Michael Rice from Rice Warner and I have a chat about the cost to government of using superannuation for a home deposit
Super for Homes
Ross: First up on Work Life Money this week, I want to take you to an issue that has caused an enormous amount of political controversy in the lead-up to the federal budget which will happen on the second Tuesday in May. Now, I believe that the government will not follow this path for plenty of people including some inside the government.
In other words, the coalition parties have been trying to push the government in this direction. And that is allowing people to use a superannuation to help them afford their first time. The reason why I don’t believe it will happen is because it’s too difficult. If your money is in superannuation and you use that as a deposit for a home but you go broke, that’s how you lose your job, you’re paying too much for a house, you get divorced.
All those things happen at the same time, the value of the house goes down, you lose your deposit the bank is going to want to get its hands on that deposit. Now, that’s in your super fund but account law says, if a person’s going bankrupt at that time which you most likely are, they cannot get their hands on the money inside a super fund. How will a bank possibly lend money when it can’t get its hands on the deposit?
Let’s try and find out some of the other statistics about whether people should be allowed to use their superannuation as a housing deposit. Michael Rice, one of the leading independent actuaries in this country. From Rice Warner online right now. Many thanks for your time Michael.
Michael: Pleasure Ross.
Ross: Okay, I’ll put one practical problem of using superannuation as a housing deposit. What do you think?
Michael: I think it’s a terrible idea. It’s being raised probably annually for the last 25 years and it’s usually raised by people in the property industry. But when you look at it in detail, it just doesn’t work. Some of the problems are firstly, as you said, you’re taking money out of super, you’re taking them out at a young age and yet, those early contributions build up lots of compound interest and give you quite a mass balance later in life. The earlier you start, the more you’ll have.
Ross: That’s the point isn’t it? Because people forget these compounding interest rates means is that the sooner you start putting money in the super or savings of any type, the more that your compound returns on the returns on the returns. So by the time you get those last few years of your working life, it’s actually making more money out of the fund, the much you make by working.
Michael: Absolutely. The problem’s with the government. What they don’t realize is that if you let people take money out of super, then the balances that they’ll have later on will be so low that they’ll draw a higher range of pension. Either a part one earlier in their retirement or a four one later. But it could be the government’s giving away billions of dollars of future taxation by just overcoming its own objectives to super.
Michael: The money should only be used to provide retirement income.
Ross: This is also another important part about this because the contributions of superannuation are going to rise from 9.5% currently and it obviously increased to that point. The plan is to try and get it to 12% by 2025, so we’re talking only really another eight years time and so at that point, people who are starting work in 2025 are really going to find themselves with a comfortable retirement or if those people earlier in the life cycle are going to have to contribute more at some point in the future.
And sacrifices are going to have to be made enough for people to have enough for a comfortable retirement and a house paid off in retirement.
Michael: Well, the other thing is, if you look at the actuary report treasury sent to the generation of reports, you’ll find that you will get more people off the age pension for pension in 40 year’s time, but mostly they move to a part pension. That tells us that the 12% will not even be enough to make people totally self-sufficient in retirement, you know, the general population.
Ross: I’ve been talking about this for so many years. The real answer is from the age of 20 to the age of 60, you need to save 15% of your pay every year so it really becomes self-sufficient and to make certain you can look after yourself in retirement. What we’re talking about going to 12% it’s still not enough. And then the person in their family life is going to balance up having children, providing for children’s education and trying to pay off a mortgage.
All of these competing interests are very difficult for people. You’re right, if you take money out of the super fund, you’re only basically paying Peter now to rob Paul later on.
Michael: Well it’s worse than that too. Because economic theory will tell you that if you give people more money to buy a house, they will just pay more for it at auction. It’s an emotional purchase and if you’ve got an extra hundred thousand, you’ll pay a hundred thousand more because you can.
Ross: Because what you’ve said is if you allow someone to draw a hundred thousand dollars now, to basically create a deposit for a home, then ultimately they might end up with an extra welfare benefit of 92 thousand dollars later on in life. In other words, you’re giving twice over to a certain extent to a person who probably should have been able to care for themselves.
Michael: Well and also if they pay an extra hundred thousand more than the house is worth, that’s actually not got any value at all.
Will the Budget Fly?
Ross: Do you think this will fly in the budget? Do you think the government’s going to wash in on that, you’re pretty close to seeing akin, what’s the story?
Michael: Well, I think what they’re looking at is to make people borrow the money off their superannuation fund then pay it back. They’re arguing that in fact you’re not taking it out, you’re just lending it to them. The problem with that is firstly, think of the administration. Super funds are not banks, they’re going to have to keep all these records so fees will go up.
But the other thing is, you lose the compound interest. If you borrow a hundred thousand now, and you pay it back in 10 years time, you know you’ve lost 10 years worth of earning perhaps, seven percent a year on that. It might be worth 200,000 or more.
Ross: So it makes it pretty difficult doesn’t it, for people to be able to achieve. These are the competing financial interest the person is going through their working life.
Michael: That’s right. I think there are better ways to fixing the housing problem. One of the issues is that we’ve got increased demand, we’ve got all them, the migrants that come into Australia go to Sydney and Melbourne. We’ve got limited supply, and we’ve got a lot of investors who buy and force people to rent.
What the banks are doing or what the IVA and the APRU are doing at the moment to try and curb tax lending to investors should take some of the top off the market. I don’t know if that will be enough. But really, we’ve got to think about other ways to help people own a home, rather than just saying, “Oh, there’s some money here. Let’s put our hands in it too.” But it’s not going to work, is it?
Ross: No, it’s not. The second thing is– as well is maybe just a small one. You could actually prevent self-managed superannuation fund from borrowing money to be able to go and buy apartments and other things, because that certainly stimulate the demand and push prices up when a lot of people talk about foreign buyers but it’s actually also local self-managed superannuation funds that have helped to create this demand and therefore for price hikes for apartments in particular.
Michael: That’s right. I think really it’s middleclass and wealthier people who buy four or five apartments and negatively hear them. You know, there’s a lot of debates about whether you should negative hearing but you could at least cap it for example, you could say the people that you can’t offset it against your personal insertion. You’ve got to carry it forward.
Ross: I’ll tell you what, it’s always great to have a chat with you because you can see why some of these things will not fly but also why there are issues that need to be worked out. Michael Rice is one of Australia’s leading independent actuaries and the founder of Rice Warner. He’s on the program today. Many thanks for your time Michael.
Michael: Great, thank you very much Ross.
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