The COVID-19 pandemic prompted governments worldwide to implement policies to mitigate the economic consequences of lockdowns and restrictions. One such policy by the Australian Government was the early tax-free release of superannuation, which allowed individuals to withdraw up to $20,000 from their superannuation accounts between April 20 and December 31, 2020.
This policy aimed to provide financial relief to those affected by the pandemic. A significant number of Australians took advantage of the early withdrawal: 3.5 million initial applications and 1.4 million repeat applications were approved, totalling $36.4 billion in withdrawals.
Our study examines the impact of early withdrawals on Australians’ superannuation balances at retirement. The study considers various factors, such as asset allocation strategies, withdrawal amounts, age, and industry of employment, to understand the broader implications on long-term financial security.
This comprehensive approach ensures that the findings are relevant not only to policymakers but also to individuals, financial advisors, and organisations involved in retirement planning.
Data and research design
The study uses annual economic data from 1992 to 2020. The data includes superannuation guarantee rates, wage inflation, industry earnings, stock market returns, bond returns, tax rates, and management fees.
The analysis employs the Autoregressive Integrated Moving Average (ARIMA) model to predict future values of these variables and assess their impact on superannuation balances at retirement. This statistical method allows the researchers to generate reliable forecasts and simulate various scenarios to understand how different factors influence retirement outcomes.
The research examines 2,800 scenarios based on seven age groups, 16 industries, five withdrawal amounts, and five investment strategies. These investment strategies are designed to reflect the diverse approaches individuals might take towards managing their superannuation funds.
The investment strategies include the Growth Strategy, with an 85% allocation to shares and 15% to bonds; the Balanced Strategy, with a 70% allocation to shares and 30% to bonds; the Equal Strategy, with an equal allocation to shares and bonds; the Cash Strategy, with a 100% allocation to bonds; and the Lifecycle Strategy, which varies by age, shifting from aggressive to conservative as retirement approaches.
Early withdrawals reduce balances significantly, but the impact is varied by strategy
One of the key findings of the study is the significant impact of withdrawal amounts on superannuation balances. The research reveals that maximum withdrawals of $20,000 substantially diminish superannuation balances across all age groups.
However, the choice of investment strategy plays a crucial role in mitigating this impact. For instance, the Growth Strategy not only meets but often surpasses the required retirement balance for a comfortable lifestyle, even with withdrawals. This suggests that more aggressive investment strategies might help offset the negative effects of early withdrawals on retirement savings.
Conversely, the Balanced Strategy, which is common among larger funds, may not provide a comfortable retirement balance with withdrawals. This finding highlights the potential risks associated with more conservative investment approaches, particularly in the context of early superannuation withdrawals.
The Lifecycle Strategy offers a balanced approach that adjusts risk exposure over time, making it a viable option for individuals seeking to manage their retirement savings more dynamically.
The study also uncovers industry-specific challenges that affect the ability of employees to meet their retirement goals. Employees in the Accommodation and Food, Retail Trade, and Administrative and Support Services industries face significant challenges in achieving the required retirement balance, even without early withdrawals.
This suggests that individuals in these sectors may require additional financial support and tailored advice to ensure they can maintain adequate retirement savings. These industry-specific insights underscore the importance of considering the diverse financial situations of different employment groups when designing economic relief policies.
A tailored policy approach helps reduce the negative impact
The findings of the study have important policy implications. They indicate that a one-size-fits-all approach to economic relief policies may not be effective.
Policymakers should consider the heterogeneous impacts on different cohorts of society and potentially adopt more tailored approaches. For instance, individuals with non-aggressive investment strategies or those who work in industries with low average salaries may need additional support to ensure adequate retirement savings.
By adopting a more subtle approach, policymakers can help mitigate the long-term negative effects of early superannuation withdrawals on retirement security. This will ensure equitable financial support and uphold the core purpose of superannuation, which is to provide income at members’ retirement, as outlined in Section 62 of the Superannuation Industry (Supervision) Act 1993.
What does this mean for retirement planning?
Individuals should reassess their superannuation investment strategies, especially if they have made early withdrawals. Financial advisors could gain insights from this study to better meet their obligations under the Financial Planners and Advisers Code of Ethics 2019, enabling them to provide industry-specific guidance to help individuals in vulnerable sectors optimise their retirement savings.
In conclusion, this study provides valuable insights into the long-term impacts of early withdrawals on retirement balances. It highlights the importance of investment strategy choice and the need for more subtle policy approaches.
By thoroughly examining the early withdrawal’s implications, the study contributes to a broader understanding of economic interventions and their long-term effects on retirement savings. The insights gained can inform future policy decisions to better support financial stability and retirement readiness for all Australians.
Original article
Kapoor, U, Tajaddini, R & Moradi-Motlagh, A 20204, The impact of early withdrawal on superannuation balance at retirement: Evidence from Australia, International Review of Finance, Early View.
Good observations. Yes, paradoxically, the “risky” strategy of all shares in an SMSF is actually less risky given that the mission statement of the RBA since the 60s has been to debase the value of the currency.
Actually superannuation should be a lifetime income averaging mechanism with unlimited deductibility for contributions, tax exemption in the fund, no preservation requirements but all withdrawals to come out as lifetime or life expectancy fixed term taxable pensions or annuities – with a $1 for $1 income test against any means tested social security benefit. (The ideal tax world is where tax does not distort income transfers or self-provision and drive people to become bludgers).
Vickrey saw this decades ago. The annual accounting period is arbitrary, especially when looking at lifetime labour income.