Category Australian Perspectives

COVID-19: Giving people early access to their super is the right move

The Prime Minister has announced that people who lose their jobs or have their hours cut because of the COVID-19 crisis will be able to take up to $20,000 from their super accounts – $10,000 this year and a further $10,000 next year. It’s a good move. It will put money in the hands of people when they need it most. Retirement incomes would fall if workers withdraw their super, but not by as much as you might expect, especially for middle-income earners. Instead it’s government, via higher Age Pension payments, that could bear much of the cost.

Early withdrawals may not mean big falls in retirement incomes

Our modelling suggests that a 35-year-old who takes the full $20,000 allowed from their super will see their balance at retirement fall by around $58,000. For someone earning the median wage of about $60,000 today, they can expect their total super income through retirement to fall by around $80,000 in today’s dollars. But their total retirement income would fall by only $20,000 in today’s dollars, or around $800 each year. The Age Pension is means tested – the higher your super balance, the less pension you get. So workers who take money from their super will lower their super balance at retirement, but they will receive more Age Pension – helping to soften the blow.

The story is a little different for high-income earners. The total retirement income of a worker earning around $110,000 a year today (more than 90 per of workers of that age) would fall by around $70,000, or around $2,700 a year, if they withdrew the full $20,000 from their super over the next few months. They would lose the same amount in superannuation as a middle-income earner, but receive less Age Pension to compensate, since they’re ineligible to receive an Age Pension for most or all of their retirement.

Of course, many workers would be withdrawing their super at a bad time: the value of the ASX 200 has already fallen by about 40 per cent in the past month. If markets recover next year, that $20,000 in withdrawn super could soon enough be worth about $30,000 again. If that’s the case then the hit to retirement incomes is larger: $33,000 over the course of retirement for the median worker and $106,000 for a worker at the 90th percentile of all wage earners.   But for many Australians facing bankruptcy in the coming months, it’s a trade-off that may well still be worth it.

Putting cash in people’s pockets now is the priority

Australians are in the middle of an enormous liquidity crunch due to COVID-19. More businesses are closing by the hour. Casual workers will be particularly hard hit, but many part-time and full-time employees will soon become unemployed or have their hours reduced.

Most workers, including many on middle and high incomes, don’t have much money in the bank for a rainy day. Half of Australian working households – those with at least one employed person – have less than $7,000 in the bank, including mortgage offset accounts. About 20 per cent have less than $500.

The Government is temporarily doubling the rate of Newstart and accelerating people’s access to the payment by relaxing the assets test. But even a higher rate of Newstart won’t cover many people’s costs, especially people who are on higher incomes. Even at the top, about 40 per cent of the highest fifth of income earners have less than 4 weeks’ income in the bank.

Diverting superannuation money from retirement into Australians’ wallets today is not without cost. But it will put money into the hands of people when they most need it. And they need it now.

Co Authors :

The track record of OECD Economic Surveys

To test the claim that Australian governments are less good at reform than in the past, we really need a list of policy reforms proposed in advance, so that we can see how many were implemented in the following years. Our results using reports from the Organisation for Economic Co-Operation and Development (OECD) are published in a Conversation article, and this post provides more detail on our methodology.

Between 1972 and 2018, the OECD issued 31 Economic Surveys of Australia – about one every 18 months. Each survey suggested policy reforms that the OECD believed would increase economic growth and living standards.

Our analysis of the full series of Surveys for Australia shows that the vast majority of the recommendations that had been made since 1972 were taken up between 1984 and 2001. The Hawke and Keating governments enacted almost all of the OECD’s rolling wish-list, as did the Howard government in its first two terms.

Policy recommendations from OECD Economic Surveys of Australia 1972-2018, by date

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But from roughly 2003 onwards, the record is a lot more patchy: many more of the reforms recommended by the OECD have been rejected, only partially implemented, or, in the case of carbon pricing, implemented and then unwound. Policies that have run into the sand include reducing the gap between the company tax and top personal income tax rates, implementing a mining resource rent tax, reviewing negative gearing, creating competitive neutrality among Australian ports, aligning the eligibility ages for superannuation and the Age Pension, including more of the value of owner-occupied housing when calculating Age Pension eligibility, and raising Newstart. A number of other policy reforms continue to sit in the too-hard basket, such as increasing the rate and coverage of the GST, swapping stamp duties for general property taxes, congestion charging, and using smart meters for time-of-day retail electricity pricing.

Are the OECD Surveys a reliable guide?

As a means to evaluate the history of reform, the OECD Economic Surveys aren’t perfect. Their scope has changed, they are partly influenced by politics, and they recommend reforms that are invariably contested. Nevertheless, they are still a useful guide.

The format of OECD Surveys has changed over 46 years. Surveys before 1990 tended to be more passive, make fewer recommendations, and focus more on reforms that were already underway. Their scope tended to be limited to trade liberalisation, freeing up industrial relations, and limiting public expenditure. Consequently, their recommendations fall well short of a comprehensive summary of Australian economic policy reform.

Though the 1990s, the Surveys became more forward-looking, and they expanded to cover more areas. Towards the end of the Hawke and Keating governments, the OECD’s recommendations turned to broader tax reform, competition in utilities, and higher education reforms. During the Howard government, they started to advocate better regulation of the financial sector, health and welfare reforms, and market-based environmental reforms (particularly for water and carbon emissions). In the past few years they have expanded again to advocate better infrastructure provision and charging.

Policy recommendations from OECD Economic Surveys, by policy area

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Nevertheless, even as proposed reforms expanded into new areas, the Hawke and Keating governments, and the Howard government in its first two terms, succeeded in implementing almost all of them. It appears that Australia’s better record of reform before 2003 is not just a result of the OECD’s changing scope.

OECD reports are partly influenced by political reality. In practice they are prepared after extensive consultation with officials, particularly from the Commonwealth Treasury. They are at least influenced by the priorities of the government of the day. It is hard, for example, to imagine that the OECD would have advocated abolishing awards under a federal Labor government – it advocated this change for the first time in 2006 when the Howard government was in power, and it has not done so again since Labor was elected in 2007. Similarly, it is probably no coincidence that since the Coalition was elected in 2013, the OECD has not again recommended a mining resource rent tax or limiting negative gearing.

Nevertheless, many reforms have transcended governments. Despite political influences, the OECD persistently advocated a number of reforms well before the government of the day was prepared to implement them. Many were first suggested by the OECD under one government, and implemented by the next, including increased competition in telecommunications, tightening eligibility for disability pensions, introducing case-mix funding for hospital systems, and introducing a general goods and services tax and carbon pricing.

And of course, OECD recommendations are not gospel – they tend to reflect a specific set of value judgements regarding priorities and methods. They perhaps had a higher status in public debate in the 1980s and 1990s and were more influential in shaping the thinking of other independent voices. Nevertheless, many policy experts today would support most of the OECD’s recommendations. For example, all of the policies that are on the OECD’s continuing wish-list also continue to be advocated by Grattan Institute.

Thus our review of the OECD Surveys is broadly consistent with popular wisdom, or at least the recollections of old men – the good old days really were better.

Co Authors :

Researcher, Grattan Institute