Why our retirement savings may be at risk

Ross Greenwood speaks to Industry Super chief economist Stephen Anthony regarding the First Home Super Saver Scheme that could hit compulsory savings.

Why our retirement savings may be at risk?

Ross Greenwood: Welcome back to Work Life Money right around Australia. When the federal budget was handed down this year, the government put in place a scheme where a person alongside their superannuation fund could start to save for the deposit for their home. Now, on the face of it you say, “Well, maybe that’s okay.” The problem is, of course, it means that that person’s going to put extra savings aside, that’s not so bad. They do get a tax advantage on that, that’s not so bad also. But there are a few other bits in pieces that were a little worrying like say, for example, I have superannuation funds I’m actually going to manage the multitude of accounts those that we’re going to be taxed in one way, those are going to be taxed in another way. Those that people could take out of the Super fund, those that people couldn’t.

Then there’s a second factor as well; the cost of living pressures where you’ve got your gas, your electricity. So many basic items that are going up in price so much faster than inflation means an increasing number of households, we know, we’ve seen that over the past week or so, are really now starting to struggle. Life is not easy.

Where do the extra savings come from? Do people actually have the ability to do this? Does it mean in some cases that they’re going to sacrifice the ability to put more money into longer-term saving superannuation instead, saving through these new vehicles to try and put the money into their housing deposit? This is the subject of a submission to Treasury that’s going on right now. Industry Super Australia is arguing that in guaranteeing returns through the use in a shortfall interest charge effectively, the government would eat into the compulsory savings with these housing schemes.

Let’s now go to the man who’s put that together and of course, that man is Steven Anthony. He was the Chief Economist of Industry Super Australia. Many thanks as always Steven.

Interview with Stephen Anthony, Chief Economist, Industry Super

Steven Anthony: Thank you, Ross.

Ross Greenwood:  Just explain in this regard, why do you think that these new first time super saver schemes are really going to buy into compulsory saving?

Steven Anthony:  Well, Ross the fact of the matter is the government has guaranteed an interest rate or return on those savings that might well end up being higher than the rate of return earned by a given fund account. The only place with additional return can be generated or taken from, is from a member’s account. From the parts of that account that would otherwise be quarantined. What we’re saying here is that, in other words default superannuation, what we tapped if that rate of return turns out to be higher than the funds crediting rate.

Ross Greenwood:  In other words, it’s a matter of paying up all or if you like, taking money out of the member’s Super fund, the balance, to cover differences between guaranteed returns and actual returns. That’s where it comes from, Isn’t it?

Steven Anthony:  That’s the bottom line. It’s a de facto assault on the faults of brainwash.

Ross Greenwood:  That being the case, it means that a person has less for retirement, especially a younger person and we know the benefits of compounding. You and I have spoken about that before where it’s the money you put in the start that’s worth most money when you decide to take it out when you’re in retirement, but if some of that money is effectively diverted by these returns being topped up from the Super fund into the first home Super saver scheme then ultimately that’s money that long term somebody is going to live off in retirement.

Steven Anthony:  Absolutely Ross. We love the magic of compound interest. With that debt, younger people lose years in terms of their ability to accumulate the balances for their retirement.

Ross Greenwood:  The other part about this is whether the amount of money a person can get into these first time super saver scheme is enough really to make a big difference to the deposit on their home, that’s the other thing that always got me. It didn’t seem like it was a whole bunch of money.

Steven Anthony:  No. The maximum amount you can save is 30,000 plus interest. Now, that’s at the moment when you’re talking about Sydney and Melbourne has processed in excess of 800 thousand to a million dollars. It is insignificant against that savings objectives, achieving a 20% deposit for example.

Ross Greenwood:  The second part about it that I see is the amount of time that would take an ordinary person to put $30,000 in the bank, the maximum as it were, it’s not going to happen overnight. Nobody’s going to drop in 30 grand in one spot one time from their savings. It’s going to take a number of years to be able to accumulate that maximum. Even then, it still is insufficient to create a deposit on most houses in Australia.

Steven Anthony:  That’s absolutely right Ross. Ross, I think importantly the other factor is if you get back to first base policy responses here, having affordability is mainly an issue in Sydney and Melbourne where we’ve seen the Greeks and Russian process. This policy does not do anything to target Sydney and Melbourne and to generate additional housing supply in the market which would help assist the people that we’re talking about getting their first times.

Ross Greenwood:  What are those answers because I know part of their submission was to look at other measures that could have dealt with housing affordability.

Steven Anthony:  Yes,the key issue is decisions about rate of population increase particularly the increase in population in Sydney and Melbourne. The next thing is the interaction between students and investors and the fact that they have entered into the market for established dwellings, that seems to have driven our process.

Then there is the misallocation of tax incentives which is in demand for existing dwellings rather than built new greenfield dwellings. I think most of the issue is the interaction of those three factors in a low interest rate loans.  If government step back and looked especially at Sydney and Melbourne, it could do a lot to make housing affordable first time on it.

Ross Greenwood:  Tell you what, it’s a really interesting subject and one quite clearly that last planted this whole notion of work, life and money when so many people are struggling at a younger age to get themselves a deposit for their first time. Steven Anthony is the Chief Economist at Industry Super. As always, Steven, we appreciate your time.

Steven Anthony:  Thanks for the opportunity Ross.

Other links to articles relating why our retirement savings may be at risk:

A better way to spend your retirement

A new way to spend your retirement

Aged-care facilities need an overhaul

Changes to Super are coming soon

Pension Spending is too high

Probus – Is it for You?

Putting off the inevitable – Stephen Anthony

Super changes in the 2017 Budget

Super for homes

Time and Money can you have both?

Women retire on average with less than half the amount of superannuation than men

FAQ Superannuation

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