The government is allowing Australians to access up to $20,000 of their superannuation early. Here's why it's a bad idea.

Getty Images
  • The Federal Government will allow Australians to take out up to $20,000 of their superannuation over two years, as part of its newly passed stimulus package.
  • Economists and super funds however have criticised the policy, warning it may scupper the retirement savings of vulnerable Australians.
  • Economist and former Julia Gillard adviser Stephen Koukoulas told Business Insider Australia the government should do more to keep Australians from needing to raid their super balances.
  • Visit Business Insider Australia’s homepage for more stories.

The Federal Government is rolling out a number of new policies to get businesses and workers through the current economic downturn, as Australia and the world grapples with COVID-19.

On Sunday, it revealed it would permit Australians to crack open their superannuation funds from mid-April and withdraw up to $20,000 over two years to help see them through an Australian recession.

While that money may prove invaluable to out of work Australians over the coming months struggling to make ends meet, it’s a policy fraught with danger, according to economist and former Gillard government adviser Stephen Koukoulas.

“It’s a bad policy and it’s encouraging people to take money out when the market has just dropped 35%. Your $10,000 was maybe worth $14,000 a few weeks ago,” he told Business Insider Australia.

“The people who are most vulnerable right now, the one who have just had their hours cut or find themselves unemployed are also the people who don’t typically have great big super balances anyway. If you’re a young person, you may not even have $20,000.”

Koukoulas supports some of the measures laid out in the first stimulus package, but says there is plenty to be criticised in policies such as this one, which will be used by Australians given few other choices.

“There are a million policies that would be better than this one,” he said. “If giving people access to $10,000 is a good idea, then just give them $10,000. Don’t make them rob their own super accounts. In fact, maybe they should be putting $10,000 in people’s super accounts, rather than taking it out, so super funds can be buying shares, not selling them at a discount.”

The Federal Opposition is equally as sceptical on opening up superannuation in times of a crisis, even though it moved to quickly pass the second stimulus package on Monday night with few amendments.

Government stimulus, Labor argues, should be targeted to keep Australians employed and businesses afloat, so retirements savings don’t have to be relied upon.

“An unprecedented crisis demands an unprecedented response – but it shouldn’t be one that raids people’s retirements or resigns ourselves to the inevitability of people losing their jobs,” Federal Labor Leader Anthony Albanese tweeted.

Take the median super balance for those in their late 20s, roughly equivalent to the $20,000 withdrawal limit.

Median super balances (McKell Institute)

If they were to take their entire balance out, not only would they effectively need to start again from $0, but they would lose out on the next 30 years of compounding.

Alternatively, if they’d left the money in their super and assuming their super portfolio returned 7% annually, that $20,000 would be worth $162,330 in 30 years when those Australians were nearing their 60s. In other words, they’d potentially be robbing themselves of a decent retirement.

What compound interest does to $20,000 over 30 years at 7% interest.

Considering the expectation is most of us will work even longer than our parents and grandparents, that money could otherwise sit there for up to 40 years at which point it’d be worth $326,228.

As Koukoulas points out, assuming your super fund balance has fallen by a similar margin as markets, you’re accepting $20,000 for what was a short time ago, $31,000.

With interest rates at record low levels and governments around the globe pushing through stimulus packages, when the coronavirus is contained, it’s expected to send markets into a recovery, that again could see your $20,000 of super regain much more of its value.

Koukoulas also isn’t alone in telling Australians to be wary of drawing down their super early. Rest Super, one of the country’s largest funds, is warning members who decide to take the money and run when markets are sold-off may effectively be knee-capping their own retirement fund.

“Members with already low balances who withdraw their superannuation funds when markets are low could be worse off in the long run. They will be left with no retirement savings, and potentially no insurance if their balances go down too low or to zero,” chief executive Vicki Doyle said in a statement issued to Business Insider Australia.

“The Government has introduced many important initiatives designed to provide valuable financial assistance as a result of the impact of the coronavirus. We would encourage members to consider those options first, and only take money from their super if they have no other option.”

FairVine Super head of customer experience Rachel Hamlen said it should be considered an “absolute last resort”, and may lead to “serious financial hardship in the future”.

“If you do need to access the payment, consider taking only what you’ll need to get by, and also reinvesting money you don’t end up using back into your super,” she said in a separate statement.

If you have other financial options then, it might make a lot more sense in the long-term to leave your super alone altogether.

Disclaimer: This article contains general information only and is not intended to be used as personal advice.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.