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Supercharging the generational wealth gap

Aug 13, 2020 • 14m 38s

The federal government’s decision to give workers access to their superannuation accounts risks dramatically increasing Australia’s generational wealth gap. Today, Mike Seccombe on how the government is reshaping the fundamental purpose of superannuation.

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Supercharging the generational wealth gap

286 • Aug 13, 2020

Supercharging the generational wealth gap

RUBY:

From Schwartz Media I’m Ruby Jones, this is 7am.

One of the federal government’s most controversial decisions during the coronavirus pandemic has been allowing workers to access their superannuation accounts.

As tens of thousands of younger workers drain their retirement savings in the middle of an economic crisis, the policy risks dramatically increasing Australia’s generational wealth gap.

RUBY:

Today, national correspondent for The Saturday Paper, Mike Seccombe, on how the government is reshaping the fundamental purpose of superannuation.

Archival tape -- Unidentified Reporter:

“From today, thousands of Australians will be able to access their superannuation early in a bid to ease the financial strain during the COVID-19 pandemic.”

Archival tape -- Unidentified Reporter:

“Those who have lost income as a result of the lockdown are able to access up to ten thousand dollars…”

Archival tape -- Unidentified Reporter:

“It's one of the government's major pandemic policies…”

RUBY:

Mike, part of the federal government's response to coronavirus was changes to superannuation. Can you talk me through what was announced in relation to that, back in March?

MIKE:

Yes, sure. So the Coronavirus Economic Response Package Omnibus Act 2020, to give it its full title, contained all manner of disparate measures, you know, designed to boost economic activity, including asset write offs for business, stimulus payments to household free childcare, an increase in unemployment benefits, and, of course, those changes that you mentioned to superannuation.

Archival tape -- Unknown:

“Our economic response will allow those Australians who are in financial stress as a result of the coronavirus to access more of their own money in superannuation.”

MIKE:

What makes it interesting is that there were two quite different approaches taken. One of those changes halved the rate at which retirees were mandated to drawdown their super. So according to Scott Morrison. He said this was meant to ensure that if you were a self-funded retiree, you weren't forced to pull your money out in the middle of a bad market. And this wasn't new, wasn't unprecedented, wasn't unreasonable. Rudd government did the same thing during the global financial crisis to help protect the finances of older, retired Australians. The extraordinary thing, though, was that at the same time, they were protecting the super of older Australians. The same bill provided for working Australians to do exactly what Morrison was protecting those retirees from, which is draw money down from their superannuation at the worst possible time.

Archival tape -- Scott Morrison:

“So we supercharge our safety net, doubling effectively the JobSeeker payment. And allowing Australians to draw on those resources they've put aside for such a time as this.”

RUBY:

Right. So the government didn't want retirees to draw down their super, but they were encouraging workers to?

MIKE:

That's right. The early access scheme, which I might add was announced without any prior consultation whatsoever with the superannuation sector - anyway, it allows people to take up to 20,000 (in two lots of 10,000) out of their accrued super savings. So far, according to the peak body for the industry super sector, roughly 560,000 people have completely cleaned out their super accounts. And most of those people, 460,000 of them, were under the age of 35. So, you know, big numbers. In total, around 32 billion dollars has been withdrawn. And the Treasury estimates that could rise to 42 billion. The super industry fears that it could be even more. So we're talking very, very big money.

RUBY:

Mhm. And Mike, what is the long term financial impact of this for workers who are drawing down on their super?

MIKE:

Well, first, not only are they, as Scott Morrison noted, pulling their money out in the middle of a bad market, they also lose much more in the long term, of course, because they forego the compounding effect of keeping that money in the system for decades. So, you know, the ultimate cost to their retirement nest eggs could be, you know, multiples of the amount they actually pull out, could wind up being a couple of hundred billion dollars, you know, 40 years down the track from now. And then, of course, that's the cost to them. But then there's an additional cost on future taxpayers because those people will then not have enough super, and so there will be a bigger draw on the pension scheme. So, you know, it's pretty expensive.

RUBY:

So why do you think it is that there has been this different approach to super, depending on, I suppose, which generation you belong to?

MIKE:

Well, the first point I would make is that the government would argue that those retired folks can't replenish their accounts. Which is true. But it's equally true that the younger ones who pull their money out will never get it back. The second point is, that this is really nothing new. You know, we've seen over many years, preferential consideration given to older, wealthier Australians by this government and by the previous conservative government too, because they have the coalition's base. And so they get looked after. Young people are not.

And so they don't. I mean, it's as simple as that. But of course it happens that in this recession, it is the young, lower income, and women, who are the worst affected. And also the ones most likely to resort to withdrawing their super accounts. So in a nutshell, the government is placing the heaviest burden on the people who are least likely to vote for them. I think you could put it that way.

RUBY:

We'll be back in a moment.

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RUBY:

Mike let’s talk more about the politics of the government’s decision to allow people to access their super during this pandemic. How did they sell the policy?

MIKE:

Well, the government portrayed the scheme as a measure to help people who are in financial need. They're actually just allowing people to access “their money”, in inverted commas, to help them through this time of hardship. Which is true, but it's a limited truth. The greater truth. As former Prime Minister Paul Keating, very forcefully, you know, in his inimitable Keating-esque way, noted in a webinar organised by the Industry Funds this week, it's actually the other way round.

Archival tape -- Paul Keating:

“Instead of JobSeeker and JobKeeper carrying the main burden of income support from the get go, what we're finding is that the main burden of income support is people, you know, ratting their own savings…”

MIKE:

Early access to super savings is less about the government helping people through a time of hardship than about those people helping the government through a time of hardship because it shifts much of the cost of economic stimulus off government and onto a subset of the population.

Archival tape -- Paul Keating:

“These are the people, you know, who carry the HECS around their neck before they get moving, plus the GST, renters, and now their pool of savings has been lost to them, where, in fact, the support should have been public support from the get go...”

MIKE:

Keating made the point that of all the income support that is, you know, all the economic stimulus that has gone out so far during the pandemic...

Archival tape -- Paul Keating:

“...32 billion has been found and paid for by the most vulnerable, lowest paid people in the country - that’s the people who have taken the 20,000 out - and 30 billion has been provided by the commonwealth under JobSeeker and JobKeeper…”

MIKE:

So, y’know, the heaviest burden has fallen on the most vulnerable and lowest paid people in the country.

RUBY:

Okay, so more money has been spent by people withdrawing their super than by the government on stimulus spending?

MIKE:

Well, yes, that's right. People raiding their own savings. So there are hundreds of thousands of young people, 35 and under, who now have no superannuation accounts at all, losing their compounding.

RUBY:

And these people who are draining their superannuation accounts. Do we know what they're spending the money on?

MIKE:

Well, we have a number of approximations of it. There was some data released by an analytics consultancy called Alpha Beta, which is part of Accenture, and the credit bureau, Illion, at the start of June, which showed that much, if not most, of the money released under the early access scheme didn't actually go to relieving hardship. They analysed the bank transactions of thousands of Australians who withdrew from their super accounts and found that 40 percent of them actually had not suffered any drop in their income during the Covid crisis - so, you know, weren't in any greater hardship than they normally would have been. Many used the money to actually increase their spending. And they spent it on non-essential consumption.

To quote from the survey, people on average withdraw around eight thousand dollars and spent an extra almost 3000 - 2855 - in the first two weeks after that compared with, you know, what they would spend in a normal fortnight. 64 percent of that additional spending was on discretionary items, you know, clothing, furniture, restaurants, alcohol. Almost three times as much went on gambling as went on rent. So, you know, at best, those findings indicate poorly designed policy.

At worst, they support the arguments of those like Keating who say that the real intent was to shift the cost of economic stimulus off government or to weaken the superannuation system or both. That's not to deny that many people who cleaned out their super did so out of real need. And disproportionately those people were women, largely because they had lower balances to begin with. But there was no real attempt to ensure that the money went to people who really needed it.

RUBY:

Mm. And, you know, this entire thing was put in place as part of the government's economic response to the pandemic. So is there an economic rationale there?

MIKE:

Well, there is up to a point, I mean, you know, there are people in need as I mentioned. But...no. I think you can view a lot of this in political terms, quite frankly.

At the last election. Only 15 percent of people aged 18 to 24 gave their first preference votes to the conservative parties. Amongst those aged 25 to 34, it was just 32 percent. So, you know, that's the same group that's taken most out of super. Among women of all ages, it was 38 percent. You know, lower income earners didn't vote in large numbers for the parties of the right. Only people earning 130,000 or more gave the majority of their first preferences to the coalition, and of course, older folks did.

So, you know, when you build up the electoral picture, there's a remarkable correlation, I think, between those who have seen they're super protected and those who have had to take their super out. You know, I'm not saying that was the government's only motivator, but, you know, it's worth bearing in mind.

And another consideration was that they simply hate industry superannuation funds, you know, because they are affiliated with unions, because they give organised labour influence over the distribution of capital. They've been gunning for the industry super for a long time. And coincidentally, of course, industry super funds tend to have memberships that are younger. Blue collar, female, lower paid. Same cohort again. So it's a bit of a mystery to me that the government is persevering with this to such an extent.

I mean, they've just extended it for another three months to the end of December. The concern is that this is not really achieving its primary purported aim of supporting people in hard times. It's actually shifting the burden of stimulus onto, you know, a fairly narrow subset of the population. And I don’t think that’s a good thing.

RUBY:

If it's not achieving its aim and it's costing the amounts that it is, do you think there is any indication the government might rework the policy?

MIKE:

Well, it's certainly the industry super funds want them to. I mean, they actually were, I wouldn't say accepting, but they were muted in their criticism up until a few weeks ago, which is when the government decided they would extend it. And since then, of course, they've been agitating much more loudly because their concern is that this could become a sort of default system by which people self insure against hard times.

And that's not the idea of superannuation at all. Superannuation is supposed to be saving for your retirement. It's not supposed to be something that can be drawn down whenever the economy turns sour. This has the potential to fundamentally alter the entire superannuation regime, which has been extraordinarily successful over several decades now. So, you know, it really is a worry and one would hope that it ends at the end of December and they don't get bright ideas of continuing this.

RUBY:

Mike, thank you so much for your time today.

MIKE:

My pleasure. Thank you.

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RUBY:

Also in the news…

New Zealand’s largest city has re-entered lockdown after a cluster of up to 8 coronavirus cases have been detected in the past two days.

Businesses will be closed and public gatherings banned in Auckland, and Prime Minister Jacinda Ardern has even raised the possibility of delaying the country’s election due to the outbreak.

It’s the first community transmission of coronavirus in New Zealand in more than 100 days. The source of the infection is still unknown.

And in the United States, Democratic Presidential nominee Joe Biden has announced Californian Senator Kamala Harris as his running mate.

Harris was a candidate in the Democratic primary this year but dropped out in the early stages. She is the first woman of colour to be nominated to a major party’s presidential ticket.

I’m Ruby Jones, this is 7am. See ya tomorrow.

One of the federal government’s most controversial decisions during the coronavirus pandemic has been allowing workers to access their superannuation accounts. The policy risks dramatically increasing Australia’s generational wealth gap, as young workers drain their retirement savings. Today, Mike Seccombe on how the government is reshaping the fundamental purpose of superannuation.

Guest: National correspondent for The Saturday Paper Mike Seccombe.

Background reading:

Super funds transformed by Liberal ideology in The Saturday Paper

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7am is a daily show from The Monthly and The Saturday Paper. It’s produced by Ruby Schwartz, Atticus Bastow, and Michelle Macklem.

Elle Marsh is our features and field producer, in a position supported by the Judith Neilson Institute for Journalism and Ideas.

Brian Campeau mixes the show. Our editor is Osman Faruqi. Erik Jensen is our editor-in-chief. Our theme music is by Ned Beckley and Josh Hogan of Envelope Audio.

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286: Supercharging the generational wealth gap