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IT sounds like a tempting idea — let young Australians withdraw their superannuation early to use the money as a house deposit.
They get into their own home earlier than they otherwise would, still have many decades to save up their super for retirement, and Australia’s housing affordability problems maybe ease a little, right?
Wrong.
Fresh debate about the super-for-houses proposal was sparked last week after it was reported that the Federal Government is considering it as part of a housing affordability package for its May Budget.
It was quickly attacked by the financial services sector and the federal Opposition, and rightly so.
Put simply, it’s a super silly idea, and ignores the massive dent that would be put in the future wealth of Australian savers.
Compare super fund performance
Superannuation works well because people’s savings are locked away for decades. The longer their money sits in super untouched, the more it grows — and the numbers are staggering.
It’s the magic of compound interest — once described by Albert Einstein as the eighth wonder of the world. Any income earned by assets sitting in super gets reinvested to buy more assets, and so on, over years and years.
For a young worker today that can be up to 50 years of compounding. If the government allows them to take a chunk of their money out, it doesn’t get that chance to grow.
Consider, for example, $20,000 sitting in a fund and compounding at a rate of 7.5 per cent annually. After 20 years that $20,000 becomes $89,000. After 40 years it’s worth $400,000, and after 50 years it grows to a rather handy $841,000. All this is from just one $20,000 investment.
The largest gains from compound interest come in the later years, so sucking money from super early dramatically cuts its potential growth.
Another problem is that incentives for housing usually push up house prices, which is not going to help home buyers. We saw this with various first homeowner grants offered during the Global Financial Crisis, and the last thing much of Australia needs at the moment is more rapid house price growth.
Encouraging people to buy property at what may be the peak of the cycle in some cities is not a good move to grow wealth.
There’s one more elephant in the room that squashes the super-for-housing idea: most young Australians don’t have enough money in their super to make a real difference.
Research released by super industry group ASFA in late 2015 showed that the average super fund balance for an Australian aged 20-24 is $5118. For a 25-to-29 year old it’s $16,441, and for someone aged 30-34 it’s $30,937.
Those balances won’t go too far towards a house deposit these days, but their effect on retirement savings can be massive.
Having a few hundred thousand extra dollars in your golden years will be important as the age pension system strains because of rising longevity.
Governments must avoid the temptation to allow people to raid their retirement savings, and should let super do its job.
Source: News Corp Australia Network
