Raiding Retirement Reserves
Today 16 July 2020, marks the count down of the Australian governments policy that allows members to withdraw up to $20,000 from their superannuation accounts. The Covid-19 policy ends on 24 September 2020, which is exactly 10 weeks away, it came into effect on the 24 March 2020. It was estimated that only 1.5 million members would access their funds and it not exceed $27 billion, but with 10 weeks to go, over 2.5 million have accessed their funds, approaching $30 billion. Financial service professionals and politicians have various perspectives on this policy, but what is true is that this sum may increase and will have far reaching implications.
The Australian Superannuation system is much like the USA’s 401k plans where a person saves part of their income for retirement. With Super, an employer deposits 9.5% (Superannuation Guarantee “SG”) of the employees salary into the account until the employee retires or leaves the employer. The critics of the system state that it has led to subdued wages growth, and any increase in the SG rate will cost the individuals salary. The policy that the progressive left implemented in the 1980’s seems to benefit higher income earners and worsen lower income earners retirement savings. In short, we have a good idea that increased savings in Australia, but cannot be accessed until retirement after age 65.
Of course, while the funds are officially locked in, they can previous to Covid-19 be accessed for several reasons: severe financial hardship, compassionate grounds or being terminally ill. The current Covid-19 policy has been criticised by the progressive left, arguing that it is “riddled with fraud and abuse”. The benefits of withdrawing SG funds, while it should be a last resort, via the current policy, the funds are “tax free”, as opposed to the previous access reasons that saw up to 22% being charged on the withdrawal. The decision to withdraw remains with the individual member of the SG account, but the issue remains, meeting the exit conditions.
It can be stated that politicians and critics/journalists will always argue that an existing policy could have been better, or has risks, after it has been implemented. The current issue is if more controls were added to withdraw SG funds, it would be seen as obstructionist today. Politicians had the ability to make policy better, but were either incapable of drumming up support for amendments, or chose not to. So, when critics/journalists call an implemented policy out for its failings, it must be done so with review of parliamentary discussions, to see if the issues were highlighted as risks. The progressive left opposed the policy criticise the policy; however, the conservative liberal national party implemented a similar policy in the past for first home buyers to save, then withdraw funds from their SG accounts, the progressive left also critiqued it.
Realistically, it would make sense that where a person has withdrawn funds from their SG account, and not properly met the conditions of release, the member should have to pay the appropriate tax as with the previous release methods. It has been seen a few years ago that SG funds have been withdrawn for plastic surgery, IVF or other elective procedures, it’s no surprise that with the implementation of the current Covid-19 early release policy, it has occurred again. Every law has its loophole, so regardless what policy is implemented, there will be some form of impropriety by some individuals.
A commentator on the ABC yesterday stated that the Australian government should borrow $30 billion and invest it now to cover the retirement shortfall for those that withdrew funds in the future. While this argument reeks of the authoritarian left ideology, it could possibly work. The libertarian approach would prefer tax breaks provided to tax payers so that each individual can elect to spend more of the income that they earn, in whatever way they choose. The ideology of authoritarians is demanding of others to do for “the greater good”, where the libertarian allows the individual to choose if they wish to contribute to a worthy cause. Whether you prefer a left (big government) or right (smaller government) ideology, the level of authoritarian or libertarian, demonstrates a governments emphasis on the cohort or individual respectively. Each democratic society is enabled to elect their leaders accordingly.
To conclude, it appears that there are individuals that have applied to release their SG funds, 2.5 million out of a labour force of approximately 12.5 million, that’s 20%. The questions remain, 1) what is the magnitude of the 2.5 million that are improperly withdrew funds, and 2) should they be made to pay the tax on those withdrawals. It is up to you, the reader to decide what journalists have brought to our attention, but have not taken the next step to survey those individuals that have withdrawn funds. Should government do this study or the media? Regardless, Every law has its loophole and every politician has an effective avenue to critique and amend bills or legislation. We however, are left with the decisions to be rational individuals and raid our retirement reserves if and only if we genuinely need them or the alternative.
