sides.”

Which is to say, the super sector, in which the industry funds are now the largest player, is too big to fail – as much as some on the conservative side of politics might like that to happen.

“They’ve always hated industry super,” says Tim Lyons, deputy chair of Hostplus, whose membership is heavily concentrated in the hard-hit hospitality and tourism sectors.

“You’ve got to remember that the Libs opposed, effectively, everything we associate with ’80s reform. This was not bipartisan. This was smashed through by the moral authority of Hawke and the power of Keating.”

In large part, he says, conservative hostility is driven by the fact that industry funds represent the long-term interests of their members, rather than the short-term interests of shareholders and executives of the companies in which they invest. They give workers’ representatives a degree of control over the way capital flows.

Lyons has no doubt the government was substantially motivated by malice in its decision to allow early access to superannuation.

“This wasn’t a serious attempt to support people in need. It was [a] calculated attempt to shovel money out of industry funds on the basis of the demographics of those funds that hold money from younger, blue-collar, service workers, as opposed to older, higher-balance members,” he says.

Lyons points to past attempts by the current government to “take some paint off” industry super, notably the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The government resisted the inquiry into egregious practices by the banks, he says, until the pressure became too great.

“Then they added the super system, thinking, ‘Well, our mates will cop some crap, but the super system will cop some crap, too.’ And it did. But it was almost entirely the retail funds.”

The consequence was a “huge” inflow of funds into industry funds. “It was an enormous own goal,” says Lyons.

Others are prepared to give the Morrison government some benefit of the doubt. Weaven is one.

At the time the scheme was announced, he says, the government, or the bureaucrats who serve government, had yet to come up with the JobKeeper wage subsidy.

There was panic in the air as jobs disappeared overnight, “with people suddenly being thrown into chaos, with nothing”.

“So you can understand it, but it’s a bad policy, and it should not be repeated,” he says.

Linden, whose job involves liaising with government, is another who is prepared to cut Morrison a little slack for making bad policy on the run. “Literally, there were queues hundreds of metres long outside Centrelink offices,” he says.

But the government, in its panic, failed to seek counsel from those who best understood the system. Instead, they announced first, and then consulted.

“Had we been consulted prior to its announcement, we would have pointed out some concerns with the proposed design of the scheme,” Linden says.

“The idea of financial hardship early release is not a new thing at all. There are already established rules in the system enabling those in financial hardship to access superannuation.

“But it became pretty clear to us the policy intention was for people not to have their eligibility checked – even randomly as a compliance risk measure.

“That decision to have a very low bar may have sped up the payment of money to a degree, but there was a lot of concern about how many people would access it given the self-assessment model, and what sort of pressures that would put on the funds and markets in general in terms of releasing the money.”

Subsequent evidence suggests the government, in its haste, gave early access to a large number of people who did not actually need the money.

Data released by analytics consultancy AlphaBeta and credit bureau Illion showed much, if not most, of the money released under the early access scheme did not actually go to relieving hardship.

They analysed the bank transactions of thousands of Australians who withdrew from their super accounts, and found 40 per cent of them actually saw no drop in their income during the Covid-19 crisis. Many used the money to increase their spending on non-essential consumption.

“On average,” the survey found, “people withdrew around $8000 and spent an extra $2855 in two weeks, compared with the same group’s average spending in a normal fortnight.

“Sixty-four per cent of the additional spending was on discretionary items such as clothing, furniture, restaurants and alcohol.”

Almost three times as much went on gambling as on rent.

At best, those findings indicate poorly designed policy. At worst, they support the arguments of people such as Keating and Lyons, who say the real intent was to shift the cost of economic stimulus off government, or to weaken the super system, or both.

That is not to deny that many people who cleaned out their super did so out of real need. And disproportionately, they were women, largely because they had lower balances to begin with.

But clearly, there were many others who took it, heedless of the long-term cost to their future, those who thought, as Lyons puts it: “Shit, here’s 15 grand. Motorbike!”

Lyons says there is a third group, comprising people with high super balances, who realised they might game the system if they “take the money out, effectively wash it clean of tax, and then put it back in”.

Those people could have reaped up to $3000 on a $10,000 withdrawal, and may yet find themselves in trouble with the Tax Office, which told The Saturday Paper via email that it had “commenced making enquiries with individuals where we have serious concerns that their application was not made genuinely”.

As already mentioned, the early access policy has been particularly damaging to industry funds, because of the demographic profile of their members. It has also had a heavy impact on some retail funds, although they have been less critical.

Linden suggests a reason for this is that many of those funds are owned by banks and “the banks will not be upset with the additional liquidity from tens of billions of dollars that have gone out of superannuation funds into the banking system”.

At the time the legislation was introduced, Labor was muted in its criticism. As Pawluk says, this was a moment “to be seen to be pulling for Team Australia”. Because the early withdrawal was presented as part of an omnibus package, along with other measures, at a time of crisis, there was little scope to oppose it. Labor tried to insert amendments to improve transparency and compliance, but the government rejected them and Labor did not push. It was a take-it-or-leave-it situation.

The big test now is whether the government extends this measure again, knowing its flaws. That will give an indication of whether it was a botched policy – or a real attempt to reconstitute a sector it has always been opposed to ideologically.

This article was first published in the print edition of The Saturday Paper on Aug 8, 2020 as "Super funds transformed by Liberal ideology".

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Mike Seccombe is The Saturday Paper’s national correspondent.