We still need to provide adequate retirement income.

Aug 10, 2020

The current early drawdowns of superannuation balances will reduce those workers’ retirement incomes. It would therefore be desirable to allow and encourage them to restore their superannuation balances as and when they can.

In response to the Covid induced recession the Morrison Government has allowed early access to superannuation. The intent of this scheme was to provide financial relief for people experiencing income loss and hardship from the recession. However, there is evidence suggesting wide-spread fraud, with withdrawals by workers who have not experienced any significant loss of income.

In total, so far 560,000 people have withdrawn the maximum amount of $20,000 each; 460,000 of them being under the age of 35. As a consequence, superannuation balances have fallen by $32 billion, and Treasury estimate that the total withdrawals will eventually reach $42 billion.

Unless these withdrawals are subsequently restored this must impact on the chances of superannuation achieving its aim of ensuring that these people have an adequate retirement income.

Of course, roughly half of their retirement income loss will be offset by their increased access to the age pension, but that is hardly satisfactory. Furthermore, one of the reasons for introducing compulsory superannuation was to reduce the demands upon future government budgets from the impact of an ageing population on the cost of the age pension.

Although it is accepted that people should be allowed to tap their superannuation savings in an emergency, it would have been better if the government had allowed people to borrow from their fund, with the expectation that this borrowing would have to be repaid as and when they were able. Knowing that superannuation withdrawals would eventually have to be repaid, would probably also have encouraged these people to withdraw less, with less non-essential expenditure, which reportedly even includes increased gambling.

At present, however, government policy seems to assume that this $42 billion superannuation withdrawal has been written off for good. Still there is a strong argument for allowing, and even encouraging, people to make additional contributions to superannuation, to restore the amounts they have withdrawn, as and when they are financially able.

Specifically, it is therefore proposed that these additional contributions, over and above their compulsory contributions, would be paid from their pre-tax income and (unlike other pre-tax contributions) these “restoration contributions” would not be subject to contributions tax within the superannuation fund.

Making these “restoration contributions” effectively non-taxable should help encourage people to undertake the additional saving in future years when they are able. However, because these contributions are non-taxable, they should be limited to an amount equivalent to the original total amount withdrawn.

Not taxing these “restoration contributions” would seem to be reasonable, because they represent the restoration of contributions that have already been taxed when they were first made. Thus, the tax-exempt status of these contributions would effectively treat them as being the equivalent of repaying a loan from their superannuation fund at zero rate of interest.

Of course, as these “restoration contributions” by people to their superannuation accounts would only be voluntary, they may not raise much money. One possibility would be to make some form of repayment compulsory. That would, however, involve retrospectively changing what is in effect an implicit contract. Also it would be difficult to define just when it could be assumed that the superannuant could afford the repayments.

Furthermore, the evidence suggests that later in their working life, people are prepared to contribute more to their superannuation. By then their mortgage has typically been paid off and their family commitments are less costly financially. So as their attention turns to their retirement needs, many such people are prepared to contribute more to boost their superannuation, and this proposal to restore their fund balances would further encourage them.

Consequently, compulsory repayment of superannuation withdrawals is therefore not favoured. All in all, a scheme that allows for voluntary tax-free contributions to restore superannuation balances seems fair, and it should help both the superannuant and the government budget in future.

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