Treasurer Hockey thinks it might be a good idea to allow Australians to access their superannuation to buy their first house.
It’s garnered support from Prime Minister Tony Abbott as a “perfectly good and respectable idea”. Likewise former Commonwealth Bank, Future Fund boss, and head of the Government’s Financial System inquiry David Murray said on the ABC Monday that the idea should be given “very, careful thought”.
Former Treasurer Peter Costello urged caution, noting that when he was Treasurer it was ruled out as a bad idea.
But what nobody, besides former Prime Minister Paul Keating, seems to be saying is that this is a dumb idea. Because that’s exactly what it is.
Compulsory superannuation is one of the most important legacies of the Keating and Hawke economic reforms. It is not perfect, especially for lower income earners, and the tax breaks at the top end and leverage available for investors mean the more income you earn the better you do out of super.
But super works because of the power of compound interest.
Here’s how Paul Keating put it in his opinion piece in the AFR yesterday:
The key to wealth accumulation in retirement savings is compound earnings. It is the earnings on the earnings plus new weekly capital commitments that allow superannuation accumulations to roughly double every seven to eight years.
Indeed last week’s intergenerational report highlighted this:
As more Australians receive compulsory superannuation contributions for longer periods of their working lives, they are likely to retire with higher superannuation balances. This will have important implications for reliance on payments made through the Age Pension.
Which means that taking money out of super, particularly for younger workers with lower balances, to buy a home is completely counter to the notion of how super works.
That’s why David Murray, besides urging caution, also implied that if Australians are allowed to take money out of super at the start of their working life to buy a house then that cash, and the earnings on it from the property purchase, need to be converted back into super at the end of their working lives.
That is somewhat problematic – how much of the house needs to be converted? Is it just the deposit plus a return or is it the whole house which could not have been purchased without the deposit from super. How does the buyer access the savings embedded in the house in retirement? Reverse mortgage? Sale?
These are difficult propositions.
But here is the real reason this is a dumb idea. Joe Hockey’s idea simply reinforces Australia’s over-investment in housing.
Currently Australian households have $1.28 trillion in housing debt against what the Australian Bureau of Statistics said in February is a housing stock valued at $5.4 trillion. That’s 340% of GDP.
Yet the intergenerational report declares Australia’s super system a success but notes total superannuation assets were “$1.84 trillion”. That’s only 116% of GDP.
That means Australian super is only worth 34% of the value of Australia’s housing stock.
Joe Hockey’s idea is a bad idea because it will hurt those it is trying to help by freeing up more buyers to drive up property prices. It will hurt those it seeks to help by reducing their superannuation balances in retirement.
Crucially though, it reinforces housing not as shelter – which we all need – but as the premier investment vehicle in Australia.
That does not build a productive economy.