Wednesday, 27 May 2020

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 ”.[1]

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.[2] 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.[3] 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.

APRA data indicates that in 2018/19 approximately 80,000 members were granted access for severe financial hardship. This accounted for around 1.9% ($654 million) of the lump-sum distributions for the year.

Financial fragility

Some clear predictors emerged for those accessing their superannuation, including a measure that has been used to indicate individuals’ financial fragility [PDF, 0.3MB] (an individual’s confidence they could raise $2,500 cash within a month). Household income and home ownership were not useful in identifying those more likely to access super but this confidence rating was.

In the sample, 39% indicated they “certainly could” and 24% they “probably could” raise the money, whereas 11% said they “probably couldn’t” and 15% “certainly couldn’t”. Those who indicated that they could certainly raise $2,500 had a 6% probability of applying to access super whereas those who certainly couldn’t had a 25% probability.

Probing further as to how the $2,500 would be raised was informative. Those who could rely on their own savings were much less likely to access their super than those who would cut spending or tap loan options (e.g. credit card, home equity, family).

Related to this, having short-term debt was important as those with an above-average credit card balance (i.e. above $3,100) had a higher probability (30%) than those either with less than average or no credit card (8%). Women were more likely to access (14% vs 10%) and those in partnerships were less likely (11% vs 16%).

Financial literacy, financial fragility and personal values

The above raises the question of what factors are associated with lower financial fragility? As might be expected, having a higher income, owning a home (rather than renting or having a mortgage), and having lower credit card debt (or none at all) are associated with an increased confidence in raising cash.

Accounting for these factors though, and again the gender disparity (women are less likely on average to have confidence in raising the cash, consistent with other evidence[4]), we found that those who engaged in positive financial behaviours (e.g. budgeting, paying bills on time, comparison shopping) over the previous year were much more confident of having the cash available.

Tracing this explanation back a step, we find that financial literacy is a very good predictor of engaging in positive financial behaviours. Having the knowledge and skillset is important, as is recognised in ASIC’s National Financial Capability strategy and, as educators, it is not surprising that we found support for this.

But what is also notable in financial literacy is the role of personal values. Those who emphasise self-enhancement values (i.e. achievement and power) are more likely to engage in positive financial behaviours than those who emphasise self-transcendence values (i.e. universalism and benevolence).

This is not surprising given that self-enhancement values prioritise self-interest over the welfare of others. For those implementing strategies to promote positive financial behaviours, this suggests that recognising the significance of individual differences in personal values and how this relates to both acquiring financial literacy and making financial choices is also important.


The Federal Government’s legislative response to COVD-19 is historic. Like governments and business, many households have found themselves forced to deal with a financial shock. The option to access super has only become available because such a large number of Australians experienced income loss at the same time.

As the government begins to wind back the one-off supports, including access to super, the likelihood of financial shocks will remain for households even if “normal” conditions emerge. Strengthening policies aimed at reducing financial fragility is crucial in order to improve how households can deal with this and help mitigate the loss of the super access option.

Paul Gerrans is a Professor of Finance at UWA. His research focuses on consumer financial decision making, particularly within a retirement savings context, and the role of financial literacy. Paul is currently a member of the OECD/INFE Research Committee, ASIC’s Financial Capability Research Steering Committee, and the OECD’s PISA Expert Group.

Julie Lee is a Professor of Marketing in the UWA Business School and Co-Director of the UWA Centre for Human and Cultural Values. Julie’s research focuses on the theory, measurement and implications of human and cultural values on consumer behaviour.

Joanne Sneddon is a Senior Lecturer of Marketing in the UWA Business School and Co-Director of the UWA Centre for Human and Cultural Values. Joanne’s research focuses on the measurement of human values in adults and children and the role that values play in predicting prosocial behaviour.

[1] Yes, we must declare a close interest in this discussion!

[2] Longer terms are possible if the purpose is to buy a home. Since 2017 Australians have also been able to withdraw up to $30,000 of voluntary contributions, i.e. not compulsory employer contributions, for housing purposes .

[3] Some of those who receive the Economic Support Payment are not necessarily eligible but we did not have a more refined classification of Centrelink benefits.

[4] For example, in the HILDA survey 57% of females indicated they “could easily raise ($3,000) emergency funds” against 62% of males.


UWA Public Policy Institute