COVID-19: The new economics of our daily lives
COVID-19 and financial choices
Paul Gerrans, Joanne Sneddon & Julie Lee
Paul Gerrans, Joanne Sneddon, and Julie Lee investigate the role of financial fragility and access to superannuation funds in the wake of COVID-19.
In response to the COVID-19 pandemic, Australian organisations have been forced to make difficult choices to address a loss of income.
Governments have borrowed. Businesses have mixed staff layoffs, pay cuts, and equity raisings with debt. Universities are similarly seeking significant pay cuts from staff as well as looking to increase debt, preferably from a government “short-term, zero or low-interest loan facility”.
Each response weighs a distribution of burden. For example, in the case of government debt a significant cost burden is placed on future taxpayers to assist those in need today. In the case of universities and businesses seeking staff pay cuts, some of the cost distribution is being placed on current employees to assist fellow colleagues.
Along with each choice is a risk that the cost incurred is not worth the benefit. Individuals also face these difficult choices.
Allowing superannuation access
One such choice is whether to take the new option introduced in the first raft of legislative changes approved in March to help deal with loss of income. Superannuation fund members can apply for up to $20,000 from their superannuation account (up to $10,000 in 2019/20 and again in 2020/21) if they are unemployed, have been made redundant, are in receipt of a nominated list of Centrelink benefits, or their work hours have been reduced by 20%.
The Australian superannuation system has previously been largely resistant to significant ‘leaks’. That is, once contributions are made, members generally can’t access it until they reach their preservation age and have retired.
This policy design can be compared with systems such as in the U.S., where similar 401(k) schemes allow members to borrow up to half of their retirement account balance (up to US$50,000) and repay at market interest rates within five years. The Australian system did already allow withdrawals for severe financial hardship (as well as compassionate grounds, and having a terminal medical condition) though eligibility conditions were significantly more challenging, and wait periods longer.
How many have accessed Super?
For many members, accessing their superannuation early will result in crystallising a significant stockmarket loss (notwithstanding the 20% rebound in the All Ordinaries to 15 May from its (to date) COVID-19 low on 23 March).
Hindsight is wonderful and there is no certainty such rebounds will remain in the long-term. However, people who made this decision, made a trade-off between immediate cash flow needs and a future retirement benefit. We were interested in examining this decision and, as part of a series of surveys examining the consequences of COVID-19, administered through The Values Project at UWA, we collected data to help capture the characteristics and drivers of it.
The survey commenced on 30 April and finished on 8 May. From the 603 respondents who were not retired and had a superannuation account, we identified a sub-sample eligible to access their superannuation applying the criteria identified above.
Those who indicated that they were eligible for JobKeeper, JobSeeker, or had received the first Economic Support Payment were classified as eligible. This produced a “choice” sample of 317. Of those eligible, 12% reported that they had applied to access their superannuation.
By 7 May 2020, more than 1.17 million individual payments, amounting to $9.4 billion had been made. Given approximately 16 million Australians have at least one superannuation account this translates to approximately 7.3% of account holders having applied.
However, these account numbers would include those already retired and therefore understate the figure, so the proportion we identify in our survey does not appear dramatically different. To put the amount and number of applications this year in context, the severe financial hardship provision already existing as a basis for early superannuation withdrawal saw much lower numbers.